Occasional X: How it works (CDLXXVI)

 

“The immense power of the new plutocracy: How billionaires like Musk, Bezos and Zuckerberg shape our lives and our democracies.” (Branko Milanovic)

Billionaires are not independent and innovative entrepreneurs who risk their own money to create progress for humanity, but…

— AXEC (@EgmontHandtke) May 10, 2026

Occasional X: Clueless economists / Profit (CXLIII)

“Profit is not stolen labor. It is the return on judgment, risk, and capital that made the work possible in the first place. ” (The Rational Animal)

Ultimately, neither the workers nor the entrepreneurs produce profit. Economists never figured out how profit comes about. Profit… pic.twitter.com/oPlxES9IXS

— AXEC (@EgmontHandtke) April 22, 2026

Occasional X: Clueless economists / Profit (CXLII)

 

“… competition is a process of discovering opportunities for profit, and then adjusting market conditions so that these opportunities tend to be exploited.” (Dominick Armentano)

It is called competition when the so-called entrepreneur discovers an opportunity to reduce wage…

— AXEC (@EgmontHandtke) April 22, 2026

Occasional X: Clueless economists / Science (CCXCXV)

“Utility; for an entrepreneur, ― profit; for a player, gain or loss.” (Theory of Games and Economic Behavior, p. 33, fn. 2) von Neumann/Morgenstern got profit wrong. ⇓ Profit is the foundational economic concept. Because of this, Game Theory has always been irrelevant to… pic.twitter.com/Lys278lnmO

— AXEC (@EgmontHandtke) April 12, 2026

Also at Robert Murphy. 

Occasional X: The futile attempt to recycle Austrianism (LXXXIV)

“The gradual replacement of innate responses by learnt rules increasingly distinguished man from other animals.” (Friedrich Hayek quote)

Whatever this is, it is not economics.

Friedrich Hayek never understood profit and, by logical consequence, how the economic system works.…

— AXEC (@EgmontHandtke) April 11, 2026

Occasional X: Clueless economists / Entrepreneur (II)

“Government labs produce $50 billion fighter jets that can't fly in the rain and 'renewable energy' boondoggles that bankrupt entire states. Meanwhile, two kids in a Palo Alto garage create trillion-dollar companies that actually work.” (Handre)

Handre is still recycling the… pic.twitter.com/XCUvxzqL1x

— AXEC (@EgmontHandtke) March 17, 2026

Twitter/X Jul 15, 2026

Occasional X: Game Theory has no economic content (II)

#Economics#AllYouNeedToKnow

“Utility; for an entrepreneur, ― profit; for a player, gain or loss.” (Theory of Games and Economic Behavior, p. 33, fn. 2) von Neumann/Morgenstern got profit wrong. ⇓ Because of this, Game Theory has always been irrelevant to economics.

The major… pic.twitter.com/AJVxAJK8mC

— AXEC (@EgmontHandtke) January 27, 2026

Occasional X: Clueless economists / Entrepreneur (I)

#Economics#AllYouNeedToKnow

One of the central figures of economics—Austrianism in particular—is the entrepreneur.

“In the 20th century, the understanding of entrepreneurship owes much to the work of economist Joseph Schumpeter in the 1930s and other Austrian economists such…

— AXEC (@EgmontHandtke) January 2, 2026

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Twitter/X Aug 20, 2026

 

Occasional X: The foul spirit of political economics (CLXXXV)

 

#Economics#AllYouNeedToKnow

“It's time to take a bold stand in defense of America's oft-maligned billionaire class.” (Matthew Yglesias)

Matthew Yglesias never understood profit and, by consequence, how the economic system works. This is disqualifying for an… pic.twitter.com/JXhXL8kBvD

— AXEC (@EgmontHandtke) December 30, 2025

Also at Matthew Yglesias.

***

Twitter/X Dec 30, 2025  Jiang Xueqin: What you need to understand about billionaires

Twitter/X May 9, 2026 The problem of False Heroes and Stolen Value: progress comes from (?) entrepreneurs, (?) billionaires, (?) secret service, (?) aliens, (?) lone geniuses, (?) scientists 

Twitter/X May 10, 2026 Billionaires are not independent entrepreneurs but dependent employees

Occasional X: Clueless economists / Profit (XXXV)

 

#Economics#FailedFakeScience#Austrianism

“The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers.” (von Mises)

The #MarketEconomy runs on #Profit. The 3-sector #ProfitLaw… pic.twitter.com/LTZ8NyZ7fZ

— E.K-H (@AXECorg) May 18, 2024

Occasional Tweets: Some folks are still stuck with Austrianism

 

#Economics

“The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply.” (v.Mises) Absolutely false. The 3-sector #ProfitLaw reads Q≡(G−T)+(I−S)+Yd. Austrianism is proto-scientific garbage.

— E.K-H (@AXECorg) November 8, 2021

For more about Profit, see AXECquery.

For more about Austrianism, see AXECquery. 

Occasional Tweets: High time to finally bury von Mises

 

von Mises: “In the imaginary construction of a stationary economy the total sum of all entrepreneurs’ profit equals the total sum of all entrepreneurs’ losses.”

This is provably false. von Mises never understood #Profit. That's lethal for an #Economist.⇒https://t.co/9OOvd2cAqJ

— E.K-H (@AXECorg) September 30, 2021

For more about von Mises, see AXECquery. 

How Keynesians, Lernerians, MMTers make the Oligarchy great

Comment on Lars Syll on ‘Rethinking public budget’

Blog-Reference and Blog-Reference and Blog-Reference on Aug 9

Lars Syll summarizes: “Few issues in politics and economics are nowadays more discussed ― and less understood ― than public debt. … The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue ― at least not in a long time-horizon perspective.”

True, after 200+ years, economics is still at the proto-scientific level. Both orthodox and heterodox economists have failed. Economists do not know to this day how the price and profit mechanism works. The reason is simple: economists are incompetent scientists. To this day, they do not know what profit is, and therefore, they collectively talk mind-blowing nonsense about deficit spending/money creation/public debt.

To make matters short, the axiomatically correct macroeconomic Profit Law for an evolving economy is given here without further explanation. It holds, with Q_m monetary profit/loss, S_m monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Y_d distributed profit Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) in the open economy with distributed profit.

This reduces to Public Deficit = Private Profit, i.e., Q_m≡(G−T). And this, in turn, gives the following simplified credit cycle: (i) Public deficit spending → profit of the business sector up, (ii) profit distribution to the one-percenters up, (iii) one-percenters buy bonds, (iv) ninety-nine-percenters get taxed, taxes are transferred in the form of interest to the one-percenters for the duration of the bonds, (v) old bonds are replaced by new bonds on maturity, (vi) steps (iv) and (v) are repeated for an indefinite time, (vi) Eventual redemption of bonds requires taxation of the ninety-nine-percenters and transfer to the one-percenters. The business sector makes a loss.

From this stylized credit cycle follows immediately Lerner’s dictum: “Very few economists need to be reminded that if our children or grandchildren repay some of the national debt, these payments will be made to our children or grandchildren and to nobody else. Taking them all together, they will no more be impoverished by making the repayments than they will be enriched by receiving them.” This is one of the worst deceptions economists have put on the ninety-nine percenters.

MMTers are presently the most enthusiastic champions of deficit-spending/money-creation. It holds:#1

(i) The macroeconomic foundations of MMT are provably false. More specifically, the MMT balances equation is proto-scientific garbage. This also holds for Post-Keynesianism.

(ii) Because of (i), the whole analytical superstructure of MMT is false.

(iii) Because MMT policy guidance boils down to deficit-spending/money-creation, MMT policy directly and immediately increases macroeconomic profit. Effects on employment/prices are uncertain and secondary.

(iv) Because of (iii), MMTers are the naturally useful idiots of the one-percenters.

(v) The MMT sales crowd promotes an economic theory, which has been definitively falsified, in social media and in the econblogosphere by pretending that MMT policy is for the benefit of the ninety-nine percenters.

(vi) MMT academics do NOT promote science but provide a cover for the agenda of the one-percenters.

(vii) The observable unequal distribution of income and financial wealth is the empirical proof (a) of the axiomatically correct Profit Law, and (b) that the deficit-agenda-pushing from Keynes to Lerner to MMT and to Lars Syll has been very successful.

(viii) MMT is the easily recognizable tip of the iceberg of political corruption of economics.

Egmont Kakarot-Handtke


#1 For the full-spectrum refutation of MMT, see cross-references MMT

Related 'Keynes, Lerner, MMT, Trump, Biden, and exploding profit' and 'Keynesianism as ultimate profit machine' and 'Too much ado about deficit spending' and 'MMT-Refutation for Dummies' and 'Orthodoxy is refuted ― but MMT also'.

For more about Oligarchy see AXECquery.

***

Graphic AXEC168

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YouTube Mar 22, 2023 Evidence: US is not a democracy | Princeton University study

The UNZ Review Apr 4, 2023 “And that’s why Aristotle said that many constitutions of the Greek states claim to be democratic, but they were really oligarchic.” (Michael Hudson)

INET, Dec 19, 2023, Lynn Parramore, Renowned Political Scientist: Can We Really Save American Democracy?

***

Twitter Apr 27, 2023 Study: US is an oligarchy, not a democracy

Twitter/X Feb13, 2026  Nowadays, entrepreneurs are created by the Oligarchy

Indeed, Keynesianism and Monetarism are basically the same proto-scientific garbage

Comment on Brad DeLong on ‘Hoisted from Fifteen Years Ago: The Monetarist Counterrevolution’

Blog-Reference and Blog-Reference

Brad DeLong concludes: “Much of the history of macroeconomic thought is often taught as the rise and fall of alternative schools. Monetarists tend to write of the rise and fall of Keynesian economists rise during the Great Depression, and its fall in the 1970s under the pressure of stagflation and the theoretical critiques of Friedman, Phelps, Lucas, Sargent, and Barro.” (See intro)

Indeed, macroeconomic thought has to be taught as a sequence of theoretical failures and, by implication, as a sequence of scientifically invalid policy prescriptions. To compare Keynesianism and Monetarism in great detail only obscures the fact that BOTH are fundamentally flawed.

Let us take the widest possible perspective. The fact of the matter is that neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetarists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008, p. 10). Hence, ‘they fail to capture the essence of a capitalist market economy’ (Obrinsky, 1981, p. 495). This is rather bad for an economist. Indeed, what could be worse?

Keynes, to his greatest honor, realized that there was something wrong with previous profit theories: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, pp. 12-13, 16)

So, neither Keynesians nor Monetarists understand the two most important phenomena in the economic universe: profit and income (2014). Of course, there is complete ignorance among both sects that they are neither qualified nor entitled to give economic policy advice.

Newer Keynesians and Monetarists are united in error about employment theory: “The belief that the natural rate of unemployment is inevitably close to the average rate of unemployment and thus that monetary policy cannot affect the average rate of unemployment is standard in modern macro models.” (See intro) This belief is provably false (2012). For the equally unjustified belief in the commonplace Quantity Theory, see (2011).

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

For lack of a true theory, what Keynesians and Monetarists had to offer and still defend is proto-scientific garbage. Brad DeLong does not seem to have realized this after all these years.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

***

REPLY to Paul Mathis on Apr 15

I did NOT say that Keynes did not MENTION the ‘two most important phenomena in the economic universe: profit and income’ I clearly stated that he did not UNDERSTAND them. That Keynes was a rather confused thinker has been observed on more than one occasion: “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

You quote from the General Theory: “Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur.”*

This definition is provably false, see (2011a; 2011b; 2014).

Conclusion: Keynes did not understand profit, and neither do After-Keynesians until this very day. The proof is in your post. Not understanding profit means not understanding how the market economy works. And that is rather bad for an economist in general and for Keynesians/Monetarists in particular, isn’t it?

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.

* This quote has been on my website since 2013, among other examples of how economists got profit wrong.

***

REPLY to jorgensen on Apr 15

You say: “There is a ‘god’ equation which fully describes the global economy and all of its mechanisms and interactions in at least a probabilistic sense.”

Of course, there is, see on Graphic AXEC25. For the details, see The Synthesis of Economic Law, Evolution, and History.

To be sure, neither Keynesianism nor Monetarism fits into the economic God equation.

***

COMMENT on Nanikore on Apr 16

You say: “And he [Friedman] in fact was a great admirer of John Maynard Keynes and had more in common with pre-Samuelson Keynesianism than most people either realise or want to admit.”

It is irrelevant who admired whom. Both Friedman and Keynes were political economists and used/abused economic theory to push their agendas. Their respective theories are methodologically defective and scientifically worthless.

BOTH approaches are thoroughly refuted, so there is no use in wasting time comparing their awkward details. See, Indeed, Keynesianism and Monetarism are basically the same proto-scientific garbage.


Related 'No ground to lose'.

The zombie wars are over

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’

Blog-Reference

Economics is a failed science. In more detail, this means that the major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — have not produced much scientific value, if anything, in more than 200 years.

Economists have not risen above supply-demand-equilibrium and have still not realized that this is poor science. Schumpeter already came close to a thumbs-down, but then made this concession: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9), see also (2013)

Lacking sound scientific foundations (= episteme), economic debate up to the present consists of an inconclusive exchange of opinions (= doxa) between the four approaches. In other words, economics hitherto took place at the proto-scientific level, yet: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists obviously lack the true theory; Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives are provably false. So, what is needed is a termination of the senseless cross-talk among the four zombie approaches, because “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean. (Ingrao et al., 1990, p. 362)

At the moment, economists produce mindlessly inconsistent models according to accustomed templates: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). No penny-drop, no realization that maximization and equilibrium are NONENTITIES.

In methodological terms, a Paradigm Shift means to completely replace the obsolete axiom sets of the four failed approaches with an entirely new set. To make this concrete, here is the axiom set of Walrasianism:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

HC1 is just another expression of methodological individualism. Except for HC6, which is a petitio principii, all axioms are subjective-behavioral, which is to say, much too swampy.

Because the subjective-behavioral approaches have been a detour from the very start (as more than 150 years of blather since Jevons/Walras/Menger prove) they have now to be replaced by the objective-structural approach.

The most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms:
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

From this minimal set, which is composed of measurable real and nominal variables, follow propositions that are testable. The nonentities of methodological individualism are gone.

Methodologically correct economics starts with the SYSTEMIC axioms of the monetary economy. This yields objective systemic laws, expressed, for example, as Profit Law or Employment Law. Systemic laws are readily testable, and this is the ONLY way to settle questions according to scientific standards.

Useful input to the continuing discussion of the new paradigm is not to be expected from Walrasianism, Keynesianism, Marxianism, and Austrianism. So, let these scientific zombies go: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ...” (McCauley, 2006, p. 17)

Egmont Kakarot-Handtke


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

Immediately preceding Austrian blather

***

REPLY to Major.Freedom on Apr 3

(i) von Mises says: “The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply.” (2007, p. 293)

This is a vacuous Austrian waffle.

Profit is ultimately determined by the Profit Law, which states for the investment economy Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. This equation is testable with the precision of two decimal places.

(ii) von Mises says: “Economics is not about goods and services, it is about the action of living men.” (2007, p. 357)

This is how Austrians missed the subject matter of economics altogether and got lost in the woods of psychologism, thought-reading, second-guessing other people’s actions, and silly gossiping and storytelling. Because of this: Austrianism = gossip economics.

Correct definition: “Economics is the science that studies how the monetary economy works.”

(iii) von Mises says: “In the imaginary construction of a stationary economy, the total sum of all entrepreneurs’ profit equals the total sum of all entrepreneurs’ losses. (2007, p. 294)

This is provably false. In the stationary economy, it holds Qm≡Yd. #1


References
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. II. Indianapolis: Liberty Fund.

#1 The proofs are to be found in the working papers on SSRN

***

REPLY to Major.Freedom on Apr 4

(i) You ask, “What are you trying to accomplish by your continual evasions?” For someone who has an irrefutable theory of human action, this is a stupid question. It is well known: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

So you certainly can interpret my behavior until you are blue in the face. Obviously, you are missing the subject matter: economics is NOT about economists but about the economy.

Economists try to figure out the objective systemic laws of the monetary economy. Speculation about other people’s behavior/actions and ad hominem argumentation is a moronic pursuit. Austrians are no economists. #1

(ii) You ask, “Did you know that the GDP equation, Y = G + I + C + (X−M), can be “predicted” to 14 million decimal places, provided that people trade goods at prices to within that accuracy?”

Did you know that the GDP equation is false? For proof, see (2012). Austrians have not figured this out to this day, but swallowed the underlying logical defect hook, line, and sinker. The GDP equation is an intelligence test for economists, and Austrians flunked it.

(iii) You say: “All Mises is saying is that entrepreneurial profit, not profit per se as in your childish equation above, exists because of uncertainty.”

Uncertainty is a psychological state, and it does not produce profit just like wishful thinking or greed does not produce a profit. Mises’ explanation is at the level of voodoo thinking. For the correct explanation of profit, see (2011).

(iv) Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the managers and stockholders of the airline. The other way to look at flight is to think about the laws of aerodynamics, thermodynamics, and so forth.

The first way of explanation is the Austrian way, and it yields the same trivial psychologistic crap over and over again. Notice: Whatever the subjective motives and actions of passengers are, they do — as a matter of principle — NOT explain the phenomenon of flight.

The second way is the scientific method. Thinking people, this excludes Austrians, know that there is no such thing as an irrefutable law of human action that could explain flying.

So, just as flying is explained by the objective laws of physics, the economy is explained by the objective laws of economics.

Needless to say, Austrians never got the point: “Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

This is as extremely profound as ‘the sun goes up’.

(v) You have already declared that you have won the debate. Do you realize that 'to win every debate' has been the selling proposition of the ancient Sophists, whom Plato famously criticized? Plato made it clear that a SCIENTIFIC debate is about episteme=knowledge and NOT about doxa=opinion and to twist an audience, or what Popper characterized as demonstration of ‘the bad taste of a finicky scholasticism’.

(vi) I agree that the action axiom is just as irrefutable as ‘Zeus threw the thunderbolt because he was angry’. What I say is that with your behavior/action approach, you will never come up with something helpful like the lightning conductor. And that is rather bad because you have won the debate, but Zeus hit you with the thunderbolt. Rest in peace, Austrians.


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. I. Indianapolis: Liberty Fund.

#1 Hayek was not an economist.

***

COMMENT on Don Geddis on Apr 5

(i) Any discussion about the character of interlocutors leads away from the point at issue: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false. (Schumpeter, 1994, p. 11)

The question at issue is whether Austrianism is true or false, and not whether Major.Freedom is a tape recorder or a broken record.

(ii) Refutation is necessary but insufficient. Effective refutation consists of developing the new paradigm: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory." (Blaug, 1998, p. 703)

And, by the way, it is not only Austrianism that is obsolete. Walrasianism, Keynesianism, and Marxianism have to be left behind the curve, too. From the huge heap of scientific garbage called economics, Austrianism is only an insignificant part. It goes down the drain with the whole of methodological individualism.

References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

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REPLY to Major.Freedom on Apr 6

(i) Physicists long ago proved that, given the laws of physics, a perpetual motion machine is impossible. This did not stop some people from submitting patent applications for perpetual motion machines to this very day.

It is the same thing with Austrians and other pseudo-scientific economists. “In economics, we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened. (Morgenstern, 1941, pp. 369-370)

Austrians are ignoring/violating scientific standards.

(ii) Austrianism subscribes to methodological individualism, which claims: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that, in principle, the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Methodological individualism is (i) unacceptable for cogent methodological reasons, and (ii) has failed for everyone to see. General equilibrium theory in all variants (RBC, DSGE, etc) is indefensible, and the same holds for Austrianism as a fellow traveler of methodological individualism.

(iii) The major claim of Austrianism is that it solved the mind-body problem. Clearly, Austrians are in the wrong movie. Philosophy/psychology/metaphysics is NOT economics. The first problem to solve for an economist is the profit-income problem and NOT the mind-body problem.

(iv) NO way leads from the subjective action axiom to the objective Profit Law. It is irrelevant whether the action axiom is irrefutable or not. Austrians do not know what profit is, and by consequence, they have no idea how the economy works. The profit theory is the pivot of all of economics.

(v) The profit theory must be testable. This brings us back to the starting point of this thread. Vacuous theories like Austrianism are not testable and therefore not of interest for the point at issue.

(vi) You say, “I will declare for a third time that you lost the debate.” Did it ever occur to you that as a party to the debate, you have nothing to declare?

(vii) Austrianism is a zombie approach for more than 150 years, just like Walrasianism and everything else that subscribes to methodological individualism.

(viii) Economics needs a Paradigm Shift.


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

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COMMENT on Don Geddis on Apr 7

Science was there before economics was there. Economists either conform to scientific standards or are outside of science: they are in NO position to redefine scientific criteria.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, Austrians — has never risen above the level of a proto-science, it has become popular among economists to question the standards, to lower them or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the somersault backward: ‘Economics is not a Science with a capital S’ (Solow).

The scientific method is well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing.

Economics fails on both counts: the axiomatic foundations are provably false, and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes).

The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species is the Austrian, which is in the possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this, they are very proud.

No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For proof, re-read Major.Freedom’s posts. With this stuff, the poor souls in scientific hell are tortured.

Time to become constructive now: let’s proceed with the paradigm shift.

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FAREWELL to Major.Freedom on Apr 8

Science was there before economics was there; that is, Newton was there before Adam Smith was there. Newton is famous for his ‘hypotheses non fingo’, which means, I do not waffle but prove.

“But he [A. Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

While physics has evolved exponentially, economics is stuck at the proto-scientific level of storytelling. The key narrative is supply-demand-equilibrium and it has been false already in Smith’s days. After 200+ years, compare the entirely vacuous General Equilibrium Theory with General Relativity Theory — is there any doubt that economics is a failed science?

It seems that the irrefutable magic action axiom somehow did not work.

Economists are confused confusers, and Austrians are the worst of them. See Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist.


Related 'From microfoundations to macrofoundations'

For more about von Mises, see AXECquery.

Down and out

Comment on Henry of Nov 3 on ‘Keynes on the Theory of Interest’

Blog-Reference

You bring in a seemingly new aspect “As a matter of interest, Keynes in his ‘Treatise on Money’, did actually develop a model using entrepreneur’s income — he ended up with a relationship similar to yours, i.e. saving − investment = normal enterprise profit − actual enterprise profit. He discarded this approach in the GT. See p. 60-61 of GT.”

Correct, Keynes caught a glimpse of the solution and then went the other way. But, as is obvious from the General Theory, in this direction, he did not come to grips with profit. Let this sink in: Keynes had no idea of the essential phenomenon of the market economy! An economist who does not understand how the actual economy works lectures politicians who know even less.

Now, the new aspect you bring in is not new at all. I have dealt with it in Section 16 ‘Treatise and General Theory as limiting cases’ in the working paper Keynes’s Missing Axioms.

And I have refuted your redundant definition of “economy-wide aggregate saving” in Section 17. There is, though, no need to read or understand the paper because staying behind the curve is the natural place for After-Keynesians.

You ask rhetorically, “You define income as household income. Why not use wages income? Why not use entrepreneur’s income?” Because the definition of income and profit is by no means arbitrary. It is known since Senior that it is all-important to state ‘consciously and explicitly’ the basic concepts: “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter, 1994, p. 575)

Only dilettantes think that they can define whatever seems convenient. “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)

These errors are fatal because they bring down the whole theoretical superstructure: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

The irony is that Keynes understood the crucial methodological point better than the After-Keynesians. “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16) and “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

The unfortunate fact of the matter is that Keynes messed up his ‘non-Euclidean’ axioms. Again: the formal foundations of Keynesianism are provably false until this very day. #1

This is not a minor point but has consequences for the scientific status of Keynesianism in particular and economics in general. Because economics does not satisfy the scientific criteria of material and formal consistency and cannot even tell what income and profit are it has to leave the academic community of sciences. #2

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

#1 It is recommended that Keynesians make a full mental reset and start with this New curriculum, which correctly applies the axiomatic-deductive method.
#2 Free academia from economics

Related 'Humpty Dumpty is back again'

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ICYMI (comment on Henry of Nov 3 on Nov 4)

Theories do not consist of a heap of statements that describe a certain part of reality; they have an architectonic structure. In purely formal terms, they consist of premises and logical conclusions. The well-structured whole has to meet the criteria of material and formal consistency. “The chief demerit is inconsistency, including inconsistency with the results of experiments that a competing theory can explain.” (Popper, 1994, p. 160)

Methodologically, therefore, J. S. Mill’s Starting Problem has always to be dealt with first. The crucial question is: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)

At present, economics is not built upon a set of acceptable premises or axioms. Orthodoxy is based on the behavioral axiom of constrained optimization. Heterodoxy lacks a consistent foundation. That is, both approaches do not meet the formal minimum standards of theoretical economics. #1 There is nothing to choose from.

Conclusion: “Scrap the lot and start again!” (Joan Robinson). The Paradigm Shift is not to be delayed. #2 The correct formal foundations of economics are given under the label of Graphics AXEC04c.

The next step is to reconstruct the theoretical superstructure. In the course of reconstruction, it turns out that the Keynesian I=S is untenable and has to be replaced by  Q≡I−S, respectively Q≡Yd+I−S (see preceding posts). This immediately affects the theory of interest.

Whether the new axiomatic foundations are acceptable is not to be decided by argument but by empirical testing of propositions that are deductively derived from the axioms (the employment multiplier, for example, or the Profit Law).

Keynes explicitly addressed (with his call for ‘non-Euclidean’ axioms) but failed to solve J. S. Mill’s Starting Problem. Because its formal basis is defective, Keynesianism is irrevocably outside of science. Keynesian policy proposals have no sound theoretical foundations.


References
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality, Chap. Models, Instruments, and Truth,154–184. London, New York: Routledge.


#1 How Orthodoxy buffaloed Heterodoxy
#2 Replacing sand with granite

Related 'Are economists methodological retards?'

Key Issues: One way to get profit right, many ways to get it wrong

There are two criteria to assess a theory: material consistency and formal consistency. A theory must satisfy both criteria; that is to say, it can be rejected either on empirical or on logical grounds alone.

From the structural axioms and definitions follows the monetary profit for the business sector as a whole in the case of an investment economy

Total monetary profit in period t is given by the difference between the business sector’s investment expenditures and the household sector’s monetary saving plus distributed profits of the business sector. Overall profit is spread among firms in the process of competition.

 

As a consequence, the following statements have to be rejected on purely formal grounds:

Smith: Wages, profit, and rent are the three original sources of all revenue as well as of all exchangeable value. (2008, p. 50)

Ricardo: … profits would be high or low in proportion as wages were low or high. (1981, p. 110)

Senior: In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. (1854, 4.9)

Mill: The cause of profit is, that labour produces more than is required for its support. (2006, p. 411)

Marx: Hence, if a commodity is sold at its value, a profit is realized, which is equal to the excess of its value over its cost-price, or equal to the entire surplus-value incorporated in the value of the commodity. (1909, I. I. 31)

Jevons: I think that in the equation Produce=profit+wages, the quantity of produce is essentially variable, and that profit is the part to be first determined. (1911, p. 270)

Marshall: The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. (2009, p. 508)

Knight: The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation. (2006, p. 285)

Schumpeter: And since the new combinations which are carried out if there is “development” are necessarily more advantageous than the old, total receipts must in this case be greater than total costs. (2008, p. 129)

von Mises: The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply. (2007, p. 293)

Keynes: Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur. (1973, p. 23), original emphasis

Hicks: The curve IS can therefore be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. (1937, p. 153)

Harrod: The relevant propositions may be stated in the form of truisms or tautologies, such as that the price of an article is equal to the sum of rewards to all persons contributing to its production, ... (1938, p. 392)

Shackle: Thus it seems that we might select decision-making and uncertainty-bearing as the economic roles to perform which men come forward because of the prize of profit in the sense we have been discussing. (1955, p. 226)

Samuelson: GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP. (1998, p. 392)

Debreu: … the consumers own the resources and control the producers. Thus, the ith consumer receives the value of his resources … and the shares … of the profit of the 1st, …, jth, …, nth producer. … Consider a private ownership economy E. When the price system is p, the jth producer tries to maximize his profit on Yj. Suppose that yj does this; the profit pj(p) = p • yj is distributed to shareholders. (1959, pp. 78-79)

Arrow and Hahn: Given a set of prices for all commodities, it is possible to calculate for each activity its profit, the excess of the values of its outputs over the value of its inputs; … The assumptions of perfect competition imply that … each firm chooses an activity that yields it at least as much profit as any other possible. (1991, p. 53)

Kaldor: Income may be divided into two broad categories, Wages and Profits (W and P), where the wage-category comprises not only manual labour but salaries as well, and Profits the income of property owners generally, and not only of entrepreneurs. (1956, p. 95)

Kalecki: Gross profits = Gross private investment + Capitalists’ consumption. (1942, p. 259)

Sraffa: This is because the surplus (or profit) must be distributed in proportion to the means of production (or capital) advanced in each industry; and such a proportion between two aggregates of heterogeneous goods (in other words, the rate of profits) cannot be determined before we know the prices of the goods. (1979, p. 6)

Boland: The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out. (2003, p. 150), original emphasis

Minsky: The simple equation “profit equals investment” is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure. (2008, p. 161), original emphasis

Barro: Households receive income in four forms: profit …, wage income, rental income, and interest income. (2008, p. 131)

Wickens: Implicit measure of profits Πt = -kt+1 +(1+θ)kt. (2008, p. 82)

Ljungqvist and Sargent: In each period, the representative firm takes (rt, wt) as given, rents capital and labor from the households, and maximizes profits: Π=F(kt, nt)-rtkt-wtnt. (2004, p. 484)

Nadal: ... the budget constraint of consumers may be undetermined because it incorporates their share of firms' profits, which may not be defined. (2004, p. 39)

Keen: … net annual income in this simple model equals the sum of wages plus profits. (2011, pp. 366, 146)

About profit, economists have been groping in the dark since Adam Smith.

At all times, including the present, in judging from the standpoint of the requirements of each period ... the performance of economic theory has been below reasonable expectation and open to valid criticism. (Schumpeter, 1994, p. 19)

Not one of the quoted books contains the correct profit theory, and the compilation is far from complete.


References
Arrow, K. J., and Hahn, F. H. (1991). General Competitive Analysis. Amsterdam, New York, etc.: North-Holland.
Barro, R. (2008). Macroeconomics: A Modern Approach. Mason: Thompson South-Western.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Harrod, R. F. (1938). Scope and Method of Economics. Economic Journal, 48(191): 383–412. URL

Hicks, J. R. (1937). Mr. Keynes and the "Classics": A Suggested Interpretation. Econometrica, 5(2): 147–159. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. Online-version URL
Kaldor, N. (1956). Alternative Theories of Distribution. Review of Economic Studies, 23(2): 83–100. URL
Kalecki, M. (1942). A Theory of Profits. Review of Economic Studies, 52: 258–267. URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Knight, F. H. (2006). Risk, Uncertainty and Profit. Mineola: Dover. (1921).
Ljungqvist, L., and Sargent, T. J. (2004). Recursive Macroeconomic Theory. Cambridge, London: MIT Press, 2nd edition.
Marshall, A. (2009). Principles of Economics. New York: Cosimo, 8th edition. (1890). Online-version URL
Marx, K. (1909). Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 2, Books I-II of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. Online-version URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Nadal, A. (2004a). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, 33–47. London, New York: Routledge.
Ricado, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. Online-version URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Schumpeter, J. A. (2008). The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. New Brunswick, London: Transaction Publishers. (1934).
Senior, N. W. (1854). Political Economy. Library of Economics and Liberty. URL
Shackle, G. L. S. (1955). Expectation, Income, and Profit. Ekonomisk Tidskrift,57(4): 215–234. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. (1776). Online-version URL
Sraffa, P. (1979). Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory. Cambridge, London, etc.: Cambridge University Press.
von Mises, L. (2007). Human Action. A Treatise on Economics, Volume II. Indianapolis: Liberty Fund. Online-version URL
Wickens, M. (2008). Macroeconomic Theory. A Dynamic General Equilibrium Approach. Princeton, Oxford: Princeton University Press.

 

Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 4 URL' and 'Debunking squared' and 'Profit for Marxists URL'.


The theory of profit affects, first of all, the familiar ideas about the functioning of the market mechanism (for details see 'The Law of Supply and Demand: Here it is Finally' URL).


© 2013 EKH, except original quotes; original notation adapted to HTML code here.

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Graphic AXEC109k

Schumpeter and the essence of profit {04}

Working paper at SSRN

Working paper at ARCHIVE

Abstract  Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.