Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother

Comment on Bill Mitchell on ‘When neo-liberal masquerades as anti-establishment’

Blog-Reference and Blog-Reference

There is the political sphere and there is the scientific sphere. It is quite obvious that both are fundamentally different and because of this, it is of utmost importance to radically separate the two. The mixing of the two is the hereditary mental disease of economics.

Politics is about the realization of the Good Society. This presupposes an idea of what the Good Society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge and the crucial distinction is between true/false with truth unequivocally defined by material and formal consistency.

That much is clear after more than 200 years: economics is a failed science. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the foundational concept of the subject matter ― profit ― wrong.

So, this is the situation: economists dabble in politics where they have, to begin with, NO legitimate business. Worse, economists’ policy guidance has NO sound scientific foundations at all. This starts with Adam Smith/Karl Marx and ends with current orthodox and heterodox economics. MMT is NO exception.

Political economics is not only cargo cult science but ― intentionally or unintentionally does not matter ― political fraud: “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)

Economists are supposed to deliver knowledge (= episteme) but produce for 200+ years scientifically worthless political opinion (= doxa). To promote opinion under the label of science is a fraud.

MMT is a case in point. Bill Mitchell criticizes mainstream economics in its incarnation of New Zealand’s TOP party. All his arguments are accurate, except when it comes to the theoretical underpinning of MMT policy proposals.

Bill Mitchell claims “… MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system. It helps us better understand the choices available to a currency-issuing government. It is not a regime but a perspective on reality. … In that sense, MMT is neither right-wing nor left-wing.”

MMT claims to be an objective scientific truth. The fact is that it is proto-scientific rubbish, qualitatively not at all different from orthodox economics. MMT’s profit/employment/ money theory is provably false. In methodological terms, MMT is NOT a valid new paradigm because its axiomatic foundations are false just like Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent.

One example. Bill Mitchell claims: “Third, it is 100% correct to say that if the government runs a fiscal surplus then it condemns the non-government sector to run a deficit (spending more than its income) as a matter of accounting, dollar for dollar.”

No, this is NOT 100% correct. This is misleading, to say the least. The correct accounting truth is this. There is no such thing as a non-government sector, to begin with, only a business sector and a household sector. So, if the household sector chooses its saving/dissaving in a given period then a government deficit/surplus “condemns” the business sector to profit/loss.

These are the axiomatically correct accounting identities:
Q_m≡C+G−Y_w     profit/loss Q_m, business sector,
S_m≡Y_w−T−C      saving/dissaving S_m, household sector,
B_m≡T−G           budget surplus/deficit B_m, government sector,
-----------------
Q_m+S_m+B_m=0.

For THREE sectors, proper accounting yields THREE sectoral balances which add up to zero. It holds Public Deficit = Private Profit. The question is, why makes MMT profit disappear by creating an artificial sector called the non-government sector? In other words, why is MMT cooking the books? There is NO scientific justification, so it must be some political reason.#1

MMT is NOT a new scientific paradigm but old political crap in a new scientific bluff package. This holds for ALL of economics: when profit is false the whole analytical superstructure is false and economic policy guidance has NO sound scientific foundation.

Egmont Kakarot-Handtke


#1 For more details see ‘MMT and the magical profit disappearance’ and cross-references MMT

Related 'MMT is NOT an alternative to neoliberalism' and 'Cryptoeconomics ― the best of Bill Mitchell’s spam folder' and 'What is so great about cargo cult science? or, How economists learned to stop worrying about failure'.

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REPLY to wilwon32 on Aug 22

(i) You ask: “Am I the only one who sees little value in attempting to infer some special significance in E K-H’s profit argument.”

Yes, you are the only one left who does not understand that profit is the core concept of economics.

(ii) You maintain: “I thought that the advancement of economic understanding provided by MMT related to the special character of national sovereignty …”

Sovereignty is the core concept of political science. The legitimate national sovereign decides every political question. This is NOT a new insight of MMTers but a tautological paraphrase of what sovereignty means.

Economics is NOT about how the political system works but about how the economic system works. Economics is a science and the subject matter is “the economy” in the abstract and the universal properties of a monetary economy and ― as a matter of principle ― NOT so much the accidental specifics of any national economy. Laypersons, of course, have a quite narrow perspective and are mainly interested in what happens in their backyard and who pays for the wall. Because of this, they cannot see that there are two economixes: political economics (= agenda-pushing) and theoretical economics (= science).

Politics and science do not fit together and have to be kept strictly apart. This is known since the founding fathers: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill)

As a rule of thumb, it can be said that every economist who dabbles in politics is NOT a competent scientist but a brainless blatherer who masquerades as a scientist. It does not matter whether the blather is right-wing or left-wing.

(iii) You say: “It seems as if one could also develop an argument for the importance of DEBT in economic arguments …”

Obviously, you do not understand the macroeconomic Profit Law, Q_m≡−S_m, which says explicitly that the business sector’s profit/loss is equal to the change in the household sector’s debt. Profit and debt are the two sides of the SAME coin.

(iv) The trouble with you, Bill Mitchell, and the rest of the MMT crowd is that you suffer from a complete lack of understanding of how the profit- and price mechanism works. This is not so terribly bad because although stupidity is the criterion for exclusion in science it is at the same time the criterion for admission in politics. So, there stands nothing in the way of a clear-cut separation of science and politics. All, you, Bill Mitchell, and the rest of the MMT crowd have to do is to leave economics ― it is as simple as that.

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REPLY to ANC Driver on Aug 23

You sum up: “there is no way we can all be solvent all at the same time. To prove this scientifically … is one thing, but it still leaves us with the ill-feeling of ‘what the hell am I supposed to do about this?’”

This, exactly, is the significance of profit theory.

The macroeconomic Profit Law in its most elementary form says Qm≡−Sm or monetary profit for the economy as a whole has nothing to do with greed or monopoly power or innovation or productivity but is the mirror image of dissaving. In other words, in the pure production-consumption economy profit depends in the most elementary case on the growth of the household sector’s debt.

Now, only if profit is greater than zero the business sector maintains or increases employment. This is the minimum condition. If overall profit turns into loss firms go bust and employment decreases. If the losses continue the economy eventually breaks down.

From the fact that profit is the mirror image of the growing household sector’s debt follows logically that overall profit turns into an overall loss as soon as the household sector starts to pay back the accumulated debt. Hence, the economy eventually breaks down because of immanent logical necessity (no crisis and no criminals and no banksters and no exploding real estate or stock market bubble is needed) as soon as private and/or public households start to redeem their debt in the aggregate (i.e. new credit, rollovers, and redemption netted out).#1

The macroeconomic Profit Law for the investment economy without profit distribution says Q_m≡I−S_m or monetary profit for the economy as a whole is given by the difference between the business sector’s investment I and the household sector’s monetary saving/dissaving S_m. Let S_m for simplicity here be zero then profit depends directly on the GROWTH of the capital stock.#2

This worked fine since the Industrial Revolution but it cannot work for all eternity. The snag is this: if growth weakens or is stopped overall profit turns into overall loss and the whole economy breaks down. The situation is analogous to that of a car driver who cannot slow down because if he jams on the brakes the car explodes.

The challenge as it follows from the correct profit theory is this: how can the growth path be flattened or even reversed without causing a full-scale economic breakdown?

Because Walrasians, Keynesians+MMTers, Marxians, and Austrians have NO idea until this day what profit is they do not even see that the actual life-and-death question of economics is how to engineer a soft landing on a reasonably high plateau. All the rest of economics is sitcom blather.


#1 Mathematical Proof of the Breakdown of Capitalism
#2 Squaring the Investment Cycle

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REPLY to ANC Driver on Aug 24

You say: “What I would love is for someone like you, who obviously can see things how they actually are (i.e. 100% solvency is not possible), is to channel your knowledge into helping people like me and others to find a way to use this knowledge to get some people away from the solvency game altogether.”

The task of the economist as a scientist is to figure out how the actual economy works. This is comparable to the task of a physicist/engineer to figure out how a heavy piece of metal can get off the ground, travel great distances at high altitudes, and arrive safely and in time at some faraway place. The physicist/engineer does NOT care who is on board the craft which he is designing/constructing and whether these folks are happy, drunk, or vomiting.

If you are in an identity crisis and need psychological or philosophical help do NOT go to an economics blog but google a self-help group in your neighborhood.

People who claim that they save the world, work for the welfare of humankind, promote liberty and democracy, make you rich and happy, and help the little guy to have a better life are NOT economists who are committed to well-defined scientific standards.

No scientist ever raises peoples’ hopes/expectations, only presidential candidates, political parties, and MMTers do.

Economics, free speech, and censorship

Comment on Sandwichman on ‘Slavery, “Heritage” and Southern Fried “Free Speech”’

Blog-Reference

Sandwichman on free speech/censorship in the South:

This should also put to rest any notion that “defenders of Southern heritage” are champions of “free speech.” The are liars, cry-babies, hypocrites and TOTALITARIANS bent on imposing their self-serving distortions of history on everyone else.

Sandwichman on free speech/censorship on EconoSpeak:

I deleted an Egmont Kakaroach-Handjob “comment” as spam. To explain why, here is one example of his argument: according to Egmont my statement that experts didn’t know what they were talking about “presupposes that there exist experts who know how the market economy works.” Of course it presupposes no such thing.

To say that Egmont is a fucking idiot does not presuppose that there is an Egmont who is NOT a fucking idiot. Deleting Egmont’s comment as spam does not presuppose that there is an Egmont comment that is not spam.

All future comments from Egmont will be deleted as spam.

November 9, 2016 at 9:33 AM

“Barkley Rosser and Sandwichman as ‘The Worst Human Beings Ever Corrupting Economic Blogs’ because they will suppress this post as they have many times suppressed posts which expose their abject incompetence and stupidity”

KakaRoach Handjob’s future contributions will also be deleted as are (following inspection) advertising spam with links to porn sites.

January 26, 2017 at 11:31 PM*

Egmont Kakarot-Handtke

* See also ‘Needed: The Worst of the Worst of economics blogs’

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Screenshot Aug 20, 10:43

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Screenshot Aug 20, 19:01

MMT is NOT an alternative to Neoliberalism

Comment on Patricia Pino/THE PILEUS on ‘Labour’s economic alternative to neoliberalism’

Blog-Reference

MMT is right in pointing out that orthodox economics is false. This, though, is only part of the story. The fact is that the WHOLE of economics is false, i.e. the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got the pivotal economic concept profit wrong. MMT as a Keynesian offshoot is NO exception.

Economics does not satisfy the criteria of science ― material and formal consistency ― and because of this NONE of the economic platforms from the outer left wing to the outer right wing has sound scientific foundations. All of economics is storytelling and scientific fraud. MMT is NO exception.

Let us have a look at the main arguments#1

• “All government spending is our income, a government surplus is our deficit (debt) and a government deficit is our surplus (savings). Government spending isn’t just necessary to run our public services it also helps us to increase our wealth.”

This is false. The counterpart of a government deficit is the profit of the business sector or the saving of the household sector or a combination of the two. In the main, it is profit, therefore it is misleading to say that a government deficit ‘helps us to increase our wealth’. “Our wealth” is NOT the wealth of the ninety-nine-percenters but of the one-percenters. Given the household sector's saving/dissaving, it holds Public Deficit = Private Profit.

What has been called an absurdly unequal distribution of income and wealth is the DIRECT result of public AND private deficit spending and the exponential increase of public AND private debt.

• “What neoliberals call government debt is in fact savings to the private sector. This is composed of bonds and guilts which are purchased by the population at large…. The reason they are so popular is that they are seen as the safest form of investment.”

This, of course, is true, except for the fact that government securities are not bought and held by ‘the population at large’ but by the one-percenters. With the promotion of deficit spending, MMT sees to it that the business sector not only enjoys profit but also a risk-free asset and a long-term flow of interest. This flow comes in subsequent periods from the taxation of the household sector and is secured by the taxing power of the government.

Patricia Pino sums up: “Macroeconomics is a complex subject.” This is trivially true, and what the general public needs to know is that economists do not understand it.#2 Economists do not even understand profit which is the foundational concept of their subject matter. Economics is a failed science and MMT is part of it.

Egmont Kakarot-Handtke


#1 For the comprehensive overview and the point-by-point refutation of MMT see cross-references
#2 First Lecture in New Economic Thinking

Related 'Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother' and 'MMT’s two shots in the head' and 'Down with idiocy!' and 'Political economics: Who hijacks British Labour?'.

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REPLY to Calgacus on Aug 18

You say: “…, of course, MMTers & functional financiers understand your points, and treat them at length, and explain how the alternative you may be proposing ― no deficit spending? ― is worse. Sorry to put words in your mouth, but that seems to be your position.”

Time to get above the usual kindergarten blah-blah. My argument is NOT about a specific economic policy but that economic policy has NO sound scientific foundations. In other words, economic theory is scientific rubbish ― including MMT. The result is that economists in their bottomless stupidity ruin the economy.#1

So, my position is the same as Napoleon’s: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner)

Note that I am not crazed about the deficit or any other MMT policy issue. The point at issue is that MMT policy proposals have NO sound scientific foundations. MMT is materially and formally inconsistent and just as ill-founded as Neoliberalism. Therefore, it is NO alternative to Neoliberalism. Scientifically, it is the same crap in a different political package.

I have refuted the theoretical foundations of MMT point-by-point on this blog.#2 The bottom line is this, MMT lacks the true theory and this is lethal: “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)

So, whatever MMTers are claiming to do and whatever they think of themselves they are doing does NOT matter. Because the theoretical foundations of MMT are defective and MMTers are in the state of self-delusion, what MMT economic policy OBJECTIVELY amounts to is a wellness program for the one-percenters.#3

It seems that MMT fell victim to the Law of Unintended Consequences: “The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s ‘invisible hand,’ the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, ‘is led by an invisible hand to promote an end which was no part of his intention,’ that end being the public interest.”

MMT is the inverse case: It seeks to promote public interest but ends up promoting private interest.


#1 Mass unemployment: The joint failure of orthodox and heterodox economics
#2 See cross-references MMT
#3 See also Keynesianism as ultimate profit machine
#4 The Concise Encyclopedia of Economics

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REPLY to Ralph Musgrave on Aug 18

Ralph Musgrave cannot resist the temptation to expose himself again as a brainless blatherer. He argues “… I’ll do him a favour and demolish one of his phrases: ‘The counterpart of a government deficit is the profit of the business sector or the saving of the household sector or a combination of the two.’ The mistake there is the popular assumption that a business’s profit (or the profit of the entire business sector) is equal to the increase in it’s stock of cash. That’s nonsense. A business or the business sector can increase its stock of cash during the year, but still make a loss (e.g. because its stock of assets lose a lot of value because of depreciation or obsolescence, or because lots of its debtors turn out to be no-hopers, which was what happened to banks when they realized the NINJA mortgagors they’d lent to were no hopers.)”

WOW, that is rather big news. If Ralph Musgrave were a little smarter than a fruit fly he would have taken a closer look at the full set of macro axioms.#1 The definition of TOTAL profit says that it is the sum of MONETARY profit/loss Q_m and NONMONETARY profit/loss Qn. The latter is not an issue in the present context because MMTers do not even understand the concept of monetary profit.

Nonmonetary profit has been dealt with at length elsewhere.#2


#1 Wikimedia New axiomatic foundations
#2 See cross-references Profit

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REPLY to Calgacus on Aug 19

(i) You say: “There is a minimal level of understanding of a theory that is necessary refute it. A point-by-point refutation has to be that of the theoretician’s points, not things selected by the ‘refuter’.”

I have NOT selected anything, I have refuted all 16 posts that have been presented by Peter Copper on this blog as the key propositions of MMT.#1

Take notice that MMT is refuted on ALL counts.

(ii) You say: “You seem to be saying that deficits are bad because the money can wind up in the hands of the rich. This is not news & one does not need anybody’s ‘true theory’ beyond educated common sense. This is not a valid criticism of deficit spending.”

I have NOWHERE said that deficit spending is “bad”. I have PROVED that the Keynesian/Post Keynesian/MMT profit/employment/money theory is false.#2, #3

(iii) Do not argue against what I SEEM to be saying but what I AM saying which is easy to check by everybody thanks to an abundance of smart search tools.#4

(iv) Your reference to the trickle-up meme is misplaced. What I have clearly stated is that public deficit spending is, since Keynes, a veritable profit machine.#5 Public and private deficit spending over the last decades explains the extremely biased income distribution which MMTers certainly do not endorse.#6 That there is a logical contradiction in the MMT argument should be plain.

(v) The policy proposals of MMT are based on a provably false profit/employment/money theory and they are propagated by misleading arguments. Assertions like “Government spending isn’t just necessary to run our public services it also helps us to increase our wealth” are actually false with regard to “us” and “ours”. Same with Lerner’s directly contradicting assertion: “We owe the debt to ourselves”.

(vi) MMTers are incompetent scientists. Their policy proposals have NO sound scientific foundations. MMT is soapbox economics just like Neoliberalism. BOTH approaches are materially and formally inconsistent and their proper place is the wastebasket of proto-scientific rubbish.


#1 See cross-references MMT
#2 Unemployment is high because economics is false
#3 Putting economic policy on scientific foundations
#4 Just enter ‘Employment Law’ or ‘Phillips Curve’ in the search field (Ctrl F) of the AXEC Blog
#5 Keynesianism as ultimate profit machine
#6 Profit and the decline of labor’s nominal share

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REPLY to MRW on Aug 19

You are asking: “Why do you keep insisting that MMT is supposed to be based on ‘sound scientific foundations.’ What the hell for, Egmont?”

Since Adam Smith/Karl Marx economics is explicitly defined as science. The general public is year after year reminded of this fact with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. And every economist learns in Econ 101: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Clearly, economics is since 200+ years a self-declared science. Now, science is well-defined since 2000+ years by material and formal consistency: “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)

Fact is: economics is a failed science because economists are scientifically incompetent. The fact is that since Adam Smith economic policy guidance never had sound scientific foundations. Both, orthodox and heterodox economists sell proto-scientific rubbish in the bluff package of science.

You argue: “It’s been clear from Day One that it’s based on accounting and accounting rules, and the US congressional reality that our country creates its own currency, which since 1971 (internationally) has been a sovereign non-convertible currency with a floating exchange rate. That’s not a scientific fact, Egmont, that’s an accounting reality.”

Unfortunately, economists did not even get the elementary mathematics of accounting right in the last 200+ years.#1 What you call accounting reality is one of the worst scientific blunders of all times.

Because economists, including MMTers, continually violate scientific standards they have to be expelled from the sciences. Their proper role is that of clowns in the political circus.

# For details see cross-references Accounting

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REPLY to MRW on Aug 20

Thank you for the links.

Of course, I agree with Paul Davidson and you that Samuelson’s ergodic axiom is proto-scientific rubbish like all of Samuelson’s.#1 The point is, though, that Keynes, Davidson, Post Keynesianism, and MMT, too, is proto-scientific rubbish. And this has NOTHING to do with ergodicity/nonergodicity, which, to begin with, does not at all apply to economics, but with profit, which, indeed, is the foundational concept of all of economics. The fact is that Keynes, Samuelson, Davidson, Kelton, Mitchell, Wray, and all the rest of the MMT crowd got profit wrong.

The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This syllogism is conceptually and logically defective because Keynes did not come to grips with profit: “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.)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false. Let this sink in: Keynes had NO idea of the fundamental concepts of economics, that is, of profit and income. Neither have After-Keynesians.

Keynes’ lethal blunder is in the premise Income = value of output. The same blunder reappears in the most used economics textbook: “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.” (Samuelson and Nordhaus, 1998, p. 392)

Some generations of dull economics students later, the same lethal blunder reappears in MMT: “We have seen that total spending equals total income.”#2

For the rectification of this 200+ years old proto-scientific embarrassment see Macro for dummies.#3

When Samuelson’s false microfoundations and Keynes’ false macrofoundations are flushed down the drain and replaced with the correct macrofoundations one gets the Profit Law, the Law of Supply and Demand, and other essential economic relationships.#4 These relationships are SYSTEMIC and because of this Davidson’s ridiculous ergodicity/ nonergodicity pseudo-issue vaporizes with a minuscule puff just like Samuelson’s cargo cultic synthesis previously.


#1 For the detailed arguments just enter ‘Samuelson’ or ‘Davidson’ or ‘ergodicity’ in the search field (Ctrl F) of the AXEC Blog.
#2 Peter Cooper Short & Simple 16 – The Expenditure Multiplier and Income Determination
#3 For the full-spectrum refutation of MMT see cross-references MMT
#4 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

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TWEET on Aug 22

E.K-H‏ @AXECorg  29m29 minutes ago

Replying to @PatriciaNPino @ProfSteveKeen and 

Surplus for govt means NOT “deficit for US” but lower profit. See https://axecorg.blogspot.de/2017/08/mmt-is-not-alternative-to-neoliberalism.html … #Economics #FailedScience #FakeScience #MMT

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TWEET on Aug 22

E.K-H‏ @AXECorg  1m1 minute ago

Replying to @JuliaJay8 @PatriciaNPino and 

ICYMI Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother https://axecorg.blogspot.de/2017/08/economics-hereditary-mental-disease.html …

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REPLY to Tom Hickey on Aug 23

The macroeconomic Profit Law for the pure production-consumption economy in the most elementary form says Q_m≡−S_m or monetary profit for the economy as a whole is the mirror image of dissaving and has nothing to do with greed or monopoly power or innovation or productivity or risk. In other words, in the pure production-consumption economy profit depends in the most elementary case on the growth of the household sector’s debt.

Now, only if overall profit is greater than zero the business sector maintains or increases employment. This is the minimum condition. If overall profit turns into loss firms go bust and employment decreases. If the losses continue the economy eventually breaks down.

From the fact that profit is the mirror image of growing household sector’s debt follows logically that overall profit turns into overall loss as soon as the household sector starts to pay back the accumulated debt. The economy eventually breaks down because of immanent logical necessity (no crisis and no criminals and no banksters and no exploding real estate or stock market bubble and no revolution is needed) as soon as private and/or public households start to redeem their debt in the aggregate.#1

The macroeconomic Profit Law for the elementary investment economy says Q_m≡I−S_m or monetary profit for the economy as a whole is given by the difference between business sector’s investment I and household sector’s monetary saving/dissaving S_m. Let S_m for simplicity here be zero then profit depends directly on the GROWTH of the capital stock.#2

This worked fine since the Industrial Revolution but it cannot work in all eternity. The snag is this: if growth weakens or is stopped, overall profit turns into overall loss and the whole economy breaks down.

The challenge as it follows from the correct profit theory is this: how can the growth path be flattened without causing a full-scale economic breakdown?

Because Walrasians, Keynesians+MMTers, Marxians, and Austrians have NO idea until this day what profit is they do not even see that the actual life-and-death question of economics is how to engineer a soft landing on a reasonably high and sustainable plateau of production and employment.

You say: “The only way to address this internal contradiction of pure capitalism is by introducing some socialism into the system by allowing the government to offset the balance of the nongovernment sector.”

This is inaccurate and misleading. What a government sector deficit actually does is to increase overall profit because it holds Q_m≡(I−S_m)+(G−T) or, if I is falling and S_m is rising then the government deficit offsets the negative effect on profit. To sell the MMT profit push program as socialism is indeed a milestone in new political marketing. Hitherto, it has not been the primary goal of socialism to secure the profits of the one-percenters, at least not officially.

The real issue ― to end unsustainable growth without a breakdown of the economy ― cannot be solved by permanent government deficit spending. This is technically no problem, as MMT correctly points out, but it simply does not work. In order to see this, though, one has to consistently switch from profit- to employment theory.#3 Unfortunately, MMT employment theory, too, is false.


#1 Mathematical Proof of the Breakdown of Capitalism
#2 Squaring the Investment Cycle
#3 Macrofounded labor market theory

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REPLY to Tom Hickey on Aug 24

I say that MMT got profit theory wrong (just like Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism), and that the axiomatically correct macroeconomic Profit Law reads Q_m≡I−S_m, and that, for this reason, MMT policy guidance has no sound scientific foundations.

So, MMT is political agenda pushing masquerading as science (just like Neoliberalism, Marxianism, Austrianism, and all the rest). Note, I do NOT discuss MMT policy proposals, I prove that they lack an underlying true theory (just like all the alternatives).

You say: “Right. Kalecki-Levy profit equation. This is the price that MMT economists are willing to pay to fund full employment with a JG. along with progressive social welfare.”

This makes the impression that MMT knows all this profit stuff already, has discussed it at great depth and length, and has factored it in.

This is NOT the case. As I have proven, Kalecki’s and Levy’s profit equations are false.#1, #2, #3

The whole Keynesian, and Post Keynesian, and MMT crowd got it wrong. Only one economist got the elementary mathematics of national accounting right: Allais.#4

There is NO greater embarrassment in the history of modern science than economics, and MMT is part of it.


#1 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example and cross-references Kalecki
#2 Heterodoxy, too, is scientific garbage
#3 Rethinking deficit spending
#4 How Keynes got macro wrong and Allais got it right

No exploitation, no classes

Comment on Michael Hudson/Counterpunch/FAIRCONOMY on ‘Putting an End to the Rent Economy’

Blog-Reference

For most people, economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters, and the hardships of the honest and exploited/alienated ninety-nine-percenters. This is the soap-opera view of economics.

The scientific view is not focused on the human drama/farce but on the functioning of the economic system as a whole. Economics leaves all questions about Human Nature/motives/ behavior/action to psychology, sociology, anthropology, history, political science, biology, etcetera.#1, #2

Because NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works all behavioral approaches have failed. The actual state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. The fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle.

Therefore, economics has to undergo a paradigm shift. Economic analysis has to be based on entirely new macrofoundations and the fundamental questions have to be put again at the top of the agenda and answered with the help of better analytical tools. The key concepts of classical economics were profit, capital, exploitation, and classes. So let us, first of all, revisit profit.

The pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and 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. (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.#3

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#4

Monetary profit is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

In the pure production-consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because of C=Yw. All changes in the system are reflected by the market-clearing price. As a matter of principle, the pure production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined by productivity.

Now, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W1 by half. From this follows that the market-clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market-clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down―profit up. This fits the time-honored stereotype of wages and profits as antagonists.

However, this situation cannot last for long if profit has been zero in the initial period. In this limiting case, firm 2 makes a loss which is exactly equal to firm 1’s profit. The arbitrary wage rate cut of firm 1 does not increase the profit for the business sector as a whole but only REDISTRIBUTES it.

Seen from the perspective of a single firm, the antagonism of wages and profits is real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers.

For the economy as a whole, the classical antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. There is no distributional conflict about output between profits and wages. When classes are defined according to these economic categories the actual conflict materializes within the classes.

When, in the limiting case, there are two groups of workers and two groups of capitalists and the first group of capitalists exploits the first group of workers by slashing the wage rate, then the exploiters OBJECTIVELY act in the interest of the second group of workers whatever their own subjective motives may be. The second group of workers has no economic interest to overcome the wage discrimination of the first group, yet the second group of capitalists has indeed because its profit is indirectly affected. On a deeper level, the relation between the two groups of capitalists is antagonistic. The same holds for the two groups of workers. What looks like exploitation is, in fact, cross-over exploitation within the Marxian classes. This explodes the idea of a ‘natural’ common class interest and, by consequence, of a ‘natural’ class war.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. The generalization of partial effects has the compelling logic of the profit and loss account and the irrefutable empirical evidence of firm 1 on its side. Indeed, what could be more convincing? Wages down, profits up. It works. The invisible redistribution of profit and output is anonymously effected behind the agents’ backs by the market-clearing price. Neither capitalists nor workers understand how the market system and the price mechanism works. Neither do economists since Smith, Ricardo,#5 and Marx.#3 Neither does Michael Hudson.

Egmont Kakarot-Handtke


#1 Economics is NOT about Human Nature but the economic system
#2 Economics is NOT a social science
#3 For details see ‘Profit for Marxists’
#4 Wikimedia, The elementary production-consumption economy
#5 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

Related 'The abject failure of orthodox and heterodox distribution theory'

***

REPLY to MRW on Aug 18

You say: “As far as I’m concerned, you muddle macro- and microeconomics; at least, you muddle American microeconomics in with American macroeconomics.”

I clearly state in Sec. 3 “Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle. … Economic analysis has to be based on entirely new macrofoundations.” In Sec. 5 the MACRO axioms are enumerated.

The muddle is in YOUR head.

You ask: “What do your bêtes noir, wages, and profits, have to do with sectoral balances and fiscal policies—US macroeconomic issues the latter of which have not been properly instituted in this country for over 35 years?”

Wage income and profit are the fundamental concepts of economics and economists do not understand the difference between them since Adam Smith and Karl Marx. This has NOTHING to do with US macro. Just like there is no Law of Gravitation for the US, France or China there is NO national Profit Law.

The Profit Law reads in the most elementary case Qm=-Sm and it holds for the world economy as a whole and every single country no matter whether it is capitalist or communist. The scientific concept of law implies universality.

The problem of US macro policy is that US economists do not understand what profit is and how the market economy works. Scientifically, US economists are at Trump University level. The problem of economic policy is always and everywhere the lack of sound scientific foundations.

***

REPLY to MRW on Aug 18

You say: “It’s just that I agree with Paul Davidson who says that no US economist has a clue what the Keynesian approach is, that it has never been taught in American universities, and what passes for the ‘Keynesian approach’ is not. It’s in Davidson’s latest book …”

(i) You are right, of course, with regard to Samuelson’s synthesis and all that followed from it.#1
(ii) Keynes’s approach, though, has been already formally defective in the GT.#2
(iii) Davidson has not realized Keynes’s foundational blunder until this very day.#3,#4


#1 The father of modern economics and his imbecile kids
#2 How Keynes got macro wrong and Allais got it right
#3 Why Post Keynesianism Is Not Yet a Science
#4 Post Keynesianism, too, is proto-scientific garbage

Fixing the loanable funds blunder

Comment on Lars Syll on ‘Krugman and Mankiw on loanable funds — so wrong, so wrong’

Blog-References

The loanable funds theory, as presented since time immemorial in the textbooks, is proto-scientific garbage. There is no use at all to discuss one more time what Krugman or Mankiw has to say about the issue. As a matter of principle, constructive Heterodoxy does not waste time criticizing the incompetence of Orthodoxy but fixes matters.

So, let us first put the elementary mathematics of accounting right. At first, we have only the business- and the household sector.#1 The two sectoral balances are given as follows:
Q_m≡C−Y_w   profit Q_m is the household sector’s spending C minus wages Y_w,
S_m≡Y_w−C    saving S_m is wage income Y_w minus consumption expenditures C,
------------
Q_m+S_m=0    or Q_m≡−S_m.

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving. This is the most elementary form of the Profit Law.

For a start, the household sector’s budget is balanced, i.e. C=Y_w, hence profit is zero.

Money is needed by the business sector to pay the workers who receive the wage income Y_w per period. Money is provided by the central bank in the form of deposits. The average stock of transaction money is given as M=κY_w, with κ determined by the payment pattern. In other words, the ‘quantity of money’ M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank in the form of deposits and overdrafts which are always equal. The economy never runs out of money. The idealized transaction pattern is shown on Wikimedia.#2

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank is continually created and destroyed during the period under consideration.

Now, the government sector GS is added. The three sectoral balances are given as follows:
Q_m≡C+G−Y_w     profit Q_m is HS and GS spending C+G minus wages Y_w,
S_m≡Y_w−T−C      saving S_m is wage income Y_w minus taxes T and expenditures C,
B_m≡T−G            budget surplus B_m is taxes T minus government expenditures G,
----------------
Q_m+S_m+B_m=0   or Q_m≡−S_m−B_m.

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving plus the government sector’s budget deficit. For a start, taxes T are set to zero and the household sector’s budget is balanced, i.e. C=Y_w, i.e S_m=0. In this case, the business sector’s profit is equal to the government’s deficit, i.e. Q_m =−G.

The combined transaction pattern of the household- and the government sector is shown on Wikimedia.#3

The transaction pattern of the business sector is the exact mirror image. So, while the government sector ends up with overdrafts, the business sector ends up with deposits of equal magnitude.

Positive/negative balances are the interface between the sphere of production and the financial sphere.

Let us call the deposits loanable funds then it can be said that the ‘supply of loanable funds’ is always quantitatively equal to the ‘demand’. At the end of the period, the accounts of the central bank ― which has created the money for deficit spending out of nothing ―, the business sector, and the government sector look as shown on Wikimedia.#4

The government’s deficit spending causes an increase in the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank that bears zero interest.

In the second step, the public debt is consolidated by the issuance of long-term government bonds or other types of securities. Government securities are offered with a certain maturity and interest rate. In the present case, the business sector is in possession of loanable funds and decides which amount to buy. It is here assumed for simplicity that the whole government debt is consolidated. After the switch from non-interest bearing deposits to interest-bearing bonds, the newly created money vanishes again and the accounts look as shown on Wikimedia.#5

Note that the creation of deposits/overdrafts, i.e. money, is temporally disconnected from the consolidation. The long-term financing of a government deficit may happen before or after the spending has taken place.

As a matter of principle, the ‘supply of loanable funds’ = deposits is ALWAYS quantitatively equal to the ‘demand’ = overdrafts. The terms supply and demand make NO sense at all in the context of money creation.

Matters are analogous with household sector saving and business sector investment. In this case, the monetary profit of the business sector is given by Q_m≡I−S_m. By consequence, the increase of loanable funds of the household sector is given by monetary saving S_m and that of the business sector by Q_m. The total financing requirement, on the other hand, is given by I.#6 The most important thing to notice is that business sector’s investment expenditure I and household sector’s saving S_m is NEVER equal. To assume that the interest rate equalizes both magnitudes is the lethal blunder of the familiar loanable funds approach.#7

Egmont Kakarot-Handtke


#1 The pure production-consumption economy is defined by the macro axiom set: (A0) The objectively given and 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. (A1) Y_w=WL wage income Y_w 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. For a start X=O.
#2 Wikimedia AXEC98 Transaction pattern C=Yw
#3 Wikimedia AXEC99 Transaction pattern C+G greater than Yw
#4 Wikimedia AXEC102 Government deficit spending, creation of money
#5 Wikimedia AXEC103 Government deficit spending, consolidation
#6 For details see ‘Squaring the Investment Cycle’
#7 For more details see cross-references Refutation of I=S and cross-references Debt

Related 'Loanable funds ― no hoax, just breathtaking stupidity' and 'Say hello to Lars Syll, Keynes’s last parrot' and 'A new episode of one of the worst blunders of economics' and 'Macrofoundations, too, are defective' and 'Loanable funds, lack of scientific firepower and abundance of political fartpower' and 'Enough! Economists, retire now!' and 'Ending the economic Froschmäusekrieg a.k.a. Batrachomyomachia' and 'Not a question of simplicity but of stupidity' and 'How economic thinkers think they think about interest' and 'Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right'.

Advancing to the correct multiplier

Comment on Peter Cooper on ‘Short & Simple 16 ― The Expenditure Multiplier and Income Determination’

Blog-Reference

Peter Cooper states: “We have seen that total spending equals total income. It has been argued that it is spending that creates (or determines) income. This can be inferred from the observation that some spending can occur independently of income. Spending that occurs independently of income is called autonomous spending. … Examples of autonomous spending are: government spending; autonomous private consumption; private investment; exports.”

We have proven that the statement ‘total spending equals total income’ is false. #1 By consequence, the whole formal apparatus of MMT is defective. This, of course, affects the multiplier.

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown under the label of Graphic AXEC62: #2

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade.

Items (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρ_F, as defined in (iii), embodies the price mechanism.

The correct employment and income multiplier consists of TWO components, the expenditure ratio ρ_E and the factor cost ratio ρ_F. #3 The latter component is missing in the familiar approaches, which leads to wrong policy prescriptions.

Egmont Kakarot-Handtke


#1 For the full-spectrum refutation of MMT, see cross-references MMT
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 For details of the big picture, see cross-references Employment

Related 'It’s the price mechanism, stupid!' and 'Rethinking the multiplier' and 'Note on the employment multiplier' and 'The labor market and the consistent failure of 101-economics'.

Profit and the decline of labor’s nominal share (I)

Comment on Asher Schechter on ‘The Rise of Market Power and the Decline of Labor’s Share’

Blog-Reference and Blog-Reference on Aug 16 and Blog-Reference on Sep 21 adapted to context

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: economists have NO idea of what the foundational concept of their subject matter is.#1

It is pretty obvious that without the true profit theory there is no true distribution theory.#2 In order to arrive at the true profit theory, the analysis has to let the false Walrasian microfoundations and the false Keynesian macrofoundations behind and to be based on the correct macrofoundations.#3

For the elementary production-consumption economy then follows:
Q_m≡C−Y_w      profit Q_m is household sector’s spending C minus wage income Y_w
S_m≡Y_w−C      saving S_m is wage income Y_w minus consumption expenditures C
-------------
Q_m≡−S_m.

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior or on markup setting.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity. Automation affects only the DISTRIBUTION of total profit AMONG firms (and countries).
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is the most elementary mistake to maintain that total income is the sum of wages and profits.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. Microfounded profit theory is one big Fallacy of Composition.

The axiomatically correct macroeconomic Profit Law is given for the GENERAL case as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) and reduces to Q_m=(I−S_m)+(G−T) for Y_d, X, M = 0; Legend: Q_m total monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving, G government expenditures, T taxes, X exports, M imports.

The nominal labor share λ is defined as the quotient of wage income Y_w and the sum of wage income and monetary profit Q_m, that is, λ≡Y_w/(Y_w+Q_m)≡1/(1+Q_m/Y_w).

It is obvious now that market power or automation cannot account for a falling nominal labor share λ. The MAIN drivers of increasing overall profit have been in the past decades the increasing debt of the household- and the government sector.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See also Essentials of Constructive Heterodoxy: Profit
#3 (A0) The objectively given and 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. (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. For a start X=O.

Related 'Profit and distribution: a primer' and 'Profit and the decline of workers’ nominal share (II)' and 'There is NO such thing as a “labor share of income”' and 'Links on McKinsey’s A new look at the declining labor share of income in the United States' and 'Profit'. For details of the big picture see cross-references Profit.