Heterodoxy as superior alternative

Comment on Lars Syll on ‘Deductivist modeling leading economics astray’

Blog-Reference and Blog-Reference Nov 18

Since the human brain works sequentially, every analysis has a start and then proceeds logically from there. It seems pretty obvious that if the premises are false, then the conclusions are false, too, or as the IT-crowd always had it: garbage in, garbage out. This is known since antiquity: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Resume of Aristotle’s Posterior Analytics)

Every day thinking, of course, works differently: “The animistic fallacy is the informal fallacy of arguing that an event or situation necessarily arose because someone intentionally acted to cause it. While it could be that someone set out to effect a specific goal, the fallacy appears in an argument that states this must be the case. The name of the fallacy comes from the animistic belief that changes in the physical world are the work of conscious spirits.” (See Wikipedia)

So, animistic thinking explains the appearance of a thunderbolt with Zeus being angry, while physics explains it as an electromagnetic phenomenon. The latter thinking eventually leads to the lightning rod. Animism regularly leads to a milder or stronger form of paranoia, that is, in speculation about the behavior of unknown entities, which are seen as either benevolent or malevolent. Thus, everyday thinking or common sense runs essentially in the categories good/bad or like/dislike, while scientific thinking runs in the categories true/false.

Economics is a strange mixture of analytical and animistic thinking. Orthodoxy holds that the working of the economy is explicable as the result of the interactions of an entity called homo oeconomicus and an entity called the Invisible Hand. Both are benevolent and increase an entity called welfare.

These ideas are explicitly formulated as hardcore premises: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (Weintraub, 1985, p. 147)

Now, remember Aristotle, the crucial condition is that ‘premises are certain, true, and primary’. It has also been observed since antiquity that there is no such thing as certain, true, and primary premises about human behavior.

“Alexander Rosenberg lays great emphasis on the role of intentionality in the social sciences, for in his view this role explains the nomological failures of the social sciences and supports the view that the social sciences (in anything like their current form) can never succeed in formulating real laws of human behavior.” (Hausman, 1992, p. 326)

This, too, is known since antiquity: “For arguments about matters concerned with feelings and actions are less reliable than facts: and so when they clash with facts of perception they are despised, and discredit the truth as well.” (Aristotle, quoted in Georgescu-Roegen, 1966, p. 184)

So, what Jon Elster demands is a contradiction in terms: “To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe.” (See intro)

Gossiping about human behavior is popular, but definitely the wrong angle of analytical attack. The crucial methodological point is that economics cannot be based on behavioral assumptions. Neither constrained optimization nor animal spirits will do (Hudík, 2011).

The set of five hardcore propositions has proven its worthlessness. Orthodoxy is a failed approach according to the formal and empirical criteria that define science. And, most importantly, the failure has been built into the premises. Keynes knew this very well: “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.” (Keynes, 1973, p. xxi)

Therefore, economics has to be redefined, and this amounts to emancipation from the animistic thinking of the so-called social sciences.

Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

No! It is not the task of the economist to dabble in psychology, sociology, political science, history, anthropology, law, ethics, or philosophy. The subject matter of economics is the economy.

New definition, objective-structural: “Economics is the science that studies how the monetary economy works.”

This requires a new set of hardcore propositions to start with, which — and there is no way around it — have to be ‘certain, true, and primary’ (2014b; 2014a).#1

Heterodoxy will either succeed in this task or it will be thrown out of science just like Orthodoxy.

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1966). Analytical Economics, chapter Choice, Expectations, and Measurability, pages 184–215. Cambridge: Harvard University Press.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). Objective Principles of Economics. SSRN Working
Paper Series, 2418851: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

#1 For a start see cross-references New Curriculum

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ICYMI (comment on Bruce Wilder of Nov 12 on Nov 19)

‘Uncertainty’ has become the shibboleth of Post-Keynesianism and the mantra is ‘We simply do not know.’ This raises the question: why do Post Keynesians still waste their time with economics instead of making long and healthy walks in the lovely countryside?

That much is sure; the flight path of a down feather is uncertain. All that can be said after countless meticulous empirical observations is that it eventually falls to the ground. This is why physicists ignored the uncertainty of the down feather entirely and took another route to figure out the Law of Falling Bodies.

In any case, physicists have not made a habit out of telling the world what they do not know or what is unknowable. They are famous for telling the world what is known and what can be known.

So the answer to Post Keynesian know-nothings is to get out of the way, or as G. B. Shaw put it ‘People who say it cannot be done should not interrupt those who are doing it.’

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ICYMI (comment on Silwyson of Nov 21 on Nov 21)

You say that the fallacy called ‘denying the antecedent’ is “a very common logical mistake, particularly among economists.” This is true, indeed, and here is the best example I can think of.

First, a specimen of the fallacy from Wikipedia:
(i) If it is raining, then the grass is wet.
(ii) It is not raining.
(iii) Therefore, the grass is not wet.
Proposition (ii) denies the antecedent. While all premises are true, the conclusion is provably false.

Now, the application to a central tenet of economics:
(i) If a system explodes/implodes, then it has no equilibrium.
(ii) The market economy has not exploded/imploded in the last 200 years.
(iii) Therefore, the market economy is an equilibrium system.
Not much more than this logical crap is needed to convince the representative economist of the General Equilibrium approach.

Economics is traditionally awash with logical fallacies. So much so that already J.S. Mill took it upon himself to categorize and expose them at great length (see the chapter Fallacies in 2006).

The worst fallacy of economics, however, is the Fallacy of Composition, i.e., to generalize what is true for a single case (individual, firm) for the whole economy. This fallacy is the very foundation of Marshall’s approach, and it is literally built into the neoclassical program of methodological individualism (Arrow, 1994, p. 1). For the fatal Keynesian fallacy, see (2011).

In sum: While I agree with you that true propositions can follow from wrong premises — classical case: the sun goes up (true) because it circles around the earth as the center of the universe (false) — I am pretty sure that there is no logical fallacy in my post of Nov 18.

References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.

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AXEC113h What the Paradigm Shift is all about

Ricardo, too, got profit theory wrong

Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Blog-Reference and Blog-Reference

In his letter of 1829 To the Heads of the University of Oxford, One of the Old School asked: “ARE THE PRINCIPLES OF POLITICAL ECONOMY WHICH GOVERNMENT IS ACTING ON TRUE OR FALSE?” #1

He got the following answer in the Westminster Review. #2

“The first of the principles which ‘the old school’ think so erroneous, is the well-known doctrine of Mr Ricardo, that, putting rent out of the question, the price of every commodity consists wholly of wages and profits.”

Ricardo is known for having asserted: “… profits would be high or low in proportion as wages were low or high.” (1981, p. 110) However, things are not as straightforward as they seem.

The WR now goes on to filibuster: “In this nomenclature low and high have no reference to amount; they indicate only proportion. If a commodity should at one time sell for ten shillings, of which the labourer received nine, and should afterwards sell for twenty, of which the labourer received fifteen, this, according to Mr. Ricardo’s nomenclature, would be a fall of the labourer’s wages. Though he would receive a larger amount, he would have a smaller proportion. And proportion is all that Mr. Ricardo considers.”

“This strange use of words, like every other deviation from ordinary language, has produced much obscurity. It has some times led even such men as Mr. Ricardo and Mr. M'Culloch into inconsistency. Our readers may imagine how it has confused Mr. Blackwood’s correspondent. He has not the least glimmering of the meaning of the writers whom he attacks, but goes on heaping abuse on economists for propositions in which they understand by the word low wages a low proportion, while he supposes them to mean a small amount.”

“But he [Ricardo] is not consistent. When he says, that ‘whatever raises the Wages of labour, lowers the Profits of stock,’ he considers Wages as a proportion. When he says that ‘high Wages encourage population,’ he considers wages as an amount. Even Mr. M'Culloch, who has clearly explained the ambiguity, has not escaped it. He has even suffered it to affect his reasonings. In his valuable essay ‘On the rate of wages,’ he admits that ‘when Wages are high the Capitalist has to pay a larger share of the produce of industry to his labourers,’ An admission utterly inconsistent with his general use of the word, as expressing the amount of what the labourer receives, which, as he has himself observed, may increase while his proportion diminishes.”

The profit theory has not improved since 1829. As Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

The error/mistake/blunder of Ricardo’s profit theory is that it is a generalization of what can be observed at the microeconomic level, that is, it is a Fallacy of Composition. The profit for the economy as a whole has to be derived from macroeconomic axioms. #3

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w (C consumption expenditures, Y_w wage income) and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing, C=Y_w total monetary profit is zero.

Macroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt. It does NOT depend on labor time, or wages, or productivity, or monopoly power, or greedy capitalists/managers. More specifically:

• 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.
• Macroeconomic profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup-setting, nor on risk-taking.
• In order that profit comes into existence for the first time in the pure 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/rent-seeking is irrelevant for macroeconomic profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• Profit is a factor-independent residual and qualitatively different from wage income (difference of flows vs flow). Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits. #4

Microfounded profit theory suffers from three methodological blunders: the Fallacy of Insufficient Abstraction, the Fallacy of Composition, and the Humpty Dumpty Fallacy. The Principles of Political Economy were false in 1829 and are false to this very day.

Egmont Kakarot-Handtke


#1 Blackwood’s Magazine (courtesy EconoSpeak)

#2 Westminster Review
#3 The profit theory is false since Adam Smith
#4 Profit, income, and the Humpty Dumpty Fallacy

Related 'When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism' and 'Profit for Marxists' and 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?' and 'Ricardo and the invention of class war'.

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REPLY to Barkley Rosser on Feb 14

Like Ricardo, I consider the most elementary case, i.e., wage income and profit. The axiomatically correct macroeconomic Profit Law says for the general case Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). Legend: Q_m monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving, G government expenditures, T taxes, X exports, M imports.

All variables are measurable with the precision of two decimal places. Therefore, the Profit Law can be tested, in principle, for every country around the globe. There can be no doubt that it will be confirmed without exception.

to Sandwichman

The link #2 to the article in the Westminster Review works probably better from my blog.

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REPLY to Barkley Rosser on Feb 15

You say, “But while you have been asked to do so many times, you have never offered a shred of evidence to support this claim that data will support your crank theory. And evidence does not support it.”

Instead of gossiping about the sex life of the House of Sa'ud, you should have done some methodological homework. You may have stumbled across Popper’s meme of conjectures and refutation. And you may have realized that there is theoretical physics that provides the conjectures, and experimental physics that does the testing. Both tasks require different talents/tools and are normally performed by different people.

Your scientific education apparently ended with the story of Galileo throwing cannonballs from the Leaning Tower of Pisa in order to prove his Law of Falling Bodies. In modern science, the division of labour is firmly institutionalized.

The first calculation of the deflection of light by mass was published by Johann Georg von Soldner in 1801. Einstein calculated the relativistic deviation of light twice. Ironically, he got it wrong the first time in 1908 without realizing it until 1915. Luckily for him, the First World War prevented testing. It was Eddington (and two other expeditions to Brazil and Russia) who tried in 1919 to actually test = measure the deviation during a solar eclipse. Einstein did NOT test relativity himself. The same goes for Higgs and the testing at CERN. Note that the folks at CERN had to build the biggest and most expensive machine in human history. Something that was obviously beyond the means of the theoretical physicist Higgs.

No scientist ever came up with the idea that von Soldner, Einstein, or Higgs should have tested their theories themselves or with the brain-dead critique that they have “never sullied their hands” with actual empirical data.

So, theoretical physics provides the testable formula, and experimental physics does the testing. Likewise, theoretical economics provides the formula, and the econometricians do the testing.

Here is my challenge: MMT asserts in the Keynesian tradition that the macroeconomic balances equation reads (I−S)+(G−T)+(X−M)=0 while I claim that the axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Q_m−Y_d)=0.

I wonder how long it takes to test such a clear-cut alternative and why neither Post Keynesians, Anti-Keynesians, MMTers, nor you can get their asses up and “sully their hands” and settle this fundamental economic question once and for all. Wouldn’t it be a field day for you to PROVE me wrong?

I understand, as an economist, you are busy 24/7 with the WaPo gang, the CIA/SVR meeting, and the sex life of the House of Sa'ud.

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REPLY to Sandwichman on Feb 15

Note that One of the Old School challenged the scientific status of economics: “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

Note also that economics is still “a mass of fictions”. And the reason why economics is a failed/fake science is that economists can to this day not tell what profit and income are.

Note also that the ‘refutation’ of One of the Old School is a semantic shell game that messes up simple algebra.

“In this nomenclature low and high have no reference to amount; they indicate only proportion. If a commodity should at one time sell for ten shillings, of which the labourer received nine, and should afterwards sell for twenty, of which the labourer received fifteen, this, according to Mr. Ricardo’s nomenclature, would be a fall of the labourer’s wages. Though he would receive a larger amount, he would have a smaller proportion. And proportion is all that Mr. Ricardo considers.”

Ricardo defined total income Y as the sum of wages W and profits P, i.e., Y=W+P. This gives after transformation 1=1/(1+P/W)+1/(1+W/P) with 1/(1+P/W) = share of wages and 1/(1+W/P) = share of profits. And yes, One of the Old School is right, if wages rise, the share of wages increases, and the share of profits decreases. The absolute amount and the share move in the SAME direction. However, the critics of One of the Old School confused themselves by simultaneously increasing wages and profits but in different proportions, i.e., wages from 9 to 15 and profit from 1 to 5. Wages seem to rise but actually fall IN RELATION to profit, and this is why the share of wages falls. No ambiguity here, no paradox, all plain and simple algebra.

The one thing that the alleged refutation of One of the Old School proves is the utter scientific incompetence of economists. Ricardo got profit theory wrong, and neither Walrasianism, Keynesianism, Marxianism, Austrianism, nor Barkley Rosser has realized it to this day. Not to speak of rectification.

As One of the Old School clearly saw in 1829, these folks are disgracing their universities. High time to throw them out.

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REPLY to Barkley Rosser on Feb 16

Your restless attempt to mess up any issue is not even comical. You simply cannot resist the temptation to parade your absolutely irrelevant knowledge of biographical and historical detail. As always, you are missing the essential point.

The essential point is the alleged antagonism between wages and profits, which provided the economic argument for Marx’s sociological/political concept of class struggle.

Sandwichman’s introductory quote, “There is no other way of keeping profits up, but by keeping wages down.” (David Ricardo) clearly defines the point at issue.

The Westminster reply starts “The first of the principles which ‘the old school’ think so erroneous, is the well-known doctrine of Mr. Ricardo, that, putting rent out of the question, the price of every commodity consists wholly of wages and profits.”

“… putting rent out of the question” means focusing on the relationship between wages and profits and putting rent aside for the moment.

This, of course, is unacceptable for the confused confuser Barkley Rosser because he has a lot to parade about rent and Malthus and Oxford and Cambridge and who was alive and who was dead.

This drivel is, as always, pure disinformation.

The point at issue is that Ricardo’s theory of profit and rent is provably false.#1

This, in turn, means that Political Economy has no scientific merits, a fact that One of the Old School did not fail to mention “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

This is as true today as it was in 1829 because profit theory is still false, or as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008)


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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REPLY to Sandwichman on Feb 16

The issue of substance theories has been dealt with exhaustively by Mirowski in More Heat Than Light.

So we know definitively that both the Labour Theory of Value and the Utility Theory of Value are dead and buried, just like the Flat Earth Theory.

The only interesting question is now where the exit of the scientific graveyard is. Or, as Feynman put it, “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.”

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NOTE on Sandwichman’s ‘Rumble on Wall St. ― No Other Way of Keeping Profits Up!’ on Feb 16

You say, “And this is also why I think it would be impossible to empirically confirm Egmont Kakarot-Handtke’s ‘law’ of profit. There is no ‘real’ yardstick with which to measure aggregate profit. If Egmont is right that ‘[m]acroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt,’ then he is wrong that his profit ‘law’ can be tested empirically and ‘will be confirmed without exception’.”

You are wrong, of course. What you overlook is that there are TWO kinds of profit: monetary profit Qm and nonmonetary profit Qn. Monetary profit emerges in the production-consumption economy and can be measured with the precision of two decimal places in all countries with a proper system of National Accounting and at least one intelligent economist. Countries that do not satisfy these conditions may be called scientific shitholes.

Therefore, the structural/systemic/behavior-free/objective/macroeconomic Profit Law #1 will be confirmed without exception in all (non-shithole) countries around the globe.

The market economy, though, consists of TWO entirely different types of markets: the primary markets of the production-consumption economy and the secondary markets of all kinds of real and financial assets. #2 In these markets, non-monetary profits/losses Qn emerge through the re-evaluation of assets. These re-evaluations are highly subjective and can, at the moment at least, be entirely fictitious/fraudulent.

So, there are TWO theories of value, and there are TWO entirely different kinds of profits, i.e., objective/measurable monetary profit Qm and subjective and currently not reliably measured non-monetary profit Qn.

As you can see from the correct axiomatic foundations, #3 total profit is given with the 4th axiom as Q≡Qm+Qn. The macroeconomic Profit Law relates to Qm and is provably true. #4


#1 First Fundamental Law vs. Fundamental theorem of income distribution
#2 Primary and Secondary Markets
#3 Graphic AXEC132
#4 For details of the big picture, see cross-references Profit

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REPLY to Barkley Rosser, Sandwichman on Feb 18 and Blog-Reference MNE

Barkley Rosser says: “So, to get back to the main issue, where both S-man and the execrable Egmont decided that they were in it together being really serious, neither of them has even recognized the point I made from Ricardo that rent is the third category of income, “

False. I gave you a reference to my paper about rent. Here, once more. #1 The whole point of this thread is to clarify first the relation between wages and profits, which is the pivot of all of economics. Your repeated attempts to draw attention away from the point at issue are ridiculous. Your assertion “neither of them has even recognized the point I made from Ricardo that rent is the third category of income” is provably false.” Anybody can check it anytime by browsing the posts above.

Sandwichman says: “The ‘lump of labor’ is FUNDAMENTAL to ‘economic thinking’ and the way that economists disavow the foundation of their very own fetish is to project it onto others.”

False. First of all, there is NO such thing as economic thinking. There is merely the blathering of confused confusers. #2 And you and Barkley Rosser are here and now providing the Smoking Gun proof.

Second, NOT the lump-of-labor is fundamental to economic thinking, but profit. Who does not understand what profit is does not understand how the economy works. This applies to all economists between Ricardo and Barkley Rosser/Sandwichman.

You muddleheads do not even understand the existential problem of economics. Marx did: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

Marx saw the problem, but he could not solve it. He drowned in the semantics of the Labour Theory of Value just as the Neoclassicals later drowned in the verbiage of the Utility Theory of Value.

Just like Ricardo, Marx got the profit theory wrong. #3 The correct answer to the existential problem of economics is that the “capitalist class as a whole” can only “draw out of circulation what was not previously in it” if either the household sector or the government sector throws more into the circulation than they take out, that is, if they run a deficit, that is, if they increase their debt. And this is something that can be observed and measured with the precision of two decimal places. The axiomatically correct profit theory is given with this general balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0, which fully replaces the false After-Keynesian balances equation (I−S)+(G−T)+(X−M)=0.

Sandwichman says: “Poor, dumb Kaka-root thinks he can overturn ‘unscientific’ economics with ‘scientific’ economics.”

Economics is, according to its self-definition for 200+ years, a science. And everybody who doubts it is reminded each year in no uncertain terms with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. This Prize, of course, is a fraud because economics is a proto-science or what Feynman called a cargo cult science that has not even managed to get its foundational concepts consistently together. The dire consequences were pointed out by One of the Old School back in 1829: “If it [economics] be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

The muddleheads of economics sit squarely in the swamp where “nothing is clear, and everything is possible”. (Keynes) And when they are told that their inconclusive blather is cargo cult science, they pull the ejection seat and claim that there is no scientific truth because of ontological uncertainty and because of Heisenberg and Gödel. #4

It is absurd in the extreme when scientific morons who have not gotten the foundational concepts of their own discipline right and fail at the elementary mathematics of accounting waffle about advanced physics and mathematics. On this score, Barkley Rosser and Sandwichman never disappoint the audience: “Well, S-man, … I have a paper coming out in the Journal of Evolutionary Economics with Simone Landini and Mauro Gallegati on the implications of that theorem for economics, which is a deep jump into such matters.”

We are all looking forward to Barkley Rosser’s jump from the 10m springboard into the empty swimming pool. #5, #6


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
#3 Karl Marx, fake scientist
#4 Failed economics: The losers’ long list of lame excuses
#5 How economists shoot themselves non-stop in the methodological foot
#6 The insignificance of Gödel’s theorem for economics

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REPLY to Sandwichman on Feb 19

Rent is profit as it appears in the agricultural industry. Economically, a farm is not different from a firm. Ricardo did not understand what profit is, and things have not improved in the meantime. The foundational concepts of economics have been ill-defined for 200+ years. Well done, soapbox economists!


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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REPLY to Sandwichman on Feb 20

“That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy. (Marx)

“But all science would be superfluous, if the appearance, the form, and the nature of things were wholly identical.” (Marx)

“People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, . . . , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (Mill)

Rent is profit as it appears in the agricultural industry. The bigots of common sense don’t get it since Ricardo. The blather of the bigots of common sense is to this day called economics.

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REPLY to Sandwichman on Feb 20

You still have not answered the foundational question of economics: What is macroeconomic profit, and how is it related to wages?

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QUESTIONNAIRE back to Sandwichman on Feb 21

no
n/a
n/a
look it up in my working papers on SSRN
no
n/a

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JFTR on Feb 22

“To determine the laws which regulate this distribution, is the principal problem in Political Economy.” (Ricardo, Principles, 1821, Works, I, p. 5)

The Law of Distribution for the production-consumption economy is shown on Graphic AXEC134

The Law presupposes the axiomatically correct definition of monetary profit Q_m and total nominal income Y.

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Graphic AXEC143d  Profit Law (with increasing complexity) and Balances Equation

Passionate belief is no substitute for knowledge

Comment on Asad Zaman on ‘The rise and fall of logical positivism’

Blog-Reference

With regard to econometrics, I agree with you that Orthodoxy messed the whole thing up. #1 This is bad enough; however, it is only a secondary effect. The root cause is that Orthodoxy as a whole is unacceptable as a scientific theory because it is based on NONENTITIES. Roughly speaking, if one starts with utility, constrained optimization, equilibrium, etc., and then goes on to test for the equilibrium price, one is bound to fail — not because the statistical methods are defective but because the hypothesis to be tested has no real-world content.

Empirical verification/falsification plays a decisive role in demarcation, which in turn is the central issue of science since the ancient Greeks introduced the distinction between opinion and knowledge.

“There are always many different opinions and conventions concerning any one problem or subject-matter (such as the gods). This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper, 1994, 39-40)

For more than 2000 years, it has been known that science is about knowledge and that religion is about belief. Obviously, you cannot get your head around this fundamental point: “These debates often get clouded by strong emotional attachments to science or religion — both sides having passionate believers.” (your post of 10 October)

There is, to begin with, no place for passionate believers in science. All great scientists pleaded for the utmost degree of objectivity, and that meant keeping belief, #2 passion, and other human-all-too-human failings out of the discourse. Science is about true/false, and that is that. “Like Planck, Einstein viewed the human element of any physical theory as essentially arbitrary, something that should be purged on realization of the final true theory.” (Mirowski, 2004, p. 159)

Heterodoxy has a choice: it either drowns in beliefs, opinions, emotions, wish-wash, ad hominem argument, and anything goes (= political economics) or it eventually establishes material and formal consistency (= theoretical economics). #3

Egmont Kakarot-Handtke


References
Mirowski, P. (2004). The Effortless Economy of Science? Durham, London: Duke University Press.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.

#1 Redefining economics
#2 “The animistic fallacy is the informal fallacy of arguing that an event or situation necessarily arose because someone intentionally acted to cause it. While it could be that someone set out to effect a specific goal, the fallacy appears in an argument that states this must be the case. The name of the fallacy comes from the animistic belief that changes in the physical world are the work of conscious spirits.” (Wikipedia)
#3 For a start, see cross-references New curriculum

Related 'Demarcation works, but it takes longer in economics'

How economists missed out on the essential relationship of economics

Comment on Nick Rowe* on ‘Public Debt: A Global Perspective’

Blog-Reference

Roughly speaking, science is about relations. Economics, too, abounds with relationships: supply function, demand function, consumption function, the Phillips Curve, IS-LM, the global debt clock, #1, and so on.

Some of these relationships implicate trouble for the future: “As interest rates rise, there are bound to be spillovers from one sector to another with the linchpin being households. As interest rates rise, it is individual households that ultimately pay the debt service costs to government via taxes, pay to service their mortgages and buy the goods and services from corporations that keep the economy humming and allow the corporations to service their debt. It is a lot more inter-connected than you think which is why central bankers should be on edge.” (Nick Rowe)

True, indeed, but a bit trivial. A higher interest rate means more money for the borrowers. This has been known for five millennia. #2 To be sure, deficit spending and debt have an impact on the distribution of income and financial wealth.

However, economists talk much about the relationship between deficit spending and inflation or employment, but not so much about deficit spending and distribution. The reason is simple: economists know next to nothing about it. The ultimate reason, though, is that economists do not know what profit is. #3 This, of course, includes Nick Rowe.

The fact is that economists are incompetent scientists, and they thoroughly messed up macroeconomics.

To make the argument short, the axiomatically correct Profit Law for the economy as a whole is given as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M), which reduces to Q_m=(G−T) for Y_d, I, S_m, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Q_m is equal to the deficit (G−T) of the public sector, in a nutshell: Public Deficit = Private Profit.

As public debt grows, so does the financial wealth of the one-percenters. The same holds for private debt. And this is what can be observed over the last decades. Everybody has heard the two slogans: the rich get richer, and the worldwide debt grows exponentially. The exact relationship between the two phenomena is given by the Profit Law.

The Profit Law is the essential relationship for the monetary economy. The curious thing is that economists do not know it. #4 For 200+ years now, the Profit Theory is false and, by consequence, Distribution Theory. Nick Rowe’s discussion of the potential hazards of public debt shows that he is wandering around in the dark in blissful ignorance of the real threat.

Egmont Kakarot-Handtke


* "That was my post so if the post is ‘trivial’, I am entirely to blame."  Livio Di Matteo

#1 Economist The global debt clock
#2 Business Insider, The 5,000-year history of interest rates shows just how historically low US rates still are right now
#3 For details of the big picture, see cross-references Profit
#4 “A satisfactory theory of profits is still elusive.” (Desai, Palgrave Dictionary)

Related 'The demise of phony experts: macroeconomics is provably false' and 'Fact of life: your econ prof is scientifically incompetent' and 'Does economics matter more for bread or for circuses?' and 'Macro imbeciles' and 'The curious non-existence of profit in economics' and 'Profit: The most powerful formula of economics'.

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Source: Twitter

Source: Twitter

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REPLY to Frank Restly, Dean on Jun 4

After Livio Di Matteo’s opening trivialities: (i) the credit markets are interrelated, (ii) there are spillovers, (iii) central bankers should be on edge, some people feel encouraged to come forward with more of this brain-dead stuff.

Frank Restly: “Debt and deficits are not synonymous.”

Dean: “Your equation Q_m=G−T Does not explain rising profit margins from about 1947 to 1969.” The Profit Law says nothing about profit margins but about macroeconomic profit. This should be obvious to everybody who can read an equation. The reduced equation highlights the contribution of public deficits to total macroeconomic profit. The point at issue is the relationship between deficits and distribution.

Frank Restly: “… a productivity boom is sufficient to raise corporate profits”. Macroeconomic profit does NOT AT ALL depend on productivity. This is a microeconomic Fallacy of Composition. You simply do NOT understand what profit is and what the Profit Law says. #1

Dean: “I just have yet to see any clear demonstration of the mechanics of how profits come into existence other than by an increase in financial claims.” You will NOT find this demonstration on the Worthless Canadian Blather blog. #2, #3

Frank Restly: “I believe what Egmont is referring to is retained/accrued profits or some form of marginal propensity to consume among recipients of profit. But his simple equation does not address this.” True, the reduced equation does not address this because the express purpose of the reduced equation is to ISOLATE the effects of public deficits. What you obviously do NOT understand is that the complete equation Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) contains distributed profit Y_d and, by implication, retained profit. These issues have been treated elsewhere.#4

#1 For details of the big picture, see cross-references Profit

#2 The Emergence of Profit and Interest in the Monetary Circuit

#3 Primary and Secondary Markets

#4 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?

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REPLY to Frank Restly, Livio Di Matteo on Jun 4

Frank Restly: “This is a static equation in that there is no time lag indicated between a government/person going into debt and increases in macroeconomic profits being realized, which is quite unrealistic.”

The time dimension has been left out here in order to focus on the crucial distributional relationship, which is given with Public Deficit (in period t) = Private Profit (in period t). Time has been extensively dealt with elsewhere. #1, #2

You maintain: “… if you want to define "macroeconomic profit" this way, that’s your prerogative.”

The foundational concepts of economics have to be consistently defined. This is done by axiomatization. There are no definitional prerogatives in science; this delusion is called Humpty Dumpty Fallacy, and it is endemic among brain-dead economists. #3

The Humpty Dumpty Fallacy is one of the main reasons why economics is, after 200+ years, still at the proto-scientific level.

Livio Di Matteo says, “I do not see how deficits are equivalent to profits.” It could be perhaps a good idea to study serious economics#4 and no longer hang out with the econ-clowns of WCI.

Livio Di Matteo says, finally: “The view of deficits as profit also does not explain to me why the business community is usually at the forefront of calls for deficit reduction and balanced budgets.” This phenomenon has been addressed several times elsewhere. #5, #6


#1 Essentials of Constructive Heterodoxy: The Market
#2 The Synthesis of Economic Law, Evolution, and History
#3 Profit, income, and the Humpty Dumpty Fallacy
#4 Profit theory in less than 5 minutes
#5 Austerity and the idiocy of political economists
#6 Austerity: Who takes the little man for a ride?

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REPLY to Dean on Jun 5

Your example points in the right direction. However, it suffers from the Fallacy of Insufficient Abstraction.

In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is, for a star,t defined by three macroeconomic axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w), and two definitions (monetary profit/loss Q_m≡C−Y_w, monetary saving/dissaving S_m≡Y_w−C). #1

It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving, and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

Starting from the elementary production-consumption economy, complexity is then successively increased. To make matters short, the axiomatically correct relationships are 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:
(i) Q_m≡−S_m in the elementary production-consumption economy,
(ii) Q_m≡I−S_m in the elementary investment economy,
(iii) Q_m≡(G−T)+(I−S_m) in the investment economy with government deficit/surplus,
(iv) Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) in the open economy with distributed profit.

From (i)/(ii) follows that saving and investment are NEVER equal and that ALL I=S/IS-LM models are false since Keynes/Hicks. In other words, macroeconomics has been dead for 80+ years, and After-Keynesians have not realized it.

From (iii) follows that ― given business sector investment I and household sector monetary saving S_m ― Public Deficit = Private Profit. The government deficit (co-)determines the cumulative stock of financial assets in the business sector. The sum of public deficits over time accumulates to ever-growing public debt.

Eq. (iv) defines the relationship between deficits, macroeconomic profit, and growing debt. Economists do not understand it from Adam Smith/Karl Marx onward. Economics is the worst embarrassment in the history of modern science, and the so-called Worthwhile Canadian Initiative is an integral part of it. #2


#1 Macro for retarded economists
#2 Is Nick Rowe stupid or corrupt or both?

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AXEC109i

Exploding the Household Fallacy

Comment on Charles Adams on ‘The household fallacy’*

Blog-Reference and Blog-Reference (Link) and Blog-Reference Nov 15

Charles Adams, a physics professor at the University of Durham, explains the Household Fallacy: “When the goverment spends, that spending is someones income and that someone pays some tax so the government immediately gets some of their money back. And then that someone spends most of their money which becomes other peoples income. And these other people also pay tax, so the government gets another fraction back. And these other people also spend which becomes the income of even more people who also give a fraction back to the goverment. And so on. If everyone spends then the government gets all its money back. Whereas when you or I spend we do not get anything back. That is a big difference. The only way the goverment can be in deficit is if the people decide to save. The goverment debt is simply the peoples savings. If at any point the people go out and spend their savings, then the goverment debt will be cleared.”

The first thing to notice is that in this story, only the government sector and “people”, i.e., the household sector, appear, but not the business sector. And, curiously, the word profit does not appear once. An economic story without profit is fishy, to begin with. However, having a bad smell in the nose and precisely locating its source are quite different things. So, one has to advance from storytelling to proper economic analysis.

For a start, one needs a description of the elementary production-consumption economy. This economy is constructed from scratch with the following set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household sector 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.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. This is the macroeconomic Law of Supply and Demand. For the graphical representation of the analytical starting point, see AXEC31. #1

In this elementary economy, the Central Bank finances the wage bill by creating fiat money out of nothing. The average stock of transaction money is given as M=κYw, with κ determined by the payment pattern. #2

So, the business sector spends money into the economy in the form of wage income, Yw, and gets it back in the form of consumption expenditures C. The stock of fiat money is zero at the beginning of the period under consideration and zero at the end. Money is created and destroyed by the autonomous transactions between the business and the household sector. There is NO government, NO taxes, and NO deficit spending.

It is pretty obvious that this elementary production-consumption economy can run for all eternity at any level of employment. Problems arise if the households do not spend exactly their income, i.e., do not balance their budget.

Dropping the condition C=Yw yields two balances: Saving/dissaving of the household sector S≡Yw−C and profit/loss of the business sector Q≡C−Yw. It always holds Q≡−S, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving, and vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

Now, if the households save, the business sector makes a loss, and if this continues for a while, the economy breaks down. If the households dissave, i.e., run a deficit, the business sector makes a profit. The business sector’s deposits at the Central Bank (= money) grow in perfect lockstep with the household sector’s overdrafts (= debt). The deficit spending of the households is financed by the Central Bank, and it ends when the Central Bank puts the brake on further debt growth. In this case, C falls back to Yw, and profit falls back to zero.

Conclusion: Capitalism depends on profit, and profit depends on deficit spending, so Capitalism depends, in the most elementary case, on the growing debt of the household sector. It is NOT enough that “people” always fully spend their wage income; they have to spend more. So ultimately, Capitalism depends on a credit-creating banking system. However, here is the problem: either the households are not willing to go into debt, or the banking system is not willing to give them much credit for an extended time span.

This is where the state comes to the rescue. With the state as an additional sector, the Profit Law reads Q≡−S+(G−T). So, if the private households balance their budget, i.e., S=0, and the public households balance their budget, i.e., G−T=0, the balance of the business sector (= profit) is zero. If the government sector taxes only a part of its expenditures back, i.e., T<G, then the business sector makes a profit, i.e., Q=G−T. The minimum condition for the survival of state-sponsored Capitalism is G−T>S.

Now, the crucial difference between private households and public households is that the growth of household sector debt is limited, while the growth of public sector debt is virtually unlimited. Up to an ex-ante unknown amount, state debt is considered riskless because of the taxing power of the state.

So, the Household Fallacy does NOT come down to the economic miracle that “If everyone spends then the government gets all its money back.” No, the government runs a deficit, i.e., G−T>0, while the households spend what they get as wage income, i.e., C=Yw. The government does NOT get its spending back, and this is why the public debt permanently increases ($22 trillion and counting). #3

The Household Fallacy consists of the idea that the public sector is, in the same way, debt-restricted as the individual household. MMT is absolutely right in pointing out that this is NOT the case. However, MMT is absolutely wrong in maintaining that government deficit-spending/money-creation is a good economic policy. As a general rule, it is NOT. MMT policy creates the distribution of income and wealth that is now generally regarded as a grave danger to social stability. Economically, MMT policy amounts to the limitless issuance of counterfeit currency for the benefit of the Oligarchy.

The physics professor again gets economics badly wrong. #4 There is something rotten in UK academia.

Egmont Kakarot-Handtke


* Progressive Pulse
#1 Graphic AXEC31
#2 For details, see Criminals and the monetary order
#3 Keynes, Lerner, MMT, Trump, Biden. and exploding profit
#4 MMT and the single most stupid physicist

Related 'The sectoral balances obfuscation: stupidity or corruption?' and 'The right and the wrong way to bring money into the economy' and 'Dear idiots, it is deficit spending that creates the distribution people complain about' and 'Dear idiots, government deficits do NOT fund private savings' and 'How counterfeiters save America with an extra profit and make WeThePeople pay for it' and 'MMT undermines democracy' and 'The MMT-Yawner: Government is not a household' and 'Swabian housewife vs Wall Street loan shark' and 'Why economists always seem to lose the fight against inequality' and 'Links on Austerity' and 'A beginner’s guide to MMT' and 'From the debt economy to the gift economy: how America is brainwashed to love budget deficits'.

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#PointOfProof
Nov 14

Link missing
#EconBlocker

How Heterodoxy got lost in the methodological woods

Comment on Lars Syll on ‘What kind of realist am I?’

Blog-Reference

Lars Syll advertises his realist methodology: “Perhaps the most important contribution a researcher can make is reveal what this reality that is the object of science actually looks like.”

Translated into economics, this means in concrete terms that the most important contribution an economist can make is to reveal how the actual economy works. This contribution takes the form of the true theory with truth well-defined as material and formal consistency.

Sometimes it is necessary to reflect on methodology, but only as a stepping stone on the way to the true economic theory. The economist who thinks he is in the possession of a superior methodology is supposed ― NOT to run around and give good methodological advice but ― to directly apply it and show the results. As J. S. Mill put it: “Doubtless, the most effectual mode of showing how the sciences of Ethics and Politics [and Economics] may be constructed, would be to construct them.”

Lars Syll rightly criticizes the methodology of Orthodoxy, which comes under the umbrella heading of methodological individualism, always implying that his realist methodology is superior, yet he has never produced a solid piece of economic theory. He has not even realized that Keynesianism, his prototype of a superior approach, is logically defective. #1

The repetitive blunder of Heterodoxy consists in getting stuck with methodology: “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell)

Heterodoxy in general and Lars Syll, in particular, talk much about how ‘the science of economics may be constructed’ but never get started.

The crucial step on the way to the true theory is to move from the naive description of reality to abstraction: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (J. S. Mill)

Needless to emphasize that abstraction can go badly wrong. Starting with the realistic description ‘the earth stands still and the sun goes up’, Ptolemy constructed the geocentric theory. With this, Ptolemy committed the Fallacy of Insufficient Abstraction. The later paradigm shift from geocentrism to Heliocentrism delivered the best-known example for successful abstraction: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo)

The realists never got the point: “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don’t theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” This is how realists became the laughing stock of science, and the whole filibuster about realism/unrealism became pointless.

There are TWO pitfalls in the process of abstraction: (i) that the unknown ‘essential’ aspects of reality are unintentionally abstracted away, i.e., that reality gets lost, and (ii) that the ‘inessential’ aspects of reality are not abstracted away, i.e., that the analysis remains on the commonsensical surface. Accordingly, we have (i) the Fallacy of Lethal Abstraction, and (ii) the Fallacy of Insufficient Abstraction. Orthodox economics suffers from (i), heterodox economics from (ii). And this is why economics is a failed science and why economists never came to grips with reality.

Lars Syll’s realist methodology is good for criticism but worthless for the axiomatic reconstruction of economics and therefore prevents the necessary Paradigm Shift, i.e., genuine scientific progress.

The common blunder of Orthodoxy and Heterodoxy consists of defining economics as a social science. While it is quite obvious that human behavior plays an important role in how the economy develops, this is NOT the subject matter of economics but of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory, etcetera. Economics has to focus on the systemic aspect of the economy. That means economics is NOT a social science but a systems science. Put differently, the focus of the theory of flight is NOT on why crew and passengers are on a plane, what their ulterior motives are, how they behave, and whether they are happy or not. The focus is on what makes the plane fly, i.e., the laws of aerodynamics, thermodynamics, and so on. The theory of flight abstracts from the concrete human beings and leaves all Human Nature issues to social scientists, that is, to people who will NEVER get a plane off the ground.

Lars Syll argues: “The overarching flaw with methodological individualism and rational choice theory is basically that they reduce social explanations to purportedly individual characteristics. But many of the characteristics and actions of the individual originate in and are made possible only through society and its relations.”

This is a true example of the Fallacy of Insufficient Abstraction. The overarching blunder of BOTH orthodox and heterodox economists is that they dabble in psychology and sociology, which is NOT their proper business, and have until this day NOT figured out how the price and profit mechanism works. Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives are proto-scientific garbage, and the realist Lars Syll stands clueless right in the middle of it. #2

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Economics: 200+ years of scientific incompetence and fraud

For details of the big picture, see cross-references Heterodoxy and cross-references Paradigm Shift.

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Twitter/X Nov 14, 2025 The meaning of Compression and Abstraction is methodologically roughly the same

It has been said before but economists still don’t get it

Comment on Nick Rowe on ‘Hydraulic Monetarism’

Blog-Reference and Blog-Reference

Nick Rowe concludes: “I’ve said all this before (and it’s all in Yeager and Clower and others). But maybe I’ve said it clearer this time.”

It has been said before: microfounded economics from utility maximization to supply-demand-equilibrium is false for 150+ years but one fraction of economists do not grasp it (= Orthodoxy) and the other fraction has never come forward with a superior alternative (= Heterodoxy). The theory of money circles in the endless loop of repetition ― except for MMT.

MMT has made the valid point that orthodox monetary theory is stuck with ridiculous barter stories and entirely misses the reality of fiat money. Fiat money does not circulate but is permanently created and destroyed. So, there is no fixed stock of money, to begin with. Let us call this lethal blunder of Orthodoxy the Moneybag Fallacy.

The Moneybag Fallacy was rectified by Wicksell and his giro system but for some reason, the news never illuminated the mental darkness of the Quantity Theory folks.

In the monetary economy, there is no direct barter, i.e. part of the stock of good 1 against part of the stock of good 2, but indirect barter, i.e. flow of labor time against the flow of goods. Money is created by wage payments and destroyed by consumption expenditures. In the most elementary case C=Y_w, that is, consumption expenditures are equal to wage income, that is, money is zero at the beginning of the period under consideration, is then created and destroyed through the transactions between the business and the household sector, and is zero at the end of the period. NO moneybag there! No circulation there! NO hydraulics there!

In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Y_w, (ii) C is less than Y_w, (iii) C is greater than Y_w.

• In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
• In case (ii) monetary saving S_m is positive and the business sector makes a loss, i.e. Q_m is negative.
• In case (iii) monetary saving S_m is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Q_m is positive.#1

It always holds Q_m≡−S_m, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, 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 case (ii)

• the household sector ends up with a stock of money = deposits at the central bank and the business sector ends up with overdrafts,
• the change of the household sector’s stock is given by ΔM=Y_w−C,
• the economy falls into recession.

In case (iii) it is just the other way round.

The household sector’s stock at the end of period t is given as the discrete numerical integral M_t=∑ΔM+M₀ with M₀=0.

Both the commonplace Quantity Theory and Hydraulic Monetarism is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 Money and time

Related 'MMT: Richard Murphy’s battle-for-money hoax' and 'Nick Rowe’s soapbubbling about money' and 'Money: from silly stories to the true theory' and 'Rectification and generalization of MMT' and 'MMT sucks'.

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REPLY to Nick Rowe on Jun 26

You said in the intro: “If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals.”

To compare money with land is as gaga as it gets. MMTers don’t get tired of shouting from every rooftop that money is produced out of nothing at almost no cost. As a matter of principle, the economy NEVER runs out of transaction money if the central bank understands what their primary task is.#1, #2

The apparatus of supply-demand-equilibrium is inapplicable to fiat money. To speak of a money “supply” is the Moneybag Fallacy all over again.

If every household “wants to increase their stock of money” they reduce their consumption expenditures. In this case, C is less than Yw and the deposits of the household sector (= money) increase and the overdrafts of the business sector increase also because the business sector makes a loss and both sides of the central bank’s balance sheet are always equal.

The same holds for a gold-coin economy. If the business sector pays the workers in gold coins and they fully spend their income, i.e. C=Yw, then the coins return to the business sector. If the households save, i.e. C less than Yw, then the household sector’s stock of coins increases until the end of the period under consideration and the business sector’s stock decreases. The business sector makes a macroeconomic loss and this triggers a recession.

In the elementary production-consumption economy, nobody can stop the households from increasing their stocks of money as long as they receive a wage income. The form of money, fiat money or gold coins, is irrelevant.

The household sector’s stock of money develops according to the discrete numerical integral M_t=∑ΔM+M₀, and the business sector’s stock is the exact mirror image except for the initial stock which, however, is zero in a fiat money system.#3

Economists never got the relationship between macroeconomic flows, differences of flows, change of stocks, and stocks straight.


#1 The creation and value of money and near-monies
#2 MMT: Richard Murphy’s battle-for-money hoax
#3 Reconstructing the Quantity Theory

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REPLY to Benjamin Cole, louis, Majromax, Jeremy Fox, Frank Restly, Roger Sparks on Jun 27

The history of money from the cowrie shell to bullion to coins to notes and to the credit card shows a clear tendency of progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. In the monetary economy of the digital age, the ultimate data carrier is the server at the central bank.

The pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. Your idiocy consists of getting caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: Money = Information. There is no ambiguity about money. Money is deposits at the central bank. Bank deposits are near money, not money.#2 And all other historical forms have to be treated as surrogates/substitutes/prefigurations of the real thing.

The theory of money is macro. Some people have realized this: “However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis.” (Fontana)

So, you are way behind the curve. The theory of money has to be built upon macrofoundations and not upon silly microeconomic barter or casino stories. The analytical framework is given by the ‘monetary theory of production’. (Keynes)

The remark “I have seen casino chips used for cash in Las Vegas” is not a contribution to the theory of money but proof that the representative economist has no idea about how the monetary economy works and how money functions. It is a wonder of Nature that a dead brain does not impair the faculty of blathering in the econblogosphere.


#1 Money: from silly stories to the true theory
#2 Basics of monetary theory: the two monies

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REPLY to Frank Restly on Jun 28

You say: “Simplistic stripped down models can aid in understanding ― it all depends on your audience.”

Because economics is a science the primary audience is the scientific community. The scientific community never had any problems with stripped down models but with FALSE models.

The story of how Zeus threw his thunderbolt at Typhon is NOT a stripped down model of how electricity works but a false model. The same holds for all barter stories. The defining characteristic of the economy is that labor time is exchanged for IOUs/money and money is exchanged for goods. The subject matter of economics is NOT barter or barter with a money-good but the ‘monetary theory of production’ (Keynes).

So, the most simplistic stripped down model in economics has to be a macro model. The ultimate methodological blunder of economics is microfoundations.

The scientific failure of economics is due to economists clinging to microfoundations. A scientist needs to read the microeconomic axioms#1 only once and knows for sure that they are proto-scientific garbage. And methodology tells us that if the axiomatic foundations are false the whole analytical superstructure is false.

Not to see that monetary theory has to be macrofounded is the disqualifying scientific blunder of Nick Rowe. It is not the only one.#3


#1 “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 Buddha on the microeconomic men in the dark
#3 Nick Rowe’s soapbubbling about money
► Is Nick Rowe stupid or corrupt or both?
► I is never equal S and even Nick Rowe will eventually grasp it
► Cryptoeconomics ― the best of Nick Rowe’s spam folder
► Getting out of IS-LM = Getting out of despair
► Nick Rowe: Bury me at the end of coal-pit
► Macro poultry entrails reading
► Worthless Canadian model bricolage
► The Humpty Dumpty methodology

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REPLY to Jacques René Giguère on Jul 4

You say: “Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.”

You confound historical storytelling with scientific theory. A historical account of the various forms of money is NO substitute for the theory of money, just as the history of the burning of Rome, London, San Francisco etcetera is no substitute for the theory of thermodynamics.

The theory of money has to be embedded in a consistent macroeconomic framework or in what Keynes called the ‘monetary theory of production’.#1, #2

The subject matter of economics is how the actual monetary economy works and NOT historical storytelling.#3


#1 The ultimate ― analytical ― origin of money
#2 How money emerges out of nothing ― the functional account
#3 It has been said before but economists still don’t get it