Comment on Lars Syll on ‘The Ricardian Vice’
Blog-Reference and Blog-Reference on May 3
Ricardo is the traditional boogeyman of Heterodoxy: “Ricardo literally invented the technique of economics. … His gift for heroic abstractions produced one of the most impressive models, judged by its scope and practical import, in the entire history of economic theory: seizing hold of a wide range of significant problems with a simple analytical model involving only a few strategic variables, he produced dramatic conclusions oriented to policy action. In short, he was the first to master that art that brought success to Keynes in our own day. Not everyone will consider this praiseworthy. Even Schumpeter calls Ricardo’s habit of applying severely simplified abstractions to the solution of practical problems ‘the Ricardian Vice’. And to the Historical School and the American Institutionalists, Ricardo has always stood for everything they detest in orthodox economics.” (Blaug)
In April 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out ― among others ― the idea of comparative advantage which serves until this day as the ultimate rationale for free trade. Heterodoxy criticizes Ricardo for 200 years. Time enough, one should think, to spot Ricardo’s pivotal blunder and to come up with a superior alternative.
This did not happen. Keynes, for one, complained that Malthus “failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain”. But Keynes, too, failed to furnish an alternative construction. Keynes subscribed to the Cambridge School of Loose Verbal Reasoning and established himself in the scientific no man’s land where ‘nothing is clear and everything is possible.’#1
The common blunder of Keynes and Ricardo is the profit theory. Both got the foundational concept of economics wrong: “His [Keynes’s] 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.)
In his chapter On Profits Ricardo stated that “profits would be high or low in proportion as wages were low or high.” This relationship holds for a single firm but is false for the business sector as a whole. Ricardo committed the classical logical Fallacy of Composition.#2 Overall profit does NOT depend on wages.
What Keynes and Ricardo had in common was a false profit theory and this is the worst thing that can happen to an economist. In 200 years of critique of the Ricardian vice neither Orthodoxy nor Heterodoxy has made any progress. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008) The state of economics 200 years after Ricardo is this: the four major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.
Since Ricardo, the root of methodological vice and intellectual confusion is scientific incompetence.
Egmont Kakarot-Handtke
#1 Marshall and the Cambridge school of plain economic gibberish
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
For details of the big picture see cross-references Profit.
Showing posts sorted by relevance for query Ricardo. Sort by date Show all posts
Showing posts sorted by relevance for query Ricardo. Sort by date Show all posts
April 26, 2017
February 14, 2018
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 Qm≡C−Yw (C consumption expenditures, Yw wage income) and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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=Yw 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:
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'.
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 Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm 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.
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)−(Qm−Yd)=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.
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.
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
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.”
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
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
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
“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.
You still have not answered the foundational question of economics: What is macroeconomic profit, and how is it related to wages?
QUESTIONNAIRE back to Sandwichman on Feb 21
no
n/a
n/a
look it up in my working papers on SSRN
no
n/a
“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 Qm and total nominal income Y.
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 Qm≡C−Yw (C consumption expenditures, Yw wage income) and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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=Yw 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)
#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'.
***
REPLY to Barkley Rosser on Feb 14Like Ricardo, I consider the most elementary case, i.e., wage income and profit. The axiomatically correct macroeconomic Profit Law says for the general case Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm 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.
***
REPLY to Barkley Rosser on Feb 15You 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)−(Qm−Yd)=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.
***
REPLY to Sandwichman on Feb 15Note 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.
***
REPLY to Barkley Rosser on Feb 16Your 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
***
REPLY to Sandwichman on Feb 16The 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.”
***
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
***
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
***
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
***
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.
***
REPLY to Sandwichman on Feb 20You still have not answered the foundational question of economics: What is macroeconomic profit, and how is it related to wages?
***
no
n/a
n/a
look it up in my working papers on SSRN
no
n/a
***
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 Qm and total nominal income Y.
***
Graphic AXEC143d Profit Law (with increasing complexity) and Balances Equation
February 8, 2019
Socialism and scientific incompetence
Comment on David Ruccio on ‘Socialism and exploitation’
Blog-Reference and Blog-Reference on Feb 14
There is no such thing as economics. There are TWO fundamentally different types of economics: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda; the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics, anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.
For non-economists, the most important thing to realize is that theoretical economics (= science) has been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. Economics is a failed science. The four main 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.
As a result, since Adam Smith/Karl Marx economic policy guidance NEVER had sound scientific foundations. Economists of all colors sell proto-scientific garbage in the bluff package of science.
This, of course, also holds for Marxianism:
Because both Capitalism and Socialism have no sound scientific foundations, their respective economic policies are not much more than blind political agenda pushing. Never forget that both left-wing and right-wing economists do NOT know what profit is and how the actual monetary economy works.
David Ruccio concludes: “Workers, especially young workers, are suffering the consequences of increased exploitation and beginning to look beyond capitalism, to different ways of organizing the U.S. economy and society.” If so, what is their winning formula? Go for it but do NOT think that economists have any solutions for you or that they are of any help. Forget this Capitalism/Socialism thing. For 200+ years, economists have been incompetent blatherers who are too stupid for the elementary mathematics that underlies macroeconomics. Independent of their political color, economists have always been a real hazard to their fellow citizens. #8
Egmont Kakarot-Handtke
#1 Profit for Marxists
#2 Capitalism, poverty, exploitation, and cross-over exploitation
#3 If we only had classes
#4 Ricardo, too, got profit theory wrong
#5 Ricardo and the invention of class war
#6 MMT and Marxism ― blather as immunizing stratagem
#7 MMT ― backstop or advanced life support for the Oligarchy?
#8 Econogenics in action
REPLY to Tom Hickey, Clint Ballinger on Feb 16
Profit and rent are, in the final analysis, the same thing. Ricardo messed things up, and in 200+ years, economists still have not realized it. #1, #2, #3
#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Ricardo, too, got profit theory wrong
#3 Ricardo and the invention of class war
Blog-Reference and Blog-Reference on Feb 14
There is no such thing as economics. There are TWO fundamentally different types of economics: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda; the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics, anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.
For non-economists, the most important thing to realize is that theoretical economics (= science) has been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. Economics is a failed science. The four main 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.
As a result, since Adam Smith/Karl Marx economic policy guidance NEVER had sound scientific foundations. Economists of all colors sell proto-scientific garbage in the bluff package of science.
This, of course, also holds for Marxianism:
- Marx’s profit theory is provably false. #1
- As a consequence, the concepts of exploitation and class are false. Marx lacks the concept of cross-over exploitation. #2, #3
- Because the foundational concepts are false, Marx’s whole analytical superstructure is false.
- Because the theory is defective, Marxian economic policy guidance was bound to fail from the very beginning. #4, #5
- After-Marxians have not spotted Marx’s foundational blunder to this day. #6, #7
- Marxians are scientifically incompetent just like non-Marxians and altogether are only employable as useful political idiots.
Because both Capitalism and Socialism have no sound scientific foundations, their respective economic policies are not much more than blind political agenda pushing. Never forget that both left-wing and right-wing economists do NOT know what profit is and how the actual monetary economy works.
David Ruccio concludes: “Workers, especially young workers, are suffering the consequences of increased exploitation and beginning to look beyond capitalism, to different ways of organizing the U.S. economy and society.” If so, what is their winning formula? Go for it but do NOT think that economists have any solutions for you or that they are of any help. Forget this Capitalism/Socialism thing. For 200+ years, economists have been incompetent blatherers who are too stupid for the elementary mathematics that underlies macroeconomics. Independent of their political color, economists have always been a real hazard to their fellow citizens. #8
Egmont Kakarot-Handtke
#1 Profit for Marxists
#2 Capitalism, poverty, exploitation, and cross-over exploitation
#3 If we only had classes
#4 Ricardo, too, got profit theory wrong
#5 Ricardo and the invention of class war
#6 MMT and Marxism ― blather as immunizing stratagem
#7 MMT ― backstop or advanced life support for the Oligarchy?
#8 Econogenics in action
***
Profit and rent are, in the final analysis, the same thing. Ricardo messed things up, and in 200+ years, economists still have not realized it. #1, #2, #3
#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Ricardo, too, got profit theory wrong
#3 Ricardo and the invention of class war
February 16, 2018
Ricardo and the invention of class war
Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’
Blog-Reference and Blog-Reference on Feb 17
Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false. #1
By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war. In the following, the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.
The elementary 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. #2
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 productivity. For the graphical representation, see Graphic. #3
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. It says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.
In the elementary 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 elementary production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined solely by productivity.
Obviously, there is NO such thing as antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up, the market-clearing price goes up according to (1) and the real wage remains unchanged according to (2).
This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx, who built on Ricardo.
The business sector is now split into two identical firms, and firm 1 is supposed to cut the wage rate W1 arbitrarily 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.
The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm, and this is known as the Fallacy of Composition.
If profit has been zero in the initial period because of budget-balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.
Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off at the disadvantage of firm 2, and the workers of firm 2 are better off at 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. A global wage rate change leads under the condition of budget balancing and market clearing, only to a price hike.
For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false, Marx’s theory of class war is false. What looks like exploitation is, in fact, cross-over exploitation WITHIN the Marxian classes.
The myopic agents, workers and capitalists alike are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.
As One of the Old School put it in 1829 “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.” #4, #5
Egmont Kakarot-Handtke
#1 Ricardo, too, got profit theory wrong
#2 For details, see Profit for Marxists
#3 Graphic AXEC31 Elementary Production-Consumption Economy
#4 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#5 The real problem with the economics Nobel
Related 'Profit and stupidity' and 'The abject failure of orthodox and heterodox distribution theory' and 'No exploitation, no classes' and 'Marx, the moron' and 'Your profit theory is false' and 'If we only had classes'. For details of the big picture, see cross-references Profit.
You say, “Well, Egmont, you forget that if the owners of capital BELIEVE that profits are a subtraction from wages (and/or vice versa) and act accordingly, it becomes a self-fulfilling prophecy.”
Obviously, you have never heard of the Invisible Hand. It does not matter what people believe they are doing. They think they follow their own interest, but, in fact, promote the overall optimum optimorum. Self-delusion is the whole point of the free market system and the ultimate justification since Mandeville’s Private Vices = Public Benefits. Of course, this is economic storytelling and proto-scientific garbage.
Overall net profits do NOT come into existence because people dream or hallucinate about them, but ultimately because of the increase of private/public debt. This is the Invisible Hand. If the budget is balanced C=Yw, there is NO overall profit, NO matter what capitalists believe or how they act. With regard to profit, there is NO self-fulfilling prophecy, only the Iron-Objective-Eternal-Testable Profit Law.
My proof shows how the Invisible Hand works. What people believe is NOT AT ALL a matter of economics but of psychology and sociology.
Take notice that economics is NOT a science of Human Nature/motives/beliefs/ expectations/behavior/action, but a systems science. Economics has since 200+ years been on the wrong track and has produced nothing but folk psychology and folk sociology. Economics is a failed science because economists are incompetent scientists who suffer from the social science delusion. #1
The Profit Law consists of measurable variables. It is testable, and it will be corroborated without exception in all countries with a scientific infrastructure, without bothering one second about people’s silly beliefs.
#1 For details of the big picture, see cross-references Failed/Fake Scientists
You say, “The ‘invisible hand’ is a lump of labor”
Obviously, you have not realized that your lump-of-labor (EXPLETIVE DELETED) has already been refuted. See Unemployment is the outcome of political economics.
Scientific standards are well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
Because a theory must satisfy TWO criteria ― material AND formal consistency ― it is sufficient for a refutation to prove that it is EITHER materially OR formally inconsistent.
I have proven that Ricardo’s profit/distribution theory is formally inconsistent. More specifically, Ricardo committed the Fallacy of Composition and the Humpty Dumpty Fallacy by defining total income as the sum of wage income and profit. #1, #2 More specifically, the macroeconomic definition of total income as Y=W+P translates algebraically into 1=1/(1+P/W)+1/(1+W/P) and this translates verbally into Ricardo’s pivotal claim “… profits would be high or low in proportion as wages were low or high.” (Principles, p. 110) but because the premise is false Ricardo’s assertion is false.
By consequence, Ricardian economics is refuted. Now, the ball is in your field. If you do not agree with me ― and you obviously don’t ― you have to demonstrate where my logical error/mistake/blunder lies. Blah blah is NOT sufficient.
What you could alternatively do is to demonstrate that I am empirically wrong because from the axiomatically correct profit theory follows the sectoral balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 while from Ricardo’s false profit theory follows the Post Keynesian balances equation (I−S)+(G−T)+(X−M)=0.
The experimentum crucis ― which of the two equations is empirically true? ― has never been performed for the simple reason that macroeconomics has run since Keynes blindly on the false profit theory and the false Post-Keynesian balances equation. #3 MMT is the Smoking Gun proof.
But again, the ball is in your field. If you know in your profound academic erudition that there is an empirical study that has corroborated the Post Keynesian balances equation or refuted my balances equation, it is your scientific duty to present it in the current discussion. Again, blah blah is NOT sufficient.
As One of the Old School said 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.”
#1 Ricardo, too, got profit theory wrong
#2 Profit, income, and the Humpty Dumpty Fallacy *
#3 How Keynes got macro wrong and Allais got it right
* Graphic AXEC129f
Blog-Reference and Blog-Reference on Feb 17
Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false. #1
By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war. In the following, the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.
The elementary 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. #2
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 productivity. For the graphical representation, see Graphic. #3
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. It says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.
In the elementary 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 elementary production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined solely by productivity.
Obviously, there is NO such thing as antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up, the market-clearing price goes up according to (1) and the real wage remains unchanged according to (2).
This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx, who built on Ricardo.
The business sector is now split into two identical firms, and firm 1 is supposed to cut the wage rate W1 arbitrarily 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.
The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm, and this is known as the Fallacy of Composition.
If profit has been zero in the initial period because of budget-balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.
Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off at the disadvantage of firm 2, and the workers of firm 2 are better off at 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. A global wage rate change leads under the condition of budget balancing and market clearing, only to a price hike.
For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false, Marx’s theory of class war is false. What looks like exploitation is, in fact, cross-over exploitation WITHIN the Marxian classes.
The myopic agents, workers and capitalists alike are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.
As One of the Old School put it in 1829 “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.” #4, #5
Egmont Kakarot-Handtke
#1 Ricardo, too, got profit theory wrong
#2 For details, see Profit for Marxists
#3 Graphic AXEC31 Elementary Production-Consumption Economy
#4 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#5 The real problem with the economics Nobel
Related 'Profit and stupidity' and 'The abject failure of orthodox and heterodox distribution theory' and 'No exploitation, no classes' and 'Marx, the moron' and 'Your profit theory is false' and 'If we only had classes'. For details of the big picture, see cross-references Profit.
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REPLY to Sandwichman on Feb 16You say, “Well, Egmont, you forget that if the owners of capital BELIEVE that profits are a subtraction from wages (and/or vice versa) and act accordingly, it becomes a self-fulfilling prophecy.”
Obviously, you have never heard of the Invisible Hand. It does not matter what people believe they are doing. They think they follow their own interest, but, in fact, promote the overall optimum optimorum. Self-delusion is the whole point of the free market system and the ultimate justification since Mandeville’s Private Vices = Public Benefits. Of course, this is economic storytelling and proto-scientific garbage.
Overall net profits do NOT come into existence because people dream or hallucinate about them, but ultimately because of the increase of private/public debt. This is the Invisible Hand. If the budget is balanced C=Yw, there is NO overall profit, NO matter what capitalists believe or how they act. With regard to profit, there is NO self-fulfilling prophecy, only the Iron-Objective-Eternal-Testable Profit Law.
My proof shows how the Invisible Hand works. What people believe is NOT AT ALL a matter of economics but of psychology and sociology.
Take notice that economics is NOT a science of Human Nature/motives/beliefs/ expectations/behavior/action, but a systems science. Economics has since 200+ years been on the wrong track and has produced nothing but folk psychology and folk sociology. Economics is a failed science because economists are incompetent scientists who suffer from the social science delusion. #1
The Profit Law consists of measurable variables. It is testable, and it will be corroborated without exception in all countries with a scientific infrastructure, without bothering one second about people’s silly beliefs.
#1 For details of the big picture, see cross-references Failed/Fake Scientists
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REPLY Sandwichman on Feb 16You say, “The ‘invisible hand’ is a lump of labor”
Obviously, you have not realized that your lump-of-labor (EXPLETIVE DELETED) has already been refuted. See Unemployment is the outcome of political economics.
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REPLY to Barkley Rosser on Feb 17Scientific standards are well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
Because a theory must satisfy TWO criteria ― material AND formal consistency ― it is sufficient for a refutation to prove that it is EITHER materially OR formally inconsistent.
I have proven that Ricardo’s profit/distribution theory is formally inconsistent. More specifically, Ricardo committed the Fallacy of Composition and the Humpty Dumpty Fallacy by defining total income as the sum of wage income and profit. #1, #2 More specifically, the macroeconomic definition of total income as Y=W+P translates algebraically into 1=1/(1+P/W)+1/(1+W/P) and this translates verbally into Ricardo’s pivotal claim “… profits would be high or low in proportion as wages were low or high.” (Principles, p. 110) but because the premise is false Ricardo’s assertion is false.
By consequence, Ricardian economics is refuted. Now, the ball is in your field. If you do not agree with me ― and you obviously don’t ― you have to demonstrate where my logical error/mistake/blunder lies. Blah blah is NOT sufficient.
What you could alternatively do is to demonstrate that I am empirically wrong because from the axiomatically correct profit theory follows the sectoral balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 while from Ricardo’s false profit theory follows the Post Keynesian balances equation (I−S)+(G−T)+(X−M)=0.
The experimentum crucis ― which of the two equations is empirically true? ― has never been performed for the simple reason that macroeconomics has run since Keynes blindly on the false profit theory and the false Post-Keynesian balances equation. #3 MMT is the Smoking Gun proof.
But again, the ball is in your field. If you know in your profound academic erudition that there is an empirical study that has corroborated the Post Keynesian balances equation or refuted my balances equation, it is your scientific duty to present it in the current discussion. Again, blah blah is NOT sufficient.
As One of the Old School said 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.”
#1 Ricardo, too, got profit theory wrong
#2 Profit, income, and the Humpty Dumpty Fallacy *
#3 How Keynes got macro wrong and Allais got it right
* Graphic AXEC129f
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REPLY to vertegaa@vcn.bc.ca on Feb 18
A theory must satisfy TWO criteria ― material AND formal consistency. Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing. This is known for 2300+ years: “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.” (Aristotle)
So, the first problem to solve is the Starting Problem. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”
Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”
Krugman, of course, is an idiot. Maximization and equilibrium cannot serve as axioms because they are NOT certain, true, and primary. For various methodological reasons, given elsewhere #1, I propose to start with this core of macroeconomic and behavior-free axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. *
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic; that is, Occam’s Razor has been applied, and the set cannot be reduced further, only expanded. The set contains no nonentities like utility, constrained maximization, equilibrium, and no normative assertions.
You can NOT refute these axioms by doubting and nagging, only by replacing them with a superior set. Or, in Feynman’s words: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)
I am sure that you cannot do it, and nobody else, for that matter, because you cannot have an axiom set for the most elementary production-consumption economy with less than three axioms. The set (A1)/(A3) replaces the neo-Walrasian set and the Keynesian set of foundational propositions.
You say: “because the ‘axioms’ you come up with are inherently insufficient to glean a systematic meaning, or purpose, from.” Yes, but the idea that some purpose must be put into the axioms indicates that you do not yet fully understand what axiomatization is all about.
You say: “You ‘axiomatically’ split total profit Q into Qm (monetary profit) and Qn (non-monetary profit). If the system allows the latter to become part of the former and/or vice versa, however, then not only are these not ‘entirely different kinds of profits’ as you claim but you’ll have to show a common numeraire as well, or the premise and hence your theory of profit is false, …”
Perhaps the terminology is a bit unfamiliar. Both monetary Qm and nonmonetary profit Qn are nominal magnitudes, e.g. Dollar, Yen, Euro, etc., but monetary profit can be read off a bank account or touched in the cash box, non-monetary profit is the not-yet-realized increase of an asset’s value or what is commonly called a paper profit. #2
You say, “Come to think of it, what is your theory of money? Every factor/element in your identities numerated in the latter needs it!”
True, accordingly, money has already been treated extensively elsewhere. #3
You say, “what makes you now think that such a static depiction has merit in a known to be dynamically operating economy.”
The ‘general balances equation’ is not static and has nothing to do with equilibrium. It is more like reading a speedometer in a moving car. #4
#1 For details of the big picture, see cross-references Axiomatization
#3 For a start, see Fixing the loanable funds blunder
* Graphic AXEC121e
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REPLY to Sandwichman on Feb 19
You ask: “What is your motivation for expending what must be considerable time, effort and frustration in promulgating your ‘science’?”
Moot question, as you could know from Schumpeter: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”
More clues for the clueless are to be found in A heap of scientific rubbish.
You ask: “Do you ever experience self-doubt or are you 100% certain that your discovery is 100% foolproof?”
No, yes. More clues for the clueless are to be found in John Hicks, fake scientist.
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REPLY to vertegaa@vcn.bc.ca on Feb 19
Roughly speaking, the distinction between science and non-science corresponds to the ancient Greeks’ distinction between episteme (= knowledge) and doxa (= opinion). Aristotle relates to episteme while the Sophists relate to doxa: “Sophistry is a productive art, human, of the imitation kind, copy-making, of the appearance-making kind, uninformed and insincere in the form of contrary-speech-producing art.” (Wikipedia) Economics has never risen above sophistry.
You say: “All your axioms involve accounts; “ False. The 2nd axiom, i.e., O=RL, involves NO accounts. Only the subset of nominal variables Yw, C reappears in macro accounting. The axioms involve elementary algebra, and accounting is only part of the story.
Thank you for the link to your preface. I have read your three axioms and, as you let me know, “I don’t think you are capable of teaching me much”, you dispense me from the obligation to comment on them.
Here are some minor points for general clarification.
You say: “You’re not saying much about objectivity, i.e. your quasi-subjective approach.” I have clearly stated that economics is not a social science but a systems science. Accordingly, it has to be based on objective axioms. My approach is objective-structural-systemic, and this is exactly what makes it superior.
You say: “Or do you perhaps also hold that the economy is meaninglessly meandering through time?” Meaning is a religious/philosophical/psychological category that is NOT axiomatizable, to begin with. You are still lost in the social science delusion.
You mention Koopmans’ monetary theory and ask: “The dissertation was written in German, did you investigate it in your quest to destroy conventional economics?”
No. Koopmans was one of the founding fathers of General Equilibrium Theory. If he had a superior theory of money, it did not reappear in GT, see Hahn: ‘On some problems of proving the existence of an equilibrium in a monetary economy.’ Anyway, Koopmans did not realize in time that the Walrasian equilibrium is a dead end, and therefore, he failed the scientific competence test.
“At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug, 1997)
The GT folks have put equilibrium in the axioms, and this is a rather ordinary petitio principii. #1
By the way, I just stumbled across a quote of Hahn which makes my point: “It is pretty clear that usable economics will have to be of some sort of macro character. But what sort?” This dovetails with my meme: “If it isn’t macro-axiomatized it isn’t economics.”
With regard to the balances equation, I retract the metaphor with the speedometer. The balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 relates to a period of a given length and shows the accounting balances = residuals of the four sectors (business, household, government, RoW). It has NOTHING to do with equilibrium. The beauty of the axiomatically correct balances equation is that it is testable against the After-Keynesian balances equation.
With regard to empirical testing, things do not end with the sectoral balances equation. From the objective systemic axioms follows the rather complex Employment Law, which is ideally suited for a test against the Phillips curve. #2
I do not see that anything comparable follows from your axioms, which resemble more a declaration of human rights.
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REPLY to Barkley Rosser on Feb 20
The Humpty Dumpty Fallacy ― one of the worst idiocies of economics
In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumer goods industry, i.e. Qc≡C−Ywc, and the investment goods industry, i.e., Qi≡I−Ywi, that is, Q≡(C−Ywc)+(I−Ywi) or Q≡C+I−Yw (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Yw.
Now, Humpty Dumpty introduces a redundant definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ, thus
(a) Ψ≡Q+Yw and now (i) is rewritten
(b) Q+Yw ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit disappear.
This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)
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REPLY to vertegaa@vcn.bc.ca on Feb 20
The first sentence of your preface reads: “The methodology used in our quest to establish how the economy of ours functions, involves persuasion by logical reasoning that existing theories either got it all wrong, or are at least lacking in consistency to be able to explain how an economy in a human-central world works.”
Feynman said: “Perhaps it is because their horizons are limited in this way that some people are able to imagine that the centre of the universe is man.”
Persons with a limited horizon invariably end up in the so-called social sciences, where they are doing cargo cult science. Cargo cult science comes in the format of the sitcom with much storytelling, second-guessing other people’s motives, plain common sense arguments of the type ‘the sun goes up’, moralizing, and appeals to emotions. People like explanations in the form X happened because A did Y to B because she is a good/bad person, and good/bad persons are supposed to act in this way, as we know since Adam and Eve. The emotionally charged narrative is the only form in which non-scientists can connect the dots and make sense of reality.
The scientists’ certain knowledge of reality is incorporated into a theory. A theory satisfies the criteria of material and formal consistency. The true theory is the humanly best mental representation of reality.
The truth value of a theory does not in any way depend on the understanding of non-scientists or whether they like/dislike it. Populism is non-existent in science.
Populism is the dominant form of communication in the political realm, where the appearance of majority assent is needed because legitimacy is defined in this way.
In the preface, you appeal directly to the populace: “The purpose of this book is to explain what an economy is and how it works; and it will set out to do so in a way that aspires to make it understandable for just about everyone moderately educated.”
This tells everyone that you are in the business of political agenda pushing and, by implication, entirely outside of science.
Your three axioms bear this out: “1. our economy is an all human-made systematic construct of accounts, having boundaries that are open to a natural existence into which we are born and live as aspiring to better ourselves beings, and whose price to do so all the economy's accounts are made-up from; 2. it exists for the sole purpose of adding an extensive variety of use-values to humanity, that couldn’t as commonly be obtained in the absence of a formal economic structure, whereby the exogenously existent living standards of human beings are to be enhanced in perpetuity; and 3. no one can be denied the opportunity to participate in it on the supply side. Short of criminal behaviour towards the stated second axiom, there are no exceptions to the third one; since there are no longer opportunities for human beings to make a living outside of an economy, it is a human rights issue.”
This axiom set does not contain the words profit or income, nor does it ever logically follow from it what profit is, and this is sufficient to prove that it relates to society but not to the economy. So, what you are defining with your three axioms is the subject matter of sociology, but not economics. You make the same economics-is-a-social-science mistake as Orthodoxy and traditional Heterodoxy.
Note that there is NO way that leads from the understanding of human behavior to the understanding of the behavior of the economic system. All human-centred approaches invariably crash against the methodological wall of the Fallacy of Composition. In other words: If it isn’t macro-axiomatized, it isn’t economics.
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April 8, 2019
Dear idiots, it is deficit spending that creates the distribution people complain about
Comment on Lars Syll/Tom Hickey on ‘Mainstream theories of income distribution’
Blog-Reference and Blog-Reference and Blog-Reference
David Ricardo defined the task of economics back in 1821: “To determine the laws which regulate this distribution [between rent, profit, wages], is the principal problem in Political Economy.” (Principles, p. 5)
Yet, the scientifically incompetent Ricardo himself messed distribution theory up and so it remained to this day.#1, #2
The economist Lars Syll sums up: “As has become abundantly clear to students of economics these days, mainstream textbook economics has pretty little in common with the real world in which we actually live. Especially when it comes to the mainstream theories of income distribution, the gap between theory and reality is ocean wide.” and “History has over and over again disconfirmed the close connection between productivity and remuneration postulated in mainstream income distribution theory. Neoclassical marginal productivity theory is obviously a collapsed theory from both a historical and a theoretical point of view, as shown already by Sraffa in the 1920s, and in the Cambridge capital controversy in the 1960s and 1970s.”
The philosopher Tom Hickey sums up: “This necessitates an investigation of power and its operation in a society as a social system (complex adaptive system). This was initiated by the classical economists in their investigation of economic rent, continued by Karl Marx, taken up by Veblen and the institutionalists, and subsequently shunted over to sociology … and political science since the advent of marginalism explained economic rent away based on idealistic models of a market economy based on near perfect markets. Conventional economists know about market imperfection, rent, rent-seeking and rent extraction but they have avoided dealing with it as a socio-economic factor. Now rising social dysfunctionality is forcing a return to investigating distribution and the causes of increasing inequality of income and wealth.”
Both Lars Syll and Tom Hickey belong to the heterodox camp. The characteristic of heterodox economists is that they demonstrate for 200+ years now that mainstream economics is false but have not come up in the meantime with something better. The unsurprising result of inconclusive blather is that the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and that all got the foundational concept of the subject matter ― profit ― wrong. Because the profit theory is false, distribution theory is false to this day.
Both Lars Syll and Tom Hickey promote MMT. And at this point, things escalate from scientific incompetence to political corruption.
To make matters short here, the macroeconomic Profit Law is given as Q≡Yd+(I−S)+(G−T)+(X−M).#3 In the most elementary case of the elementary production-consumption economy, this reduces to Q≡−S.
The Profit Law implies: (1) 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, (2) macroeconomic profit does neither 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, (3) in order that profit comes into existence for the first time in the production-consumption economy, the household sector must run a deficit at least in one period, (4) this presupposes the existence of a credit-creating entity, (5) profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt, (6) monopoly power/rent-seeking is irrelevant for macroeconomic profit and affects only the distribution of macroeconomic profit BETWEEN firms, (7) there is no relation at all between profit, capital, marginal or average productivity, (8) innovation and efficiency are irrelevant for the profit of the business sector as a whole, (9) profit is a factor-independent residual and qualitatively different from wage income, (10) it is an elementary mistake to maintain that total income is the sum of wages and profits, (11) profit is NOT income, i.e. a flow, but a balance, i.e. the difference of flows, (12) distributed profit Yd is income and adds up with wage income Yw to total income, (13) total income is NEVER equal to total spending, (14) in the most elementary case, the difference between total spending of the household sector C and total wage income Yw is saving/dissaving, (15) profit/loss of the business sector is the mirror image of dissaving/saving of the household sector, (16) saving and investment are causally INDEPENDENT and NEVER equal, (17) all I=S/IS-LM models are false since Keynes/Hicks, (18) Keynesianism, Post-Keynesianism, New Keynesianism and all variants are scientifically worthless, (19) the foundational MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is false because it lacks the balance of the business sector Q, (20) because profit is false, the whole of MMT is false, (21) because the theory is false, MMT policy guidance has no sound scientific foundations.#4, #5
With regard to government spending, the macroeconomic Profit Law boils down to Public Deficit = Private Profit and therefore the Oligarchy’s financial wealth and public debt (currently $22 trillion) grow in lockstep. Roughly speaking, fabulous financial wealth is the mirror image of continuous deficit spending of the household and government sector and has nothing to do with value creation or exploitation.
MMT theory is provably false, MMT policy serves the Oligarchy. From Ricardo onward, economists in both their orthodox and heterodox incarnations are NOT scientists but useful political idiots.#6
Egmont Kakarot-Handtke
#1 Ricardo, too, got profit theory wrong
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 For details of the big picture see cross-references Profit/Distribution
#4 Refuting MMT’s Macroeconomics Textbook
#5 For the full-spectrum refutation of MMT see cross-references MMT
#6 Economists: “a bevy of camp-following whores”
Related 'Keynes, Lerner, MMT, Trump, etc. and exploding profit' and 'Profit and the collective failure of economists' and 'Profit'.
Blog-Reference and Blog-Reference and Blog-Reference
David Ricardo defined the task of economics back in 1821: “To determine the laws which regulate this distribution [between rent, profit, wages], is the principal problem in Political Economy.” (Principles, p. 5)
Yet, the scientifically incompetent Ricardo himself messed distribution theory up and so it remained to this day.#1, #2
The economist Lars Syll sums up: “As has become abundantly clear to students of economics these days, mainstream textbook economics has pretty little in common with the real world in which we actually live. Especially when it comes to the mainstream theories of income distribution, the gap between theory and reality is ocean wide.” and “History has over and over again disconfirmed the close connection between productivity and remuneration postulated in mainstream income distribution theory. Neoclassical marginal productivity theory is obviously a collapsed theory from both a historical and a theoretical point of view, as shown already by Sraffa in the 1920s, and in the Cambridge capital controversy in the 1960s and 1970s.”
The philosopher Tom Hickey sums up: “This necessitates an investigation of power and its operation in a society as a social system (complex adaptive system). This was initiated by the classical economists in their investigation of economic rent, continued by Karl Marx, taken up by Veblen and the institutionalists, and subsequently shunted over to sociology … and political science since the advent of marginalism explained economic rent away based on idealistic models of a market economy based on near perfect markets. Conventional economists know about market imperfection, rent, rent-seeking and rent extraction but they have avoided dealing with it as a socio-economic factor. Now rising social dysfunctionality is forcing a return to investigating distribution and the causes of increasing inequality of income and wealth.”
Both Lars Syll and Tom Hickey belong to the heterodox camp. The characteristic of heterodox economists is that they demonstrate for 200+ years now that mainstream economics is false but have not come up in the meantime with something better. The unsurprising result of inconclusive blather is that the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and that all got the foundational concept of the subject matter ― profit ― wrong. Because the profit theory is false, distribution theory is false to this day.
Both Lars Syll and Tom Hickey promote MMT. And at this point, things escalate from scientific incompetence to political corruption.
To make matters short here, the macroeconomic Profit Law is given as Q≡Yd+(I−S)+(G−T)+(X−M).#3 In the most elementary case of the elementary production-consumption economy, this reduces to Q≡−S.
The Profit Law implies: (1) 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, (2) macroeconomic profit does neither 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, (3) in order that profit comes into existence for the first time in the production-consumption economy, the household sector must run a deficit at least in one period, (4) this presupposes the existence of a credit-creating entity, (5) profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt, (6) monopoly power/rent-seeking is irrelevant for macroeconomic profit and affects only the distribution of macroeconomic profit BETWEEN firms, (7) there is no relation at all between profit, capital, marginal or average productivity, (8) innovation and efficiency are irrelevant for the profit of the business sector as a whole, (9) profit is a factor-independent residual and qualitatively different from wage income, (10) it is an elementary mistake to maintain that total income is the sum of wages and profits, (11) profit is NOT income, i.e. a flow, but a balance, i.e. the difference of flows, (12) distributed profit Yd is income and adds up with wage income Yw to total income, (13) total income is NEVER equal to total spending, (14) in the most elementary case, the difference between total spending of the household sector C and total wage income Yw is saving/dissaving, (15) profit/loss of the business sector is the mirror image of dissaving/saving of the household sector, (16) saving and investment are causally INDEPENDENT and NEVER equal, (17) all I=S/IS-LM models are false since Keynes/Hicks, (18) Keynesianism, Post-Keynesianism, New Keynesianism and all variants are scientifically worthless, (19) the foundational MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is false because it lacks the balance of the business sector Q, (20) because profit is false, the whole of MMT is false, (21) because the theory is false, MMT policy guidance has no sound scientific foundations.#4, #5
With regard to government spending, the macroeconomic Profit Law boils down to Public Deficit = Private Profit and therefore the Oligarchy’s financial wealth and public debt (currently $22 trillion) grow in lockstep. Roughly speaking, fabulous financial wealth is the mirror image of continuous deficit spending of the household and government sector and has nothing to do with value creation or exploitation.
MMT theory is provably false, MMT policy serves the Oligarchy. From Ricardo onward, economists in both their orthodox and heterodox incarnations are NOT scientists but useful political idiots.#6
Egmont Kakarot-Handtke
#1 Ricardo, too, got profit theory wrong
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 For details of the big picture see cross-references Profit/Distribution
#4 Refuting MMT’s Macroeconomics Textbook
#5 For the full-spectrum refutation of MMT see cross-references MMT
#6 Economists: “a bevy of camp-following whores”
Related 'Keynes, Lerner, MMT, Trump, etc. and exploding profit' and 'Profit and the collective failure of economists' and 'Profit'.
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#PointOfProof
Apr 8
June 26, 2015
Value — the Bermuda Triangle for economic theories
Comment on Bruce Edmond on ‘Economic Value is not Price’
Blog-Reference
“Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely on utility.” (Jevons, 1911, p. 1)
Since Jevons and the other Neoclassicals, utility and equilibrium have been seen as the two pillars that support the whole theoretical superstructure of standard economics. It is common knowledge that standard economics is a failure. And it is pretty clear why. Utility and equilibrium are NONENTITIES, green-cheese assumptions, much too swampy and muddy to build anything more upon than a shaky proto-scientific construct.
Because of this, the new heterodox curriculum will certainly not mention these concepts except as an example of orthodox incompetence, or worse. By the way, that utility is not such a good starting point for a serious theory of value is known since Cournot: “The abstract idea of wealth or value in exchange ... must be carefully distinguished from accessory ideas of utility, scarcity and suitability to the needs and enjoyment of mankind... These ideas are variable, and by nature indeterminate and consequently ill-suited for the foundation of a scientific theory ....” (Cournot 1897, quoted in Mirowski, 1995, p. 208)
What is more, as already Ricardo saw clearly, the theory of value cannot be based on exchange alone but must include production: “In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.” (Ricardo, 1981, p. 12)
Marx developed this idea further in his analysis of surplus-value. This goes in the right direction because the ultimate goal of value theory is the explanation of profit: “But in the act of exchange viewed as a whole, equals are in general always exchanged for equals, individual variations being canceled out. How then, are profits made, for, obviously, they are made?” (Kirkenfeld, 1948, p. 35)
As real-world economists, the Classicals and Marx had an objective value theory in mind, while Jevons ended in subjective wish-wash. In a nutshell, this is his value theory: “The truth is that pearls are valuable because there are so many ladies who have not got pearl necklaces, and who would like to have them.” (Jevons, see Google-Books)
This blather counts as an explanation among orthodox economists. Or take Samuelson's entirely tautological solution of the so-called water-diamond paradox: “In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: ‘The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high’.” (Samuelson and Nordhaus, 1998, p. 90), see also (2011b)
Note well that supply and demand curves, too, are NONENTITIES because they are ultimately based on utility. So, on closer inspection, economics has no acceptable value theory.
There can be no doubt that a lot of New Economic Thinking is required for Heterodoxy to develop a superior value theory — without ever mentioning utility again (for a start, see 2011a).
Egmont Kakarot-Handtke
References
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2011a). The Pure Logic of Value, Profit, Interest. SSRN Working Paper Series, 1838203: 1–27. URL
Kakarot-Handtke, E. (2011b). The Value of Water and Diamonds: Back to Square One. SSRN Working Paper Series, 1954047: 1–19. URL
Kirkenfeld, T. (1948). The Paradox of Profit. Science & Society, 12(1): 33–41. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Ricardo, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Blog-Reference
“Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely on utility.” (Jevons, 1911, p. 1)
Since Jevons and the other Neoclassicals, utility and equilibrium have been seen as the two pillars that support the whole theoretical superstructure of standard economics. It is common knowledge that standard economics is a failure. And it is pretty clear why. Utility and equilibrium are NONENTITIES, green-cheese assumptions, much too swampy and muddy to build anything more upon than a shaky proto-scientific construct.
Because of this, the new heterodox curriculum will certainly not mention these concepts except as an example of orthodox incompetence, or worse. By the way, that utility is not such a good starting point for a serious theory of value is known since Cournot: “The abstract idea of wealth or value in exchange ... must be carefully distinguished from accessory ideas of utility, scarcity and suitability to the needs and enjoyment of mankind... These ideas are variable, and by nature indeterminate and consequently ill-suited for the foundation of a scientific theory ....” (Cournot 1897, quoted in Mirowski, 1995, p. 208)
What is more, as already Ricardo saw clearly, the theory of value cannot be based on exchange alone but must include production: “In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.” (Ricardo, 1981, p. 12)
Marx developed this idea further in his analysis of surplus-value. This goes in the right direction because the ultimate goal of value theory is the explanation of profit: “But in the act of exchange viewed as a whole, equals are in general always exchanged for equals, individual variations being canceled out. How then, are profits made, for, obviously, they are made?” (Kirkenfeld, 1948, p. 35)
As real-world economists, the Classicals and Marx had an objective value theory in mind, while Jevons ended in subjective wish-wash. In a nutshell, this is his value theory: “The truth is that pearls are valuable because there are so many ladies who have not got pearl necklaces, and who would like to have them.” (Jevons, see Google-Books)
This blather counts as an explanation among orthodox economists. Or take Samuelson's entirely tautological solution of the so-called water-diamond paradox: “In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: ‘The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high’.” (Samuelson and Nordhaus, 1998, p. 90), see also (2011b)
Note well that supply and demand curves, too, are NONENTITIES because they are ultimately based on utility. So, on closer inspection, economics has no acceptable value theory.
There can be no doubt that a lot of New Economic Thinking is required for Heterodoxy to develop a superior value theory — without ever mentioning utility again (for a start, see 2011a).
Egmont Kakarot-Handtke
References
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2011a). The Pure Logic of Value, Profit, Interest. SSRN Working Paper Series, 1838203: 1–27. URL
Kakarot-Handtke, E. (2011b). The Value of Water and Diamonds: Back to Square One. SSRN Working Paper Series, 1954047: 1–19. URL
Kirkenfeld, T. (1948). The Paradox of Profit. Science & Society, 12(1): 33–41. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Ricardo, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Related 'Capitalism, poverty, exploitation, and cross-over exploitation' and 'Profit for Marxists' and 'Exploitation and Its Unintended Outcomes: An Axiomatic View of Marx's Surplus Value' and 'The Logic of Value and the Value of Logic' and 'The creation and value of money and near-monies' and 'The Theory of Value and the worthlessness of economics' and 'Basics of Value Theory' and 'Primary and Secondary Markets'.
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Graphic AXEC89 Circuit Theory of Value, elementary case with equal wages, Legend: P price, R productivity
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