Profit and the collective failure of economists

Comment on David Ruccio on ‘Accumulate, accumulate! Or not’

Blog-Reference

Economists do not understand how the economy works. The deeper reason is that neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect understands what profit is. What the general public can see and touch and smell and feel is that the representative economist does not understand the pivotal phenomenon of his subject matter. Economists are like astronomers before gravity was properly understood.

Marx was, like the Classicals, a political economist and mainly concerned with society and the underlying laws/trends of societal evolution. As a matter of fact, he was rather good at descriptive sociology but completely failed as an economist. Like Smith, Ricardo, and other classical economists, he got the profit theory wrong (2014a). And this fate Marxianism shares with the other sects until this very day: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

Because of this, the formula that David Ruccio presents as Marx’s theory of accumulation is simply false, while his observations about declining capital investment in the USA are spot on. As with most heterodox economists, the sociology is better than economics proper.

The axiomatically correct macroeconomic Profit Law for the 2-sector economy reads Q_m ≡Y_d+I−S_m (2014b, p. 8, eq. (18)) #1 Legend: Q_m monetary profit, Y_d distributed profit, Sm monetary saving, I investment expenditure, dimension €, $, etc. per period

The Profit Law gets a bit more complex when foreign trade and government are included. By summing up investment expenditures over time and taking depreciation into account, the equation ultimately yields the profit rate (2011, Sec. 6.2). These details are not needed at the moment. Nonmonetary profit Q_n and nonmonetary saving S_n, which relate to re-valuations are also left out of the picture.

The macroeconomic Profit Law says (for the world economy as a whole):
(i) strong growth = high investment I = accumulation is good for the overall monetary profit Q_m of the business sector as a whole,
(ii) strong consumption expenditures = low monetary saving S_m or even dissaving −S_m = growing consumer debt is good for profit,
(iii) by implication high government deficit spending = growing public debt is good for profit, #2
(iv) substantial profit distribution Y_d is good for profit.

Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium once and for all. The market economy is not a self-optimizing equilibrium system.

Note that overall profit has nothing to do with high productivity or low wages or the capital stock. These and other factors affect only the distribution of overall profit between firms or countries.

Note also that the Profit Law holds for the USA, Russia, China, the EU, and all other countries or associations; that is, it does not matter at all whether one has a pure/mixed market economy or private property or free enterprise or any other of the alleged characteristics of capitalism. The Profit Law holds for every national monetary economy and for the world economy as a whole.

In the last decades, overall (= world) profit has been driven by the growth in Asia (= high I), by dissaving, i.e., the growth of private debt mainly in the USA, by the growth of public debt worldwide, and by substantial profit distribution mainly in the USA. Overall profit has been redistributed between nations/regions via export surpluses/deficits.

Roughly speaking, as accumulation (= I) slows down in China/Asia and the developing regions, world-profit goes down, then overall profit distribution goes down, then again profit goes down, then investment goes down, and so on. Rising unemployment and falling wages accelerate the downward spiral (2015). This spiral is deflationary no matter what the Fed or other central banks do.

So Marx got the life formula — accumulate, accumulate! — of the monetary economy almost right. He had, in any case, a better grasp of economic dynamics than standard equilibrium theory. Independent of all these differences between the major sects of economics, the greatest collective scientific embarrassment of all time is: the profit theory is false since Adam Smith.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 For the rising complexity of the Profit Law, see Graphic AXEC143d.
#2 Keynesianism as ultimate profit machine

Related 'Rethinking the Profit Law' and 'The perennial conundrum: profit and distribution' and 'Ricardo, too, got profit theory wrong!' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'Profit'. For details of the big picture, see cross-references Profit.

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Graphic AXEC109i

Occasional X: Clueless economists / Profit (LI)

 

#Economics#FailedFakeScience#Profit

Alan Reynolds maintains: “Armen A. Alchian (1914–2013), one of the twentieth century’s great teachers of economic science, ….”

This is incorrect. First of all, because there is no such thing as “economic science”.

Economics claims to be…

— E.K-H (@AXECorg) October 22, 2024

Occasional Xs: How it works (LXXII)

 

#Inflation#Profit#Deficit

The macroeconomic #LawOfSupplyAndDemand and the #ProfitLaw tell one exactly how avg #Price P & total #Profit Qm move as a function of avg #WageRate W, avg #Productivity R & overall #DeficitSpendingMoneyCreation ρE ― which is the common cause. pic.twitter.com/NlEZtuAFMN

— E.K-H (@AXECorg) October 12, 2023

Refocusing the debt/profit issue

Comment on Arthurian on 'The first of the great powers to reduce private debt will be the world's next hegemon'

Blog-Reference

The two Figures in Debunking Squared (2013) have been characterized in the text as 'straightforward graphical demonstration'. Whether you call the four-quadrant representation of the elementary production-consumption economy a model or a graph is of no great importance.

It is a bit unfortunate that you obviously cannot interpret the Figures. However, if you prefer a strictly formal argument, you could turn to the working papers that have been listed in the References. You find the elementary equations that underlie the graphical representation also here and there (2015, p. 2) and here.

You say you like the summary: 'Total income is the sum of wage income and distributed profit and not of wage income and profit.' However, that is not a matter of personal taste but of the correct formal representation of the pure consumption economy. If you do not get this most elementary case right, you are lost.

The key argument is that because total income is not (i) the sum of wages and profits but of (ii) wages and distributed profit, all approaches that are based on (i) are untenable, and this includes Keen's approach (and Keynes', and Kaldor's, and Kalecki's, and Minsky's, and so on).

The fact of the matter is that both orthodox and heterodox economists cannot tell the difference between the fundamental economic magnitudes of income and profit. This means that they are outside of science.

From the formally correct approach follows for the elementary production-consumption economy: As soon as private/public households pay off their debts, the economy breaks down. It does not matter whether the debt consists of overdrafts, mortgages, bonds, or any other of the myriad forms. The consistent inclusion of the banking sector is an entirely separate issue (2011a; 2011b).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–19. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

Occasional Tweets: Joint explosions ― pandemic, macroeconomic profit, public debt

 

#DearIdiots#LearnEconomics

COV is a godsend for the #Oligarchy. The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. Therefore, the policy of increased #DeficitSpendingMoneyCreation (=growing #PublicDebt) produces a #ProfitExplosion.

— E.K-H (@AXECorg) August 9, 2021

Occasional Xs: How it works (CIX)

 

The #FreeMarketEconomy runs on #Profit. The #ProfitLaw ⇓ implies #PublicDeficitIsPrivateProfit. So, the growth of #PublicDebt generates continuous #Profit/#Interest. #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy. Bigger is better. GOVs have done a good job. pic.twitter.com/4n2YzQYFS7

— E.K-H (@AXECorg) November 13, 2023

Vacuonomics I

Comment on Simon Wren-Lewis on ‘Is the Walrasian Auctioneer microfounded?’

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With a modicum of scientific intuition and after a deeper look into the matter everyone arrives with logical necessity at the following conclusion: “At long last, it can be said that the history of general equilibrium 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. ... General equilibrium theory is simply a research program that has run into the sands.” (Blaug, 2001, p. 160)

Clearly, general equilibrium and all its offshoots and variants are unacceptable. Why is the Walrasian approach applied nonetheless? Because economists are not only without scientific intuition they are also ignorant of scientific standards: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

The third reason is the obvious lack of imagination, that is, of some hunch of a promising alternative approach: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

For lack of a promising alternative research program the representative economist simply clings to the familiar utility-demand-supply-equilibrium core —  always open and prepared, of course, for more realism or some fancy facelift.

To be sure, in his time Keynes was one big step ahead. He realized that something was wrong with the orthodox approach. With admirable consequence, he took a different route and formulated the foundational syllogism of macroeconomics: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure of the theory is false. Actually, the fault in Keynes' syllogism is in the premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment goods industry (2014).

Profit does not appear in Keynes' elementary formalism. That is, he in effect talks about a market economy without profit. Note well that Walras' original economy was also a zero-profit economy. No such thing existed ever on this planet: “Rather surprisingly, therefore, the nature of profits remains something of a mystery in contemporary economics; indeed, in the realm of ‘advanced’ theory —  namely the perfectly competitive general equilibrium models —  profits have disappeared altogether.” (Obrinsky, 1981, p. 491)

Neither New Classicals nor New Keynesians provide a consistent description of the market economy. The representative economist is intensely involved in discussions about nonentities like equilibrium, auctioneers, intertemporal optimization, rational expectation, real exchange, and other features of his economic Disneyworld. Yet he has not the slightest idea about what profit really is.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

There can be no microfoundation of macroeconomics because microeconomics is itself unfounded. In technical terms: the behavioral axioms of microeconomics and macroeconomics are unacceptable.

“Cunningham in 1891 remarked that in the choice of premises ‘it is not always easy to tell when a professor of the dismal science is making a joke’ and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)

Time to leave the auctioneer and all the jokes and fools behind and to make economics a science.

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): 1–22. URL

* Post on mainly macro has been shortened because of space restrictions.

Which breakdown?

Comment on Erik S. Reinert on ‘Capitalism collapses when money flows to the financial sector per se’

Blog-Reference

Capitalism breaks down because of immanent logical necessity (no crisis and no criminals and no banksters needed) as soon as private and/or public households start to redeem their debt in the aggregate (i.e. new credit, rollovers, and redemption netted out). See Mathematical Proof of the Breakdown of Capitalism.

This is a result of the correct profit theory. Profit theory has been messed up by economists (2014), including Marx. See Profit for Marxists.

How did Walrasians, Keynesians, Marxians, and Austrians mess up profit theory and with it the rest of theoretical economics? Because they have, in the main, been occupied with political economics. Schumpeter identified the ultimate cause of the failure of economics: “In this and many analogous cases, of which modern economics is another deplorable example, economists indulged their strong propensity to dabble in politics, to peddle political recipes, to offer themselves as philosophers of economic life, and in doing so neglected the duty of stating explicitly the value judgments that they introduced into their reasoning.” (1994, p. 19)

Agenda pushing is different from thinking. What political economists have delivered is plain scientific garbage. Obviously, the intellectual collapse of economists long precedes the factual breakdown of the market economy. Let’s face the fact: both orthodox and heterodox economists are natural-born scientific losers.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Related 'Time to get rid of political economics' and 'Free academia from economics' and 'The utter senselessness of political economics' and 'Political economics and intellectual corruption' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Mathematical Proof of the Breakdown of Capitalism'.

The thing with profit and exploitation

Comment on Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

Blog-Reference and Blog-Reference on Nov 28

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This perhaps surprises the general public: economists do not know to this day what profit is. As a consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, and Austrianism, and NONE of them gets profit right. #1

As a consequence, economic policy guidance has never had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism, or socialism has been based upon provably false theories about how the monetary economy works.

Since Ricardo and Marx, both orthodox and heterodox economists believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers.

The idea that antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the economy as a whole. To generalize what is true for an isolated part of a system is known in methodology as the Fallacy of Composition.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income. #2 And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place.

In political terms, this means that there are NO CLASSES with a common interest. Put differently, what appears as an exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In other words, the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taking all capitalists together, their profit does not change. Taking all workers together, their real share of output does not change.

Conclusion: the naive concept of exploitation has to be replaced by the concept of crossover exploitation.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the foundational phenomenon of their subject matter. Yet, this is definitely not the case. Economists are incompetent scientists, and after 200+ years, they are still stuck in the Fallacy of Composition. So, economists have NOTHING to contribute to the discussion about how the economy, markets, and firms should be organized.

Economists have discussed the role of exploitation and profit without ever coming to the core of the matter. It is Red Friday, and time for them to retire now for good.

Egmont Kakarot-Handtke

#1 How the Intelligent Non-Economist Can Refute Every Economist Hands Down and
The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? and Profit for Marxists.
#2 Essentials of Constructive Heterodoxy: Profit

Related 'How to end the Punch and Judy show about profit'

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REPLY to Tom Hickey on Nov 27

There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a whole, (iii) Distribution of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices are inverse to productivities. #1 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio. #2

It holds in particular:
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit for at least in one period.
• Profit is, in the simplest case, determined by the increase and decrease of the household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the elementary production-consumption economy, profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal, or average productivity.
• Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.
• The existence and magnitude of overall profit do not depend on the ownership of the firms that comprise the business sector.
• The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits. #3
• There is no antagonism between total wages and total profits, and the distribution of consumption goods output has nothing at all to do with profit.
• Innovation and efficiency are irrelevant for the profit of the business sector as a WHOLE. It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm.

In sum, the classical/neoclassical and Keynesian/Post-Keynesian Theories of Value/Profit are provably false.

#1 The Pure Logic of Value, Profit, Interest
#2 Essentials of Constructive Heterodoxy: Profit
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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COMMENT on Andrew Anderson on Nov 28

You say: “A very interesting thing to me is that in the Bible profit is good but profit taking ISN’T(!) good ...”

It is common knowledge that the Bible belongs to the sphere of religion/belief/storytelling and that economics belongs to the sphere of science/knowledge/proof.

Both spheres do not mix, never have, and never will. Your post is out of place.

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REPLY to jrbarch on Nov 29

It is common knowledge that the content and level of economic discussion are far below zero. There is NO need for you or anybody else to deliver more examples.

For details, see FakeNews, FakeScience: economics in the information age.

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REPLY to jrbarch on Nov 30

You say: “I do have an issue with ‘trust me, I’m a scientist’.”

There is NO issue at all; there is only your abysmal ignorance and confusion. Science is NOT about trust or credibility or belief or authority, but only about proof, more specifically, about the logical and empirical consistency of a theory. A theory, in turn, is the best humanly possible mental representation of reality.

Since the ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme), NO scientist has ever said Believe me. As Popper put it: “... a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.”

So, there is NO issue at all. I have given you the Profit Law, and if you have qualms about it, you are invited to refute it. Of course, you cannot. But you can endlessly waffle about Love, the Divine, your Australian aboriginal brothers, and all the other good vibration stuff.

Here is the ultimate test to practically find out the difference between doxa and episteme for yourself: You have the choice to board an aircraft that has been designed/constructed by your good vibration folks and one that has been designed/constructed by scientists/ engineers. Who do you REALLY trust?

OK, and now get out of economics.

How the intelligent non-economist can refute every economist hands down

Comment on Lars Syll on ‘Dani Rodrik’s blind spot’

Blog-Reference

Most non-economists are not fully aware that economists do not understand how the market economy works. The designation economist includes here all economists and, in particular, the adherents to the Walrasian, the Keynesian, the Marxian, and the Austrian approach as well as the Pluralists. This embarrassment is due to the scientific incompetence of the representative economist who stands henceforth for the personified synthesis of the familiar sects.

Most non-economists tend to think that economists know exactly what they are talking about when they use economic terms like income, profit, capital, market equilibrium, GDP, and so on. This is not the case. As the Palgrave Dictionary summarizes with regard to profit, “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

What follows from the well-documented fact that the representative economist has no idea of what profit is? Quite simply, if the core concept of profit is false, then the whole economic theory/model is false. Every non-economist can check it out for himself that neither the Walrasian, Keynesian, Marxian, nor Austrian sect understands what profit is. There is no need at all to study the whole corpus of an approach in detail. If profit is ill-defined, the whole theoretical superstructure falls apart. It is as simple as that. Profit is the key to all of economics.

For more than 200 years, the representative economist has achieved nothing of real scientific value. Of course, this failure has often been noticed: “Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little?” (Schoeffler, 1955, p. 2)

The answer is that the representative economist does not understand the pivotal phenomenon of his subject matter. Note well that this has nothing to do with political differences. Both the defenders of capitalism and the followers of Marx have no idea of what profit is. Thus, neither the capitalist nor the communist economic system (nor their countless variants and combinations) has a sound theoretical foundation. What economists have produced so far are elaborate social belief systems, but nothing of any scientific value. Economics looks like science, but is storytelling on a level with myth or religion. Economic policy advice or institution-building never had a sound theoretical foundation.

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

Economists have as many opinions as non-economists but no true theory. Because of this, one always has to bear in mind the crucial distinction between political economics and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, and the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics, anything goes; in theoretical economics, scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics since Adam Smith can be summarized as a perpetual violation of well-defined scientific standards. Economics, as it actually presents itself to the general public, is essentially political economics, which is synonymous with being scientifically worthless. This verdict applies to Walrasian, Keynesian, Marxian, and Austrian economics. Policy proposals of all these sects have no sound theoretical foundation because theoretical economics in the strict sense is virtually non-existent. Seen from the genuine sciences, economics is a proto-science or what Feynman called a cargo cult science.

Does the non-economist have any chance to understand what economists do not understand? Yes, of course. All that is needed is one iota of scientific instinct. As we know by now, the representative economist lacks this essential mental catalyst.

We take the simplest case as the point of departure. The most elementary economic configuration is the pure production-consumption economy. It is defined for one period by three rather straightforward equations. Note well that no green cheese assumption, like constrained optimization or equilibrium, is put into the premises.

(A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For the graphical representation, see Graphic AXEC31

At any given level of employment L, the wage income Y_w that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O is followed by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Y_w, and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average if the individual wage rates are different among the employees, which is normally the case.

Under the conditions of market-clearing and budget-balancing in each period, the price is given by P=W/R, i.e., the market-clearing price is always equal to unit wage costs.

If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased, the price remains constant, provided productivity R does not change. If productivity decreases, the price P rises. If productivity increases, the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price.

We know, of course, that the firm sets a price that is different from the market-clearing price. This case has to be treated separately on another occasion.

In the next period, the households save. The result is shown under the label AXEC33

Consumption expenditure C falls below Y_w and with it the market-clearing price P. With perfect price flexibility, there are no unsold quantities and no change in inventory. The product market is always cleared, and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving which is given by S_m≡Y_w−C is not equal to investment.#1

The crucial conclusion is that the business sector makes a monetary loss that is exactly equal to the household sector’s saving, i.e., Q_m≡−S_m. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving, that is, of the growth of the household sector’s debt. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Q_m≡C−Y_w and the definition of household sector saving S_m≡Y_w−C. The sector balances always add up to zero, i.e., Q_m+S_m=0.

Note well that profit for the economy as a whole has nothing at all to do with productivity or the wage rate. And this is why all stories that economists tell about the functioning of the market system and the price mechanism are false (2014). For an individual firm, there is indeed a relationship between productivity or wage rate and profit. But this relationship cannot be generalized to the economy as a whole. This logical mistake is known since antiquity as the Fallacy of Composition. This methodological blunder is the defining characteristic of microeconomics, so much so that the representative economist could well be characterized as a Fallacy of Composition on two legs.

The Profit Law for the investment economy reads Q_m≡Y_d+I−S_m (2014, eq. (18)). Legend:  Q_m monetary profit, Y_d distributed profit, S_m monetary saving, I investment expenditure.

The Profit Law gets a bit more complex when foreign trade and government are included.

The Profit Law contains nothing but measurable variables, which means that its empirical fit can be readily established. This ultimately leads from the worthless political economics and the silly model bricolage of the representative economist to economics as a science.

The most valuable contribution to science the non-economist can actually make is to bring in his circle of influence an end to the incompetent waffling of Walrasians, Keynesians, Marxians, and Austrians. Peer-reviewed journal articles, standard textbooks, debates between the sects, and Dani Rodrik’s recent junk recycling are wasteful in all material and intellectual dimensions. To expect New Economic Thinking from people who have demonstrated over two centuries that they can not think is futile.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Schoeffler, S. (1955). The Failures of Economics: A Diagnostic Study. Cambridge: Harvard University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

#1 For details of the I=S blunder see cross-references Refutation of I=S

Related 'How economists became the scientific laughing stock' and 'Scientific Cavemen with a daunting message' and 'The ur-blunder of economics and its rectification' and 'Profit and the collective failure of economists' and 'Free academia from economics' and 'First Lecture in New Economic Thinking' and 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?' and 'Essentials of Constructive Heterodoxy: Profit' and 'Your economics is refuted on all counts: here is the real thing'.

A PDF version of this post is available on EconoPhysics, posted on 17 Dec 2015 and on SSRN, posted 20 Dec 2015

Why is 0!=1? And why is I≠S? And why economics teaching is rotten

Comment on Lars Syll on ‘Why is 0!=1?’

Blog-Reference

The failed economics teacher Lars Syll indulges in self-promotion: “The single most important factor behind successful education ― from kindergarten to university ― is, and has always been — having a good teacher!”

True, but the situation in economics is this: textbooks and teaching are provably false from microeconomic supply-demand equilibrium to macroeconomic I=S.#1

Here is what good teaching looks like.

Keynes started macroeconomics with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

This proposition is false. Where is the mistake?

The first thing to do is always to clearly state the premises. The elementary production-consumption economy is defined by a set of macroeconomic axioms.

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household sector and the business sector, which, in turn, consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditures C is equal to price P times quantity bought/sold X.

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

In case (i), the saving of the household sector S≡Yw−C is zero, and the profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e., X=O in all three cases. Accordingly, the market-clearing price as the dependent variable is given by P=W/R.
In case (ii), saving S is positive and the business sector makes a loss, i.e., Q is negative. The market-clearing price P is less than W/R.
In case (iii), saving S is negative, i.e., the household sector dissaves, and the business sector makes a profit, i.e., Q is positive. The market-clearing price P is greater than W/R.

It always holds Q≡−S, in other words, the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving.

And that’s it. The mistake in Keynes’ argument lies in the premise that income = value of output. The fact is that the value of output C=PX can be less than wage income Yw. The balance of the two flows, C−Yw is called loss. Loss, as the difference of flows, is different from the flow of wage income. Loss is NOT income.

Analogous in the opposite case, i.e., C>Yw and Q>0. Profit is NOT income either.

In the elementary investment economy, it holds Q≡I−S. Simple algebra and a look at reality tell one that saving is NEVER equal to investment. However, economics teachers explain to their students 80+ years after Keynes why I=S. #2 And every student generation swallows it with a straight face.

Something is rotten with economics teaching.

Egmont Kakarot-Handtke


#1 The father of modern economics and his imbecile kids
#2 #DrainTheScientificSwamp

Related 'Trust in economics as a science?' and 'Fact of life: your econ prof is scientifically incompetent' and 'Textbooks and the mental cloning of dumb economists' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'Economics: 200+ years of scientific incompetence and fraud'. For details of the big picture, see cross-references Econ 101/Old Curriculum/New Curriculum.

Occasional X: Clueless economists / Tax (VIII)

“You can’t take taxes out, before you have put money into the system.” (?whispers?)

The bath-tube crowd is a bunch of economic morons.

There are two cases that have to be kept separate: a balanced public budget and deficit-spending/money-creation. The total amount of State… pic.twitter.com/AEIq8XQKWj

— AXEC (@EgmontHandtke) April 8, 2026

Occasional X: Clueless economists / Science (CCCLIII)

“GDP answers the question posed to it, as well as we know how: What is the total value of goods and services produced in the market economy, and what is the value of income earned by such production in the market economy? It is a terrible measure of things it wasn't designed to…

— AXEC (@EgmontHandtke) July 8, 2026

Occasional Tweets: No false-hero memorials (XVIII)

 

“Economics is the study of the economy, not the study of economists.” (R. Reis)

The history of economic thought is the history of scientific failure. The major approaches are axiomatically false & materially/formally inconsistent & ALL got #Profit wrong. Jevons was NO exception.

— E.K-H (@AXECorg) October 21, 2023

For more about Jevons see AXECquery. 

Occasional Xs: How it works (LXXIII)

 

The US political system is an #Oligarchy with Congress/Treasury/Fed/BigBusiness as integral parts. The #ProfitLaw ↓ implies #PublicDeficitIsPrivateProfit. The growth of #PublicDebt generates #Profit/#Interest. #PrintingMoney is how the Oligarchy self-generates #FinancialWealth. pic.twitter.com/qYpfG1S3Rm

— E.K-H (@AXECorg) October 14, 2023

Occasional Tweets: The futile attempt to recycle IS-LM (I)

 

#LearnEconomics

All IS-LM models are axiomatically false.

Cross-references Refutation of I=Shttps://t.co/TGGYpnS9sG pic.twitter.com/XcgoaUGWSN

— E.K-H (@AXECorg) May 7, 2022

Occasional Xs: The futile attempt to recycle Adam Smith (XXXVI)

 

#Economics#JustDisInfoTainment

The history of economic thought is the history of scientific failure. #AdamSmith NEVER understood what #Profit is and how the economic #System works. Economic #PolicyGuidance has NEVER had sound scientific foundations. pic.twitter.com/7L3NiBYNXP

— E.K-H (@AXECorg) September 14, 2023

Occasional Xs: How it works (XL)

 

#LearnEcon

The #MarketEconomy's political correspondence is NOT #Democracy but #Oligarchy with #Parliament/#Treasury/#BoE/#BigBusiness as integral parts. The #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit, so #PrivateFinancialWealth ≈ #PublicDebt. pic.twitter.com/jJBceIkzQ6

— E.K-H (@AXECorg) September 3, 2023

MMT = Trumponomics

Comment on Bill Mitchell on ‘Japan still to slip in the sea under its central bank debt burden’

Blog-Reference

Bill Mitchell reports: “I took the UK Guardian’s ― How populist are you? ― quiz yesterday. I thought the quiz was an odd cultural artifact. The Tweet by Ronan Burtenshaw … summarised how these sorts of quizzes reflect underlying biases.

Anyway, I did the quiz and I won’t say who I was most alike because I am actually very much unalike the person (which just shows the categorisation errors in the exercise) but I felt relieved that I did score this outcome: You are least similar to Donald Trump.”

Now, this is curious at least with regard to economics because if one takes away the social populism, then MMT is economically identical to Trumponomics, that is to say, it produces exactly the same amount of macroeconomic profit for the Oligarchy. #1

In Bill Mitchell’s words, this “shows the categorisation errors in the exercise.” No, this shows how MMT’s social brainwashing works.

Egmont Kakarot-Handtke


#1 Keynes, Lerner, MMT, Trump, Biden, and exploding profit

Related 'MMT: A free lunch for the Oligarchy' and 'Stephanie and Noah ― economics at the intellectual zero lower bound' and 'MMTers are NOT Friends-of-the-People'.

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REPLY to Calgacus, Matt Franko, André, Noah Way on Nov 24

Compared to microfounded mainstream economics, macrofounded MMT is a real improvement. While mainstream economics is absolutely false, MMT is half-true. So, Bill Mitchell correctly summarizes “that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics …”

MMT is correct on these points:
• A growing public debt does NOT cause inflation.
• The limit of growth of public debt is further out than doom-merchants always claimed.
• Fiscal policy is the main game.
• The government has all the firepower it ever needs.
• The Central Bank (CB) can buy any amount of gov bonds without increasing the inflation rate.
• The CB can maintain yields on gov bonds “at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes.”

But then comes the fraudulent MMT sales slogan: “… normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector vary over time.”

What MMTers never talk about are the distributional effects of a permanently growing public debt.

What exactly happens if the government runs a deficit in an elementary production-consumption economy?#1 From the general macroeconomic Profit Law Qm≡Yd+(I−S)+(G−T)+(X−M) follows that Public Deficit = Private Profit if all other variables are taken out of the picture.

So, at the end of the first period, the business sector’s deposits at the CB (= money) are exactly equal to the government’s overdrafts. If deficit spending is repeated period after period, then the government’s debt in the form of overdrafts grows permanently, and the same holds for the business sector’s deposits. Under the assumption that the interest rate is zero for overdrafts and deposits at the CB, there is NO interest effect and no interest burden on public debt. The stock of money increases, but there is no inflation.

However, things do not stop there. Basically, two liming cases are possible. The government issues bonds, and the business sector buys them. Then, gov overdrafts at the CB go to zero, and the business sector’s deposits go to zero and are replaced by the interest-bearing gov bonds. Both sides of the CB’s balance sheet return to zero. The additional money from deficit spending vanishes. The business sector now earns interest, which is taxed from the household sector. This is what Bill Mitchell calls corporate welfare.

The other limiting case is that the CB buys the gov bonds. Then, gov overdrafts at the CB go to zero, but the business sector’s deposits (= money) remain unchanged. The CB switches on the asset side from overdrafts to long-term interest-bearing bonds. This interest increases the profit of the CB and is later on recycled to the government. So, this variant is distributionally neutral with regard to interest.

Reality is between the limiting cases.

So, while MMT is descriptively correct with regard to many monetary phenomena, it lacks sound scientific foundations because it is based on a mathematically false sectoral balances equation. Both MMTers and mainstreamers get macroeconomic profit wrong. This is disqualifying for an economist.


#1 The elementary production-consumption economy is, for a start, defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (profit/loss Q≡C−Yw, saving/dissaving S≡Yw−C). Legend: Yw wage income, W wage rate, L employment, O output, R productivity, C consumption expenditures, P price, X quantity bought/sold. It always holds Q≡−S. This is the most elementary form of the macroeconomic Profit Law. The market-clearing price is derived as P=W/R. This is the macroeconomic Law of Supply and Demand.

Related 'MMT and the inflation-red-herring' and 'MMT: agenda-pushing and money-making for the Oligarchy' and 'Why the MMT benefactors of humanity never talk about profit'.

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REPLY to Calgacus on Nov 25

I said: ‘But then comes the fraudulent MMT sales slogan: “… normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector vary over time.” What MMTers never talk about are the distributional effects of a permanently growing public debt.’

You disagree: “This is just not true. They do talk about that, I believe I have given you at least one reference. They just don’t wildly exaggerate them and remove them from context.”

When I talk about distributional effects, I refer to the core of distribution theory, that is, the relation of wages to profits or what is called the wage share/profit share. #1

The fact of the matter is that Bill Mitchell talks about the “overall saving desires of the private domestic sector” and by this, he makes the profit effect of deficit-spending/money-creation disappear. #2

There is NO such thing as the “private domestic sector”; there is the business sector and the household sector, and the balance of the household sector is saving/dissaving, and the balance of the business sector is profit/loss. And both cannot be lumped together to overall saving. Methodologically, this is called the Humpty Dumpty Fallacy; politically, this is plain fraud. #3

In the MMT balances equation (G−T)+(I−S)=0 for the closed economy, profit does not appear at all. So, MMT’s distribution theory is a priori false.

The axiomatically correct balances equation reads (G−T)+(I−S)−(Q−Yd)=0. It follows that Public Deficit = Private Profit. And this tells one that the relation between overall profits and wages, which is generally considered a distributional scandal, is produced by ― guess who? ― yes, by MMTers’ deficit-spending/money-creation.

MMTers NEVER speak about this pivotal distributional effect of their policy because underneath their butoxed social populism, they are agenda pushers for the Oligarchy.#4


#1 There is NO such thing as a “labor share of income”
#2 Rectification of MMT macro accounting
#3 Down with idiocy!
#4 Keynes, Lerner, MMT, Trump and exploding profit

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AXEC128b The Humpty Dumpty Fallacy (V1)

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REPLY Calgacus on Nov 25

You say: “I have to say, I think this is the weirdest, most illogical, most anti-scientific thing ever said here. It is unimaginably, strangely, uniquely wrong.”

I have news for you. You cannot think, that’s merely self-delusion. To blather and to think are quite different things.

You maintain: “You’re saying that some particular way that some people decided to describe and divide up economic activity was engraved in stone AND even more incredibly, that there is some mystical problem with putting together what they happened to separate.”

No, I have proved that MMTers are too stupid for the elementary mathematics that underlies macroeconomics and that they got the foundational concepts of profit and income wrong. #1 In this, they follow in the footsteps of Keynes and the Post-Keynesians. #2, #3, #4

It is pretty obvious that if the concepts of macroeconomic profit and income are ill-defined, distribution theory runs straight into a dead end. This also happened to MMT.

Economists, including MMTers, are scientifically incompetent. Their foundational concepts lack consistency, and this is why this sorry bunch of blathering Humpty Dumpties was unable in the past 200+ years to rise above the proto-scientific level. #6, #7

Get out of wish-wash and answer the question of which of the two sectoral balances equations is true/false

(i) (I−S)+(G−T)+(X−M)=0

(ii) (I−S)+(G−T)+(X−M)−(Qm−Yd)=0

#1 Wikipedia and the promotion of economists’ idiotism (II)

#2 Macroeconomics ― dead since Keynes

#3 Post Keynesianism, too, is indefensible

#4 Why Post Keynesianism Is Not Yet a Science

#6 Profit, income, and the Humpty Dumpty Fallacy

#7 Humpty Dumpty is back again

***

REPLY to Calgacus, Matt Franko on Nov 26

MMTers call themselves Progressives and are the first and loudest to condemn the distribution of income/financial wealth between the one-percenters and the ninety-nine-percenters as unjust, absurd, socially destructive, etcetera.

The MMT policy of government deficit-spending/money-creation is the very cause of this distributive outcome. Because in a three-sector economy, with the household sector’s budget balanced, the deficit of the government sector is exactly equal to the surplus of the business sector.

So, there is a logical contradiction in the position of MMTers.

This contradiction is papered over with a semantic shell game, that is, by calling the surplus of the business sector (= macroeconomic profit) surplus of the private sector. The term private sector falsely suggests that WeThePeople is part of it.#1

This semantic shell game is a political fraud to obscure the fact that Progressives are agenda pushers for the Oligarchy.

Academic MMTers are either stupid or corrupt or both. They have to be expelled from academia. This applies first of all to Bill Mitchell.

#1 For the general case, the axiomatically correct sectoral balances equation is given by (I−S)+(G−T)+(X−M)−(Qm−Yd)=0.

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

New thinking, new teaching

Comment on Maria Alejandra Madi on ‘Real world economists and the economics curriculum’

Blog-Reference

Keynes' great merit was to speak out clearly that something was deeply wrong with economics. In this, he was far ahead of his fellow economists. However, he did not succeed in developing a satisfactory alternative. “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

The deeper reason is that Keynes — just like his predecessors and fellows — did not come to grips with profit (2014). What is worse, neither did the Post Keynesians (2011) nor Heterodoxy (including Minsky) until this very day.#1

Because neither Keynes nor his followers nor his opponents understood that deficit spending has a one-to-one positive side-effect on the overall profit of the business sector Keynesian policy is ultimately responsible for the extreme distortion of income and wealth distribution that we see today.#2

Because they lack the correct economic theory, economists in effect produce the problems they are supposed to solve.

The most important tasks of Heterodoxy are (i) to develop the materially and formally consistent economic theory, (ii) to develop the appropriate curriculum,#3 (iii) to fully replace Orthodoxy in academic and non-academic teaching.

At the moment, scientifically incompetent orthodox and heterodox economists are probably the greatest menace to their fellow men.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.

#1 Heterodoxy, too, is proto-scientific garbage
#2 Keynesianism as ultimate profit machine
#3 For a start see cross-references New Curriculum

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AXEC117