There is NO such thing as a “labor share of income”

Comment on Stephen Gordon on ‘Why do we care about the labour share of income?’

Blog-Reference

Stephen Gordon summarizes: “A lot has been said and written about the decline in the labour share of income, usually calculated as total employee compensation divided by nominal GDP. This decline is generally regarded as a negative development: the reduction in the share of income going to workers is interpreted as a symptom of suppressed wage growth and of increased income inequality.”

Indeed, a lot has been said and written about income, wages, profits, and all is false because economists failed for 200+ years to get the concept of profit straight. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008) #1 In other words, economists have NO idea what the pivot of their subject matter is.

Because profit is ill-defined, income is ill-defined, and by consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income, but the difference of flows. Distributed profit is income, but profit is NOT income. Distributed profit and profit are NOT the same things.

By consequence, total income is NOT the sum of wages and profits, #2, which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”. This means that the content of this thread, comments included, is vacuous blather because all are based on false premises.  #3, #4, #5, #6

Without true profit theory, there is no true distribution theory. The axiomatically correct Profit Law is given as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) (i) and this reduces to Q_m≡(I−S_m)+(G−T) (ii) for Y_d, X, M=0; Legend: Q_m monetary profit/loss, Y_d distributed profit, I investment expenditure, S_m monetary saving/dissaving, G government expenditures, T taxes, X exports, M imports. Total profit Q is the sum of monetary and nonmonetary profit, i.e., Q≡Q_m+Q_n (iii).

Accordingly, the so-called “labor share” λ ― which is NOT a “share” but a quotient ― is defined as the relation of wage income Y_w to the sum of wage income and total profit Q, that is, λ≡Y_w/(Y_w+Q) with Q given by (iii) above.

The fact is that neither market power nor declining unionization nor automation can account for a falling “labor share” λ. The main drivers of increasing overall profit have been, in the past decades, the increased deficit spending of the household sector and the government sector, which translates into an ever-growing private/public debt.

Traditional distribution theory and the concept of a wage/profit “share” is abysmal proto-scientific garbage since the founding fathers. #7, #8

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#3 Profit and distribution: a primer
#4 Profit and the decline of labor’s nominal share (I)
#5 Profit, income, and the Humpty Dumpty Fallacy
#6 For details of the big picture, see cross-references Profit
#7 Ricardo, too, got profit theory wrong
#8 Economists simply don’t get it

Related 'Truth by definition? The Profit Theory has been axiomatically false for 200+ years' and Links on McKinsey’s ‘A new look at the declining labor share of income in the United States’ and 'There is NO such thing as a “labor share of income”’ and 'Profit and the decline of workers’ nominal share (II)’ and 'Profit and the decline of labor’s nominal share (I)’ and 'Income Distribution, Profit, and Real Shares

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Source FRED taken from WTF Happened In 1971?

Twitter/X Feb 10, 2026 Because profit is not income, there is no profit share of income

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

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

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

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

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

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

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Overall profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior or on markup setting.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal, or average productivity. Automation affects only the DISTRIBUTION of total profit AMONG firms (and countries).
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is the most elementary mistake to maintain that total income is the sum of wages and profits.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. Microfounded profit theory is one big Fallacy of Composition.

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

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

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

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See also Essentials of Constructive Heterodoxy: Profit
#3 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start, X=O.

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

Profit, income, and the Humpty Dumpty Fallacy

Comment on Timothy Taylor/Conversable Economist on ‘Behind the Declining Labor Share of Income’

Blog-Reference

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

Because profit is ill-defined, income/distribution is ill-defined, and this is due to 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., Q_c≡C−Y_wc, and the investment goods industry, i.e., Q_i≡I−Y_wi, that is, Q≡(C−Y_wc)+(I−Y_wi) or Q≡C+I−Y_w (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Y_w.

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+Y_w  and now (i) is rewritten
(b) Q+Y_w ≡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 invisible.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic Profit Law is given as Q≡Y_d+(I−S)+(G−T)+(X−M) [1], Legend: Q macroeconomic profit, Y_d distributed profit, I investment expenditure, S household sector saving, G government expenditures, T taxes, X exports, M imports. For the world economy as a whole, it holds X, M=0.

The nominal labor "share" λ is defined as the quotient of wage income Y_w and the sum of wage income and profit, that is, λ≡Y_w/(Q+Y_w) with Q given by [1] above. To recall, Ψ≡Q+Y_w is redundant/inadmissible, hence profit is NOT a "share" of "total income Ψ".

The fact is that neither market power nor capital intensity nor information technology nor union weakness can ultimately account for a falling nominal labor "share" λ. The main drivers of increasing macroeconomic profit Q have been in the past decades the increased deficit spending of the household and the government sector. The other factors can only account for the distribution of profit Q between firms, but NOT for the total amount. #2, #3

Traditional distribution theory is scientifically worthless because the foundational economic concepts of profit, income, and saving are ill-defined.* Worse, because profit is ill-defined/ poorly understood, the whole of economics is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 For details of the big picture, see cross-references Profit and cross-references Refutation of I=S.

‡ See Occam's razor in Wikipedia

*  Graphic AXEC129d

Graphic AXEC128b

Ricardo, too, got profit theory wrong

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

Blog-Reference and Blog-Reference

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

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

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

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

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

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

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

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

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

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

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

• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Macroeconomic profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup-setting, nor on risk-taking.
• In order that profit comes into existence for the first time in the pure production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power/rent-seeking is irrelevant for macroeconomic profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity.
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• Profit is a factor-independent residual and qualitatively different from wage income (difference of flows vs flow). Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits. #4

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

Egmont Kakarot-Handtke


#1 Blackwood’s Magazine (courtesy EconoSpeak)

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

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

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REPLY to Barkley Rosser on Feb 14

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

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

to Sandwichman

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

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REPLY to Barkley Rosser on Feb 15

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

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

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

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

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

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

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

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

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

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REPLY to Sandwichman on Feb 15

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

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

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

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

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

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

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

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REPLY to Barkley Rosser on Feb 16

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

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

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

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

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

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

This drivel is, as always, pure disinformation.

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

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

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


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

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REPLY to Sandwichman on Feb 16

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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REPLY to Sandwichman on Feb 19

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


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

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REPLY to Sandwichman on Feb 20

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

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

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

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

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REPLY to Sandwichman on Feb 20

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

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QUESTIONNAIRE back to Sandwichman on Feb 21

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

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JFTR on Feb 22

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

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

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

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

Profit and macrofoundations

Comment on James Galbraith on ‘A global macroeconomics ― yes, macroeconomics, dammit ― of inequality and income distribution’*

Blog-Reference

James Galbraith observes with regard to the JEL classification codes: “Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares ― Wages, Profits, Rent ― also known as the functional distribution.” and “From a theoretical standpoint distribution is the essence of micro, of market relations and of supply-and-demand. The discipline exists, largely, to explain factor returns. If it doesn’t explain ― I don’t say ‘justify’ ― the pay of the worker and the return to capital, then the rest of what it does would not sustain it.”

What is even more remarkable: the keyword Profit neither appears under Microeconomics nor Macroeconomics. The first problem of Distribution Theory is that economists obviously do not know what profit is.

Fact is: “A satisfactory theory of profits is still elusive” (Desai, Palgrave Dictionary) and this is the most damning verdict about economics. After 200+ years, economists cannot tell the difference between profit and income. This is the present state of economics: the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter ― profit ― wrong. #1, #2, #3

Because Profit Theory is false, Distribution Theory is false by logical implication.

James Galbraith identifies the point where things went wrong: “Lucas made the wrong choice. He decreed that micro takes precedence ― that the house is built on microfoundations. Godley did not have patience for this. Surely the house is better built on solid steel-and-concrete pilings, on macrofoundations, with micro-shingles on the roof?”

Indeed, that’s it. Economics needs a Paradigm Shift from false microfoundations to true macrofoundations. At this point, though, James Galbraith stops and turns to the prospects and problems of empirical research. He does not specify what the true macrofoundations are.#4, #5

From the true macrofoundations follows the macroeconomic Profit Law as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. This reduces to the core Qm≡−Sm, i.e., the business sector’s profit is equal to the household sector’s dissaving, and vice versa, the business sector’s loss is equal to the household sector’s saving.

Macroeconomic profit has nothing to do with greed/exploitation/productivity but with growing/shrinking debt. Lo and behold, this is one of James Galbraith’s key findings: “1. There are global turning points in the path of pay inequality. They occur around 1971, around 1980, and around 2000. These correspond in each case to major shifts in the worldwide financial regime: to the breakdown of Bretton Woods, to the outbreak of the global debt crisis, and to return to low interest rates and rising commodity prices that followed the NASDAQ slump and the 9/11 attacks, along with the rise of China in world trade.”

Macroeconomic profit is an objectively given and well-defined magnitude. The first thing to notice is that profit is qualitatively different from income.#6 Loss or profit is NOT income. Distributed profit is income. Because of this, it is inadmissible to speak of ‘profit income’ because profit is the difference of flows and not a flow like wage income. Wage income and profit cannot be added together to total income, and profit is not a share of total income. In their utter scientific incompetence, economists get the basics of distribution theory wrong from Adam Smith and David Ricardo onward to this day. #7, #8, #9

James Galbraith is right: “A global macroeconomics ― yes, macroeconomics, dammit” is the key to Profit Theory and Distribution Theory. Microfoundations are proto-scientific garbage since Jevons/Walras/Menger. Economics has to be based on macrofoundations. Get it: If it isn’t macroaxiomatized, it isn’t economics.

Egmont Kakarot-Handtke


* Review of Keynesian Economics
#1 Profit and distribution: a primer
#2 Essentials of Constructive Heterodoxy: Profit
#3 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#4 First Lecture in New Economic Thinking
#5 From false microfoundations to true macrofoundations (II)
#6 Macro for dummies (II)
#7 Profit and distribution: a primer
#8 There is NO such thing as a “labor share of income”
#9 Ricardo, too, got profit theory wrong

Related 'The actual distribution is unacceptable? Do NOT seek economic advice!' and 'Income distribution: No market failure but theory failure' and 'The Levy/Kalecki Profit Equation is false'. For details of the big picture, see cross-references Profit/Distribution.

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AXEC109i

MMT: Just political heat, no scientific light

Comment on Stephanie Kelton/Op-Ed on ‘Congress can give every American a pony (if it breeds enough ponies)’

Blog-Reference

The selling proposition of MMT is that the government can solve all economic problems because, as a sovereign currency issuer, it is not financially in any way restricted. In other words, in contradistinction to private households or firms, the government can run deficits without any risk of going bankrupt. This is true in principle, but leads to some unintended consequences, which are due to the fact that MMTers do not know how the economy works. In other words, MMTers lack the true economic theory. This is rather bad for people who claim to be scientists: “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)

What the layperson cannot see is that MMT has NO sound scientific foundations. The MMT policy proposals are based on Keynesian macroeconomics, which has been refuted long ago. #1

As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) 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.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w, the price is given by P=C/X=W/R, i.e., the market-clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #2

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w, and monetary saving as S_m≡Y_w−C. It always holds Q_m+S_m=0, 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 Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Now, the sovereign government decides that in the next period wage income is taxed and that a certain number of hitherto unemployed are taken into a Job Guarantee Program. So, net wage income is now Y_w−T, and the hitherto unemployed receive the guarantee income Y_g. Total income is Y₁=(Y_w−T)+Y_g, and if the government’s budget is balanced, i.e., T=Y_g, then total income does not change; it is only redistributed. Under the condition of budget-balancing C₁=Y₁=Y, consumption expenditures remain unchanged, and so does the market-clearing price P₁=C₁/X=W/R=P. What changes is the distribution of output O. The real share of wage income receivers is O_w1=(Y_w−T)/P, and that of Job Guarantee participants is O_g1=Y_g/P. So, what is achieved with income redistribution is a proportional output redistribution.

MMTers maintain that for the sovereign government, there is no need to balance the budget, and they propose a tax reduction for wage income recipients. Under the condition T=0, total income changes from Y₁=(Y_w−T)+Y_g to Y₂=Y_w+Y_g. The amount Y_g = government budget deficit comes from the central bank, i.e., is created out of nothing. Under the condition of C₂=Y₂ consumption expenditures rise with total income. This leads to an increase in the market-clearing price P₂=C₂/X=C₂/O. This, in turn, reduces the share of real output for the wage income receivers from O_w1=Y_w/P in the initial period to O_w2=Y_w/P₂.

In the MMT variant, the wage income receivers are now taxed in real terms via the price increase, that is,  O_w1=(Y_w−T)/P compares to O_w2=Y_w/P₂. Let us assume for simplicity that both variants lead to the same outcome, i.e., O_w1=O_w2. Hence, in real terms, the wage income receivers do NOT benefit from the tax reduction.

The profit of the business sector was zero in the initial period, i.e., Q_m≡C−Y_w=0 because of C=Y_w, and is now positive Q_m2≡C₂−Y_w=Y_g because of C₂=Y_w+Y_g. So, the identical redistribution of output O creates a profit for the business sector. It always holds Public Deficit = Private Profit.

This can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously, and with the business sector’s pile of cash rising continuously, and with no inflation. As long as the debt is revolved, all is fine. Interest for the public debt is reliably taken from the household sector via taxes and transferred to the bond-holding business/banking sector. This is an additional benefit for the one-percenters of the MMT way of doing things.

Compared to the redistribution via a balanced budget, the same real redistribution via budget deficits has only the optical advantage of T=0 for the wage income recipients, yet palatable and long-lasting advantages for the one-percenters in the form of higher profits and subsequent interest incomes.

The snag of the MMT policy agenda is that it simply shifts taxes into the indefinite future. Those people who suspect that the MMT economic policy agenda is too good to be true have fine instincts. MMT is not a new economic school with a superior problem-solving capacity. Instead ― intended or unintended does not matter ― scientifically retarded MMTers actually do the PR for the economic policy agenda of the one-percenters.

Egmont Kakarot-Handtke

#1 For the full-spectrum refutation of MMT, see cross-references
#2 Graphic AXEC31 Elementary production-consumption economy


Related 'The profit effect of a Job Guarantee'

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REPLY to Calgacus on Oct 2

(i) I interpreted Wray’s statement “money is a cross-balance sheet RELATIONSHIP” as a reference to the development of double-entry bookkeeping in medieval Europe. If the credits for the correct definition of money actually go to Mitchell-Innes, I appreciate your clarification.

(ii) You say: “Computer science in education today plays a similar role to Euclid for millennia ― providing intellectual rigor and discipline.” I fully agree, as you could infer from the fact that I strictly apply the axiomatic-deductive method. #1

(iii) You say: “These errors are due, like all errors, to not subjecting one's thought to discipline like mathematical proof, the discipline of writing programs that work or of testing theory by experiments. Another mistake is in debating technique ― if you want to say MMT is wrong, you have to quote an MMT statement, try to read it as the author meant, and show that it is wrong by logic, leads to a conclusion universally held to be wrong.”

I agree. From the fact that you obviously have not realized that the proofs have already been given #2,#3 I conclude that you do not heed your own advice. Take notice that it is proven that MMT is axiomatically false. Because the foundational premises of MMT are false, the whole analytical superstructure is false. MMT is scientifically worthless.#4

(iv) You say: the lack of slow and careful reasoning leads to making flatly false, indeed absurd statements like ‘budget surpluses are needed to pay off earlier deficits.’ Do you really believe this?” This is not a question of belief but of logic. Money is a credit relationship, a generalized IOU that is continuously created and destroyed. If the government runs a deficit in period 1, this takes the form of overdrafts on the asset side of the balance sheet of the central bank and of deposits = money on the liability side. This is the creatio ex nihilo step. Being a credit relationship, there must LOGICALLY be the inverse operation. Practically, the government can redeem its overdrafts at the central bank if it taxes the household sector, that is, by running a budget surplus. What the government can also practically do, though, is to indefinitely postpone the logically inverse operation to money creation. It is self-contradictory of MMTers to say money is basically an IOU without taking into consideration that IOUs have to be redeemed in finite time. Practically, this has NOT been done yet, of course, and the proof is in the continuously growing public debt. But logically, it has to be done. It is one of the political dishonesties of MMT to assert that money is a debt that has never been paid back and never will. Money that is created by government deficits has eventually to be destroyed by government surpluses. What we have historically seen is only the first part of the whole story. Note that this is NOT an obsession with balanced budgets but follows logically from the concept of money as a credit relationship. If it is credit, it has to be paid back eventually. But logic has never been the strong point of MMT.

(v) As the example above shows, MMT policy makes the household sector WORSE off. In real terms, the wage income receivers’ part of output is reduced in period 1, and it does NOT matter whether this happens via a tax or via a price increase. But with immediate taxation, the matter is settled in real AND financial terms in period 1. With government deficit spending, the matter is NOT settled in financial terms. The wage income receivers have to pay via taxes the interest for the government debt as long as it is revolved. The government taxes on behalf of the business sector, which holds part or all of the government debt in the form of securities. Ultimately, the household sector has to pay the tax of period 1 because the government debt has to be redeemed. MMT policy simply amounts to a tax deference program with income redistribution via interest over a very long time. Seen from the beginning to the logical end, MMT policy makes the household sector worse off compared to immediate taxation. ALL benefits are clearly on the side of the business sector. To sell MMT as a social program to Sanders/Corbyn is either self-deceptive stupidity or fraud.

(vi) Deficit spendinghas been, since Keynes, the main cause of the declining share of wage income. #5

(vii) MMT is simply the wrong way to boost employment and to realize all the other social improvements MMT claims to bring. For the correct macro employment theory, see #6.

(viii) Stated MMT policy goals are one thing. They are NOT the issue here. The point is that MMT policy guidance has no sound scientific foundations. MMT economic theory is axiomatically false. Scientifically, MMT is not different from the flat-earth theory. MMT has NO truth value, only some political use-value. All poofs can be found in #4.

Time for all MMTers to stop blathering and advancing the cause of the one-percenters under a social pretext and finally to do their scientific homework.

#1 From Marshall to Georgescu-Roegen
#2 Rectification of MMT macro accounting
#3 Solving Mill’s starting problem
#4 For the details of the big picture, see cross-references MMT
#5 Keynesianism as ultimate profit machine
#6 Macrofounded labor market theory

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REPLY to Tom Hickey on Oct 6

You say: “There is a tendency to see economic issues and solely or chiefly economic. This is a huge mistake, since the economy is the life support system of society and society has social and political aspects in addition to economic. … Conventional macroeconomics is junk science and involves special pleading when used for justification in policy formulation.”

Both micro and macro are junk science. And MMT is a prolific junk producer because it is based on provably false macrofoundations. Because MMT lacks the true theory, it is no more than soapbox economics.

It holds: “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)

There is political economics and theoretical economics. The main differences are: (a) The goal of political economics is to successfully push an agenda, and the goal of theoretical economics is to successfully explain how the actual economy works. (b) In political economics, anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) has been body-snatched by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. MMT is part of political economics.

Methodologically, it holds: If it isn’t macro-axiomatized, it isn’t economics. #1 Because of this, neither Walrasianism, Keynesianism/MMT, Marxianism, nor Austrianism is economics. The four main approaches have no truth value, merely some political use-value. Politics needs no true theory, only some populist rhetoric and some pseudo-scientific make-up.

MMT is refuted on all counts. #2 There is NO place for MMTers in science. Politics and science have to be strictly separated, and MMT has to be given the marching orders because of proven scientific incompetence.

#1 The ethics of science is consistency ― economics is inconsistent
#2 See cross-references MMT


References 'MMT: Money-making for the one-percenters' and 'Why is MMT so false?' and 'Gov-Deficits do NOT cause inflation.

DSGE and profit―forget it! MMT and profit―forget it!

Comment on Brian Romanchuk on ‘The Curious Profit Accounting Of DSGE Models’

Blog-Reference and Blog-Reference

Everybody knows that DSGE, as the actual version of the microfoundations approach, is dead. From this follows that a Paradigm Shift is needed: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

One of the most conspicuous blunders of DSGE is the profit theory. Brian Romanchuk observes: “One of the more puzzling aspects of neo-classical economic theory is the assertion that profits are zero in equilibrium under the conditions that are assumed for many models. One should re-interpret this statement as ‘excess profits’ are zero, but there are still some awkward aspects to the treatment of profits in standard macro models.”

Indeed, there has been something deeply wrong with the profit theory since Adam Smith. Conventional ‘wisdom’ asserts: “The consensus to date has been that it is mathematically impossible for capitalists in the aggregate to make profits.” (Keen) And: “But, from the macro perspective of Walrasian general equilibrium, the total profits, in this case, cannot be other than zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out.” (Boland) #1

The curious thing is that macroeconomic profit has been greater than zero for most of the time in most of the known market economies up to the present. This is an empirical fact. Obviously, there is something wrong with conventional profit theory, and Brian Romanchuk is not the first to notice it. As the Palgrave Dictionary puts it: “A satisfactory theory of profits is still elusive.” (Desai)

This, indeed, is the most damning verdict about economics, which claims to be a science: after 200+ years, economists still cannot tell what the pivotal magnitude of their subject matter ― profit ― is. This does not only apply to DSGE but to the four main approaches: Walrasianism, Keynesianism, Marxianism, and Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal economic concept of profit wrong.

While Brian Romanchuk notes that DSGE profit theory must be false, he passes over the fact that MMT, the approach he pushes, is not one iota better.

To make matters short, the axiomatically correct relationships are given here without further explanation.#2 It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Yd distributed profit:

(i) Qm≡−Sm in the elementary production-consumption economy,
(ii) Qm≡I−Sm in the elementary investment economy,
(iii) Qm≡(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
(iv) Qm≡Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.

From (iii) follows that ― given business sector investment I and household sector monetary saving Sm ― Public Deficit = Private Profit. This tells one that the MMT policy of deficit spending/money creation benefits only the one-percenters.

It never follows the MMT tripartite balances equation (I−S)+(G−T)+(X−M)=0. The comparison with the axiomatically correct Profit Law (iv) makes it clear that MMT ― just like DSGE ― in effect deals with a zero profit economy, i.e., Qm, Yd = 0.

Because the foundational sectoral balances equation of MMT is provably false the whole of MMT is worthless, just like DSGE.

Egmont Kakarot-Handtke


#1 Debunking Squared
#2 MMT is idiocy and fraud
#3 Macro for retarded economists

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REPLY to Brian Romanchuk and Anonymous on Mar 16 and Blog-Reference

Take notice that what you call “normal definition of income” is one of the worst methodological idiocies of economics. Needless to emphasize that the “normal economist” in his incurable scientific incompetence does not realize it.

Here, for intelligent non-economists, the Humpty Dumpty Fallacy in full detail.

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 the 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)

Take notice that “income” is NEVER equal to “value of output” and by implication that “saving” is NEVER equal to “investment” because profit is NOT “income”.

In accounting terms, wage income Yw is a flow from the business to the household sector, and consumption expenditures C is a flow in the opposite direction, and profit is the difference between the two flows Q≡C−Yw. To add a flow and a balance together is a category mistake. No accountant worth his salt would ever do it, but economists are Humpty Dumpties who do not even understand the elementary mathematics that underlies accounting. #1, #2

The analogous flow to wage income Yw is distributed profit Yd. It is methodologically CORRECT to add the two flows Yw and Yd together to total income, but it is INCORRECT to add the flow Yw and the balance Q together. #3

All this is way above the head of the “normal economist” who misspecifies the foundational economic concepts of profit/income/saving/distributed profit from Adam Smith onward to DSGE and MMT.

To argue that the “normal economist” treats profit for 200+ years without any qualms as “income” is to confirm that the “normal economist” is an incurable idiot, and this, in turn, explains the indisputable fact that economics is a failed/fake science.


#1 A tale of three accountants
#2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#3 How Keynes got macro wrong and Allais got it right

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REPLY to Brian Romanchuk on Mar 16

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

This exactly is the task of the scientist: to figure out which of the conflicting ‘opinions and conventions’ is true. Economists have badly failed at this task.

Keynes is a case in point. He was entirely clueless: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT, but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.). And: “Keynes related his definition of income expressly to ‘the practices of the Income Tax Commissioners.’ He was in grave doubt whether ‘it might be better to employ the term windfalls for what I call profits.’ But he was quite sure that ‘saving and investment are, necessarily and by definition, equal ― which after all, is in full harmony with common sense and the common usage of the world.’” (Coates) #1

After-Keynesians are no better: Kalecki defined profit as P=Cp+I, Minsky as P=I, and Keen applies the commonsensical but provably false Humpty Dumpty definition of total income = wages plus profits.#2

And so it goes on. Ricardo’s profit theory is false,#3 same as Marx,#4 same as MMT. Your assertion “there is general agreement on how to define profits in simpler cases (such as in a mathematical model)” is laughable.

Nothing shows better the scientific incompetence of economists than the fact that every half-wit applies his own confused definition of profit.

Physics has one definition of energy, and this magnitude is an element of a consistent set of foundational magnitudes. Economics has a wild variety of inconsistent profit definitions. And this is why economists never get above the level of confused blather.

The MMT balances equation reads (I−S)+(G−T)+(X−M)=0, the AXEC balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0. Only one equation can be true. As someone with applied mathematics training, you can certainly spontaneously tell which one.#5


#1 Marshall and the Cambridge School of plain economic gibberish
#2 Heterodoxy, too, is proto-scientific garbage
#3 Ricardo, too, got profit theory wrong
#4 Profit for Marxists
#5 Rectification of MMT macro accounting

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REPLY to Roger Sparks on Mar 17 and Blog-Reference MNE

DSGE is the most recent actualization of the microfoundations approach, which was kicked off 150+ years ago by Jevons/Walras/Menger. DSGE is based on the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

The representative economist has not realized it, but methodologically, these premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian hardcore contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Methodologically, the microfoundations approach has already been dead in the cradle. It was Keynes who realized this and tried to move to macrofoundations. However, in his bottomless incompetence, Keynes messed up the Paradigm Shift. This is why the proto-scientific maximization-and-equilibrium rubbish is still around.

But Neoclassicals did not only get the axiomatic foundations of economics wrong, but also the mathematics. The proof has been given by the mathematician Jonathan Barzilai. #1

Whoever discusses in our days a DSGE model proves that he has no grasp whatsoever of science/mathematics. DSGE is the economics analog of the Flat Earth Theory and is considered worthy of discussion only by some simpletons.


#1 See An Open Letter to the President of the American Economic Association and An Open Letter to the President of the Canadian Economics Association

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REPLY to Roger Sparks on Mar 17

Congratulations! It seems that you have reanimated Brian Romanchuk’s defunct brain cells. And what revolutionary insights they have produced in the shortest time:
• “You need gasoline to power your car; you cannot fill it up with dollar bills and have it run.”
• “… we need to distinguish financial assets from real ones.”

Who has ever thought such bold thoughts? I am looking forward to the continuation of this mind-boggling dialogue of imbeciles.

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REPLY to Tom Hickey

You ask: “I wonder whether Nordhaus ever responded.”

Wrong question.

Right question: What follows from Jonathan Barzilai’s proof that economists never understood the mathematics they applied?

Right answer: Mr. Nordhaus is the representative of an association of failed/fake scientists. Whether he answered the Open Letter is a matter of indifference. Being the co-author of a supply-demand-equilibrium economics textbook tells everyone that he never had anything worthwhile to say.#1


#1 The father of modern economics and his imbecile kids

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REPLY to Brian Romanchuk, Roger Sparks on March 19, and Blog-Reference MNE

Brian Romanchuk characterizes the DSGE profit equation: “The firm’s pure profit (Π) in real terms is given by (16.2.17): Π(t)=F(t, kb, n)−r(t)kb(t)−w(t)n(t), where w is the real wage, and r is the rental cost of capital.”

Because both of you have never understood what profit is, you do not know that there is no such thing as “profit in real terms”. Take notice that profit is a feature of the monetary economy and that it cannot be captured by a real model.

In order to see this, one has to go back to the most elementary economic configuration, that is, the pure production-consumption economy, which consists of the household and the business sector.#1

In this elementary 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 monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e., X=O in all three cases.
• In case (ii), monetary saving Sm is positive, and the business sector makes a loss, i.e., Qm is negative. The market-clearing price is lower than in (i).
• In case (iii), monetary saving Sm is negative, i.e., the household sector dissaves, and the business sector makes a profit, i.e., Qm is positive. The market-clearing price is higher than in (i).

It always holds Qm+Sm=0 or Qm≡−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s surplus = profit equals the household sector’s deficit = dissaving. And vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

Profit is a purely nominal magnitude: NO share of output O corresponds to it. Under the condition of market clearing, the output always goes in full to the household sector. The correspondence of profit is an increase of money in the business sector’s cashbox, as every economist knows from Marx’s famous formula M―C―M’.

That no share of output corresponds to profit is logically obvious because the correspondence of loss would be a negative share of output, and that is a NONENTITY.

There is no such thing as a “real” profit. Profit is a nominal variable and the counterpart of dissaving. The DSGE concept of profit is as brain-dead as can be, and one has to be a brain-dead economist to take it seriously for more than one second. #2, #3


#1 The elementary production-consumption economy is given by three macro 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.
#2 The Profit Theory is False Since Adam Smith
#3 How the intelligent non-economist can refute every economist hands down

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REPLY to Brian Romanchuk on Mar 19 and Blog-Reference MNE

You say: “In this case, all that it done is divide through by the price level. As long as prices are non-zero, that is a legitimate mathematical operation.”

This is simply NOT the case. Nobody, in fact, divides anything by the price level. The DSGE profit equation reads Π(t)=F(t, kb, n)−r(t)kb(t)−w(t)n(t) where F(·) is the “real” production function, where w is the “real” wage, and r is the “real” rental cost of capital. There is NO nominal variable in the equation and NO division through P.

The “real” DSGE profit formula is pure methodological BS and only good for the demonstration of the galactic dimension of economists' scientific incompetence.#1 Because you cannot even read the profit equation, you do not realize that it is all in real variables, while profit is a nominal variable that has to be determined by National Accounting.

Nobody in their right mind applies a Cobb-Douglas production function to determine profit.


#1 The futile attempt to recycle Sraffa

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REPLY to Roger Sparks on Mar 19 and Blog-Reference MNE

You say, “I think the logical gaps between our three positions are very wide.”

Then, we have to determine in earnest who is right and who is wrong. As Popper said, if statements contradict, this shows that they are not all true.

You do not even understand the problem of macroeconomic profit. 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.”

This led to the conclusion: “The consensus to date has been that it is mathematically impossible for capitalists in the aggregate to make profits.” (Keen) And this zero-profit conclusion is obviously NOT in accordance with the empirical evidence for 200+ years.

Exactly at this point resides the logical gap = black hole of economists in general, and you and Brian Romanchuk in particular.

The mathematical solution to Marx’s problem of the very existence of macroeconomic profit reads Q≡−S, that is, the business sector as a whole can only draw more out of circulation if the household sector throws more into it; in plain English, profit = dissaving.

This is the core of the life formula of the economic system we happen to live in. Needless to emphasize that neither you, Brian Romanchuk, Walrasians, Keynesians, Marxians, nor Austrians ever understood it.

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REPLY to Brian Romanchuk

To take DSGE seriously for longer than one minute and to wonder whether market-clearing is assumed (of course, this defines equilibrium in GE) is a sure indicator of substandard intellectual performance.

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REPLY to Roger Sparks on Mar 20 and Blog-Reference MNE

You repeat the core of the axiomatically correct Profit Law, profit = dissaving, and then you go on saying, “Profits do you no good unless they can be used to improve your life and (hopefully) the life of others.”

You obviously do not grasp the implication of what I called the “life formula of the economic system we happen to live in”. Since profit is the very condition of the functioning of the economy, the life formula also tells you when the economy we happen to live in will break down.

This is something that neither DSGE nor MMT nor any other approach will tell you because economists do not know what profit is since economics was established as a proto-science by the silly blatherer Adam Smith.#1

The market economy breaks down as soon as macroeconomic profit turns into loss, and this is, in the most elementary case, when dissaving stops. The macroeconomic Profit Law for the general case reads Qm=Yd+(X−M)+(G−T)+(I−Sm), and you can figure out for yourself the conditions that turn profit eventually into loss.

If you do not understand the life-and-death formula of the monetary economy, there is no need to stop emanating blatant nonsense ― you can still have an absolutely senseless conversation about the crappy DSGE profit formula with Brian Romanchuk or, what amounts to the same, channel your grandma.


#1 Mathematical Proof of the Breakdown of Capitalism

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REPLY to ANC Driver on Mar 24 and Blog-Reference MNE

To sum up. In their DSGE textbook, Recursive Macroeconomic Theory, Lars Ljungqvist and Thomas J. Sargent define macroeconomic profit in real terms. This is methodologically as idiotic as one can get because profit is a nominal variable. The DSGE model suffers from a dimensional inconsistency. Alone, for this reason, it is scientifically worthless.

Neither DSGEers themselves nor their critics have realized that the whole approach is proto-scientific garbage. On second thought, however, this is not really astounding because the representative economist swallows garbage like utility maximization and supply-demand-equilibrium already for 150+ years as if it were manna.

The alternative to microfounded DSGE is macrofounded Post-Keynesianism. It is not one iota better. The macro profit theory is provably false since Keynes.#1 This is the false MMT balances equation (X−M)+(G−T)+(I−S)=0, and this is the true equation (X−M)+(G−T)+(I−S)−(Q−Yd)=0 with profit and distributed profit greater zero.#2

Will Lars Ljungqvist, Thomas Sargent, Brian Romanchuk, Roger Sparks, and the rest of the mentally retarded microfounded macroeconomists ever get it? No chance, these folks have been lost in vacuous proto-scientific space for centuries.


#1 Forget Keynes
#2 True macrofoundations: the reset of economics

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REPLY to Brian Romanchuk on Mar 25 and Blog-Reference MNE

You say, “The equation has been divided through by the price level … that’s a valid mathematical operation.”

The problem is that you are a substandard mathematician. Because of this, you do not realize that DSGE is materially and formally flawed.

The analytical superstructure of DSGE is based upon this set of hardcore propositions a.k.a. axioms:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, p. 109) #1

HC3 introduces marginalism, which is the all-pervasive principle of standard economics. There are two methodological flaws here: (i) HC3 is an idiotic behavioral assumption, and (ii) constrained optimization of an ordinal preference order is an invalid mathematical operation, as the mathematician Jonathan Barzilai has proven (link has been given above).

Marginalism has been proto-scientific garbage from the very start.#2 DSGE is proof that economists are so stupid that they have not realized in 150+ years that their axiomatic foundations HC1/HC6 are invalid on all methodological counts.

The microfoundations approach is dead. Standard economics is dead. DSGE is dead. Nothing less than a Paradigm Shift will do. Methodologically, it holds: If it isn’t macro-axiomatized, it isn’t economics.


#1 Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
#2 Putting the production function back on its feet

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AXEC143d Profit Law (with increasing complexity) and Sectoral Balances Equation ®