Key issues: Debunking squared

What enabled me to break away from that delusional analysis was what the Australians call ‘a good bullshit detector.’ (Keen, 2011, p. 268)

Steve Keen has, with the help of his fabulous detector, divined a lot of analytical blunders and debunked a good part of standard economics. Rightly so, because to clear the heads is the indispensable preparatory task of heterodox economics. However, Keen has left standing the theory of profit. This is unfortunate because the theory of profit is the pivot of all of theoretical economics. What deserves the first and foremost attention is, in any case, the factual relation of profit and income.

Steve Keen has stated the definition of income in two prominent places as: “Total income = Wages plus Profits” (2011, p. 366) and “... national income resolves
itself into wages and profits” (2010, p. 12). This, of course, is what we have heard often from middle-of-the-road economists but also from Keynes (1973, p. 23).

This definition seems to be plain common sense, yet, like most common sense since Aristotle, it is demonstrably false (2012). Therefore, what is required for the advancement of Heterodoxy is to debunk the naive definition of total income.

This is done in the following, with a straightforward graphical demonstration. For the rigorous formal underpinning and the full implications, see (2013b, 2011). Figure 1 shows the simplest possible configuration of the elementary production-consumption economy.

Figure 1: The price in period t=1 is objectively determined by the conditions of market clearing and budget balancing. Legend: P price, L employment, W wage rate, YW wage income, C consumption expenditure, R productivity, O output, X quantity bought

At any given level of employment L, the wage income YW that is generated in the consolidated business sector is obtained by multiplying the wage rate W. On the real side, output follows by multiplication with the productivity. Finally, the price follows as the dependent variable under the conditions of budget balancing, i.e., C=YW, 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. The same holds for the distribution of wage incomes in the southwestern quadrant. All these details are not needed at the moment.

It can be directly read off from the 4-quadrant scheme that the real wage W/P is always equal to the productivity R, that is, labor gets the whole product, no matter what. If the wage rate is lowered, the market-clearing price falls. If the number of working hours is increased, the price remains constant, provided productivity does not change. If productivity decreases, the price rises. In any case, labor gets the whole product and profit is zero, or in Walras’s terms, there is ‘ni bénéfice ni perte’, neither profit nor loss. So far, all agree:

The consensus to date has been that it is mathematically impossible for capitalists in the aggregate to make profits. (Keen, 2010, p. 2)

There is also explicit assent from economics methodology.

... since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses. (Boland, 1992, p. 80)

The weak spot in the otherwise impeccable zero-profit argument is that aggregate profit has been greater than zero for most of the time in most of the known market economies up to the present. Hence, Figure 1 is the first but not the last word in the theory of profit.

The crucial point is this: there exists no such thing as an immutable law of budget balancing in the same period. Just the contrary. Logically, we have three possible cases in the next period: C2<YW2, C2=YW2, C2>YW2. The first case means loss, the second zero profit, and the third profit. Figure 2 shows an example of the third case, which has, compared to the others, the best evolutionary prospects in the real world.

Figure 2: Monetary profit in period t=2 is objectively determined by the difference between consumption expenditure and wage income under the condition of market clearing, irrespective of what the agents optimize

In the elementary production-consumption economy, profit can at first only be greater than zero if consumption expenditures are greater than wage income. This configuration has historically been realized in various ways; the ordinary way is that the household sector takes up credit from the banking industry (for details, see 2013, Sec. 18). One pertinent example is the purchase of long-lived consumption goods like cars or homes on credit. The relation between credit expansion of the household sector as a whole and profit for the business sector as a whole is measurable in principle (Keen, 2011, pp. 337-353). The only open question is how long Figure 2 can be reproduced. After all, credit has to be redeemed someday. This eventuality is not at issue here (see 2013a).

In the case of Figure 2, monetary profit is given as Q2≡C2−YW2 in the northeastern quadrant. Profit takes the form of money in the bank and remains in the business sector in the period under consideration, i.e. profit is retained (this incidentally answers the old chestnut M―C―M' or M―C―M+, see Keen, 2011, p. 217). Due to the higher market-clearing price, the real wage is now lower than the productivity.

In the next period, profit is distributed, and the household sector’s total income is accordingly: Y3=YW3+YD3. If profit is fully distributed, we have YD3=Q2, i.e., distributed profit in period t=3 is equal to profit in period t=2. Profit in period t=3 is in the general case: Q3≡C3−YW3+YD3. This solves the long-standing profit puzzle. The Profit Law is the first of the far-reaching implications of Figure 2. Note that profit and distributed profit are not the same thing, and that both are never equal in reality. Note also that the Profit Law, when augmented with investment, foreign trade, and government, is directly testable.

Resume: Total income is the sum of wage income and distributed profit, and not of wage income and profit. This distinction makes all the difference between good and bad economics. Steve Keen has debunked a large part of Orthodoxy, yet with regard to the foundational concepts of income and profit, Heterodoxy still subscribes to the conventional error.


References
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–23. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
1–23. URL
Kakarot-Handtke, E. (2013a). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2013b). Understanding Profit and the Markets: The Canonical Model. SSRN Working Paper Series, 2298974: 1–55. URL
Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.


Related 'Objective Principles of Economics'.


© 2013_11 EKH, except original quotes

Profit/Distribution: cross-references

Posts and abstracts

• Keynes―Marx―Profit: The abysmal scientific failure of economics   here
• Profit: The most powerful formula of economics   here
• Profit   here
• MMTers: too stupid for simple math   here
• There are NO crank scientists in economics because economics is NOT a science   here
• How Randall Wray takes the piss out of the House Budget Committee   here
• Marx and Marxists ― too stupid for the elementary algebra of profit   here
• Exploding the Household Fallacy   here
• Gosh! the One Percent have gotten $21 trillion richer: Links on Distribution   here
• Keynes ― the poster boy for the weakness of the economist’s mind   here
• The dirty secret of Capitalism: Economists have NO idea how Capitalism works   here
• Profit analysis ― another exercise in economic deception   here
• Profit and Distribution Theory is false for 200+ years   here
• Economics: failure, fake, fraud   here
• Macroeconomics: Economists are too stupid for science   here
• Safe assets ― how the State pampers the Oligarchy   here
• The CCC ― a monument of economists’ utter scientific incompetence   here
• Yes, economists are really that stupid   here
• Dear idiots, it is deficit spending that creates the distribution people complain about   here
• Dear idiots, MMTers are Wall Street’s agenda pushers   here
• The public-debt and private-profit pushers   here
• How counterfeiters save America with an extra profit and make WeThePeople pay for it   here
• Some nasty MMT surprises behind the time horizon   here
• Basics of Value Theory   here
• MMT: Distribution is the drawback NOT Inflation   here
• Profit and macrofoundations   here
• Deficit-spending, public debt, and macroeconomic profit/loss   here
• Links on James Petras’ ‘Big Business Strikes Back: The Class Struggle from Above’   here
• MMT and the overall political corruption of economics   here
• Very busy these days: Wall Street’s agents   here
• MMT, Warren Mosler, and the little helpers from Wall Street and Academia   here
• If we only had classes   here
• Heterodox economics: When stupidity becomes a public danger   here
• Why the MMT benefactors of humanity never talk about profit   here
• There is NO such thing as a “labor share of income”   here
• Good news for the one-percenters   here
• Go! ― test the Profit and Employment Law   here
• Economists simply don’t get it   here
• How to get rid of inflation and deflation   here
• How Keynesians, Lernerians, MMTers make the oligarchy great   here
• The Magic Money Tree is real ― too bad that the magic is a fraud   here
• The inexorable paradigm shift in economics   here
• Wikipedia and the promotion of economists’ idiotism (II)   here
• Truth by definition? The Profit Theory has been axiomatically false for 200+ years   here
• MMT: How mathematical incompetence helps the Kelton-Fraud   here
• The Kelton-Fraud   here
• Profit: after 200+ years, economists are still in the woods   here
• It has been said before but economists still don’t get it   here
• Nietzsche, entropy, full employment, and NO class war   here
• The Third Way: Towards the Happy Zero-Tax economy   here
• How economists missed out on the essential relationship of economics   here
• The demise of phony experts: macroeconomics is provably false   here
• How MMT enlightens Washington   here
• Profit and the Private-Property-Irrelevance Theorem   here
• Profit: after 200+ years still elusive   here
• Marx today   here
• Capitalism, poverty, exploitation, and cross-over exploitation   here
• The curious non-existence of profit in economics   here
• Note on “Era of Austerity coming to an end...”   here
• DSGE and profit―forget it! MMT and profit―forget it!   here
• MMT is idiocy and fraud   here
• Fiscal policy and the Humpty Dumpty Fallacy here
• The perennial conundrum: profit and distribution   here
• Ricardo and the invention of class war   here
• Profit, income, and the Humpty Dumpty Fallacy   here
• MMT = proto-scientific junk + deception of the 99-percenters   here
• Down with idiocy!   here
• Keynes, Lerner, MMT, Trump and exploding profit   here
• The profit theory is false since Adam Smith   here
• Economists understand neither Capitalism nor Socialism   here
• Saving NEVER equals investment   here
• MMT: Just political heat, no scientific light   here
• MMT: Money-making for the one-percenters   here
• The profit effect of a Job Guarantee   here
• National Accounting: scientific incompetence or political fraud?   here
• Profit and the decline of workers’ nominal share   here
• MMT ― the economics moron as problem solver   here
• Where modern macroeconomics went wrong   here
• Why economists don’t know what profit is   here
• Rectification of MMT macro accounting   here
• Karl Marx, fake scientist    here
• Profit and the decline of labor’s nominal share   here
• MMT and the magical profit disappearance   here
• Economists: scientists or political clowns?   here
• Profit and stupidity   here
• Just revealed: IS-LM is dead for 80+ years   here
• Profit and distribution: a primer   here
• Where MMT got macro wrong   here
• Austerity and the idiocy of political economists   here
• Rethinking the Distribution   here
• Where economics went wrong   here
• A vacuous analysis of profits and productivity   here
• Windmill economics   here
• Profit and price ― solving the mystery   here
• How the 99 percent can bring overall profit of the 1 percent legally down to zero in 2017   here
• Inequality: Market failure or theory failure?   here
• Income distribution: No market failure but theory failure   here
• The economic machine is broken? Don’t call the heterodox repairman!   here
• The distribution theory is false because the profit theory is false   here
• Macro for dummies   here
• The monetary circuit and how economists got it wrong   here
• Why economists know nothing   here
• Economists still don’t get Econ 101 right   here
• Rethinking the Profit Law   here
• Rethinking deficit spending   here
• How to end the Punch and Judy show about profit   here
• The thing with profit and exploitation   here
• Wikipedia and the promotion of economists’ idiotism (I)   here
• The final implosion of MMT   here
• Economics between science and magic   here
• A new episode of one of the worst blunders of economics   here
• Keynesian macrofoundations are defective   here
• The general theory of scientific incompetence   here
• How Keynes got macro wrong and Allais got it right   here
• Keynesianism: The triumph of blathering over thinking   here
• Clueless about money and profit   here
• Demystifying employment theory and policy   here
• The unfinished Keynes (III)  here
• Making the economy the focus of the economists’ dialogue   here
• Stock prices, profit, and other self-fulfilling idiocies   here
• History and future of the monetary economy   here
• There is no thrift paradox, or, How economists fell over their own feet   here
• Enough! Economists, retire now!   here
• The actual distribution is unacceptable? Do NOT seek economic advice!   here
• Fatal defects of profit and market theory   here
• The scientific self-elimination of Heterodoxy   here
• The tiny little problem with economics   here
• The great economic equations   here
• Hayek or how economists miss their subject matter for more than 200 years   here
• The unintended consequences of deficit spending   here
• Economic policy has gone wrong because economic theory has gone wrong   here
• High profits and low economics   here
• The solemn burial of marginalism   here
• How Keynes messed macro up   here
• As Napoleon said: don’t listen to economists   here
• How the American working class can bring overall profits down to zero without bloody revolution   here
• Profit, marginalism, and other anomalies   here
• Your profit theory is false   here
• “As goes GM, so goes America” — A rather ordinary fallacy of composition here
• How the intelligent non-economist can refute every economist hands down   here
• Wages and profits are NOT the components of income   here
• Heterodoxy, too, is scientific junk   here
• Confounding sociology and economics   here
• The very real problem of zero scientific utility   here
• No culpa, only stultitia   here
• Who said what to whom — and does it matter?  here
• Essentials of Constructive Heterodoxy: profit  here
• Income, profit, distributed profit: a radical simplification  here
• Refocusing the debt/profit issue  here
• The Profit Law  here
• Inequality, wage, and profit  here
• Kalecki's wrong definition of profit and income  here
• The universal Profit Law and the multitude of unique historical circumstances  here
• The profit theory is false since Adam Smith. What about the true distribution theory?  here
• What the Top 20 heterodox economists say  here
• Profit for Marxists  here
• Where is profit?  here
• Profit is the key  here
• Flawed logic  here

Profit is the pivotal concept for the analysis of how the economy works. Without a correct profit theory, economics is vacuous. The conventional profit theory is logically indefensible. Economists have no true conception of the most important phenomenon in their universe.

Working papers

• How the intelligent non-economist can refute every economist hands down   SSRN
• The profit theory is false since Adam Smith. What about the true distribution theory?  SSRN
• The emergence of profit and interest in the monetary circuit   SSRN
• Profit for Marxists   SSRN
• Primary and Secondary Markets   SSRN
• Debunking squared   SSRN
• Understanding profit and the markets: the Canonical Model   SSRN
• Income distribution, profit, and real shares   SSRN
• When Ricardo saw profit, he called it rent: on the vice of parochial realism  SSRN
• Schumpeter and the essence of profit   SSRN
• Uniform profit ratios   SSRN
• Keynes' missing axioms   SSRN

Meta references

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Graphic AXEC143d AXEC® Profit Law and Balances Equation (with the increasing complexity of the economy)

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 ®

The Fisher Effect — a specimen of scientific incompetence

Comment on David Glasner on ‘Once Upon a Time When Keynes Endorsed the Fisher Effect’

Blog-Reference

The Fisher Effect is ultimately the result of a design flaw of the monetary order/ institutions. As a rule, the monetary order is not consciously designed but the outcome of piecemeal institutional change in historical time. As we know from biological evolution, this leads regularly to suboptimal outcomes with regard to structure/functionality, which, however, become only visible in hindsight. The cecum is a case in point, but biology is full of weird and suboptimal constructions.

The Fisher Effect should not occur in a well-designed monetary order because it violates the principle of the neutrality of money. To see this clearly, one has to change the methodological perspective.

Our analytical framework is given with the elementary production-consumption economy.* The business sector consists of two firms: one that produces the consumption good, and the other that produces money and credit, which is called the central bank. The central bank stands here for the whole banking industry (for details see 2015, Sec. 7).

For simplicity, only the limiting case of a zero-profit economy is considered. Then, in the consumption goods-producing firm, this condition holds in the most elementary case

(1) Pc X=W Lc

Price Pc times quantity sold X equals wage rate W times labor input Lc. This reduces to the case of market-clearing to

(2) Pc=W/Rc

The market-clearing price is equal to unit wage costs W/Rc, with Rc standing for the productivity in consumption good production.

For the central bank holds

(3) Jo OVD=Jd DEP+W Lb

that is, rate of interest Jo on the asset side (here current overdrafts) times overdrafts OVD equals rate of interest Jd on the liability side (here current deposits) times deposits DEP plus wage rate W times labor input in the banking industry Lb. Strictly speaking, OVD and DEP are the average stocks per period.

Both sides of the central bank's balance sheet are equal, that is, current overdrafts OVD equals current deposits DEP. Current deposits are here identical to the quantity of money. For simplicity, the rate of interest on the liability side Jd, is set to zero. This reduces (3) to

(4) Jo OVD=W Lb

All real variables (labor input, productivity, output, etc) remain unchanged for the time being. The real side is frozen.

In the next period, the wage rate W in (1) and (4), which is here identical for simplicity, is doubled. As a consequence, Pc in (2) doubles under the conditions of market clearing, zero profit, and no real changes.

When W doubles in (4) on the right-hand side, then either Jo or OVD must double on the left-hand side. The correct solution is that the interest rate Jo remains constant, and the asset side = current overdrafts = OVD is doubled. Because both sides of the central bank’s balance sheet are always equal, the liability side = current deposits = DEP = quantity of money has also to be doubled.

In real terms, the situation remains unchanged for all agents. And this is as it should be, according to the neutrality principle. In the historically given monetary order, however, neither the asset nor the liability side of the consolidated balance sheet of the banking industry is properly adapted. Only for this reason, the rate of interest, here Jo in (4), changes.

Therefore, in a well-designed monetary order, the interest rate Jo is like a real variable that remains absolutely constant no matter what the rate of inflation or deflation is. It is, so to speak, the pole star of the economic firmament. The Fisher Effect is only an artifact, a historical accident, a freak phenomenon. In their analysis, neither Fisher nor Keynes ever rises above parochial realism.

This scientific incompetence is — not a matter of ‘once upon a time’ — but the defining characteristic of the representative economist.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* Graphic AXEC31

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ICYMI (comment on Frank Restly of Dec 1 on Dec 2)

The zero profit economy is defined by the absence of profit and loss. And this is, as I clearly stated, a ‘limiting case’ to start with. The general case is discussed in my papers. Please help yourself on SSRN.

I have excluded profit/loss in my post about the Fisher Effect in order to avoid a discussion about profit theory which is defective since Adam Smith. See the post Profit and the collective failure of economists.

I am well aware that a risk-free economy is different from a zero profit economy and that a central bank cannot set both price and quantity. But that is not the issue here. The issue is that the Fisher Effect is ultimately caused by a constructional flaw of the monetary order.

For the other defects see Major Defects of the Market Economy.

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ICYMI (comment on Frank Restly of Dec 2 on Dec3)

The representative economist does not understand basic methodological principles. “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern, 1941, p. 373)

The zero-profit condition is the simplest condition, therefore it is the correct starting point.

It is the very characteristic of the representative economist that he cannot rigorously focus on one line of argument and that he has the attention span of a goldfish.#1 In my posts you will not find the statement that ‘workers live forever, equipment does not wear out, and accidents and natural disasters do not happen.’

Could it be that you can neither read nor think but only waffle?

By the way, that science is the art of abstraction from irrelevant detail is known since J. S. Mill “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)


References
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

#1 One entirely sufficient reason for the shutdown of economics.

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ICYMI (comment on David Glasner of Dec 2 on Dec 4)

It seems, that not only Frank Restly can neither read nor think.

In eq. (3) of my post of Dec 1 the rate of interest Jd on the central bank's liability side explicitly appears and is subsequently set to zero in order to focus the argument. The rate of interest on financial assets is discussed in my papers on multiple occasions (please help yourself on SSRN).

It should be known by now that it is rather silly to argue that a lot of phenomena are missing in an extremely simplified example and thereby distract from the point at issue.

Note that the introduction of the rate Jd does not change the essential point of my argument. Every serious student can verify this by following the References.

The urgently required New Thinking in economics does not consist in the exegesis of obsolete authors (‘some defunct economist’ in Keynes’s apt terminology) and in playing old academic games. As Peirce nicely put it on a similar occasion: “[The pragmatist] is none of those overcultivated Oxford dons — I hope their day is over — whom any discovery that brought quietus to a vexed question would inevitably vex because it would end the fun of arguing around it and about it and over it.” (1931, 5.520)


References
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, volume I. Cambridge: Harvard University Press. URL

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ICYMI (comment on Frank Restly of Dec 3 on Dec 4)

You ask: “Then what exactly do you mean by a zero loss economy?”

I mean exactly that profit/loss is set to zero and thereby taken out of the picture for the time being in order to streamline the argument. This means that I deal with profit/loss on another occasion#1 and by no stretch of a feeble imagination that it escaped my notice that profit/loss occurs in the real world.

What I have shown, indeed, is that the profit theory is false since Adam Smith. If you intend to educate yourself have a look at my website.#2

Did you ever realize that the original Walrasian model (ni bénéfice ni perte) and the original Keynesian model are zero profit economies? [ni bénéfice ni perte = no profit no loss]

In the general case, the overall profit of the business sector as a whole is positive according to the Profit Law Qm≡Yd+I−Sm and in this case, all your objections go up in smoke. The essential point of my post of Dec 1, though, remains unaffected.


#1 Profit and the collective failure of economists
#2 Profit is the key

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ICYMI (comment on David Glasner of Dec 5 on Dec 7)

Let us agree that the Fisher effect is about (i) the difference between nominal and real interest rates and (ii) that there are many real interest rates because there are many types of real assets.

Here is the Wikipedia definition of the Fisher effect: “...the Fisher effect is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of dollars or other unit of currency owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those dollars grows over time — that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds.

The relation between the nominal and real rates is given by the Fisher equation, which states ... that the real interest rate equals the nominal interest rate minus the expected inflation rate.”

In my example, the lender rate, the borrower rate, and the price of the consumption good appear. What I have shown is that in a well-designed monetary order the rate of interest is constant, no matter what the rate of inflation/deflation is. This means that the concept of expected inflation falls flat and with it the distinction between nominal and real interest rate. Therefore, the Fisher equation as a whole falls flat.

Your answer of Dec 3 is that my example is irrelevant because the expected future price has no effect. False. My example is relevant because it shows that the Fisher equation describes a freak phenomenon that appears because of a flaw in the monetary order.

Now, if there is something fundamentally wrong with the Fisher equation there is no need to go further and to look deeper into the concept of own rates of various real assets.

What seems to be pretty obvious is that neither Fisher nor Keynes got the fundamental economic relationship right. This refers to interest rate/inflation, interest/profit, and profit/income. So there is no need for a lengthy elaboration of the finer points of their confusion.

I agree, let things stay where they stay at the moment. It is certainly much more rewarding to go beyond refuted concepts and authors.

Economists: scientists or political clowns?

Comment on Barkley Rosser on ‘Comments on Profit and Capital’

Blog-Reference

If you do not like Desai’s assessment of theoretical economics, take Mirowski’s: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” Or take Wood: “Profit is a subject to which economists have addressed themselves for at least two hundred years but without much success. For there is at the moment no general theory of profits which commands anything approaching universal acceptance either among academic economists or among men of affairs.” Or take Obrinsky: “Nor do the modern variants add anything whatever on this score. For Debreu, profits are simply a non-issue, while Arrow and Hahn make only passing reference to profits ― and that only as a historical introduction. Whatever may be the usefulness of these idealized theoretical constructs, they cannot be said to throw any light on the profit issue; surely, therefore, they fail to capture the essence of a capitalist market economy.”

Repeat: The representative economist fails to this day to capture the essence of a capitalist market economy. And these scientific nullities dare to open their mouths and give economic policy advice.

Your question “You think that Desai agrees with you and supports your views” is entirely beside the point. The only question is this: is the structural-systemic-macroeconomic Profit Law true or false, with truth defined as formal and material consistency. Scientific truth is NOT established by an opinion poll among economists.

The structural-systemic-macroeconomic Profit Law consists of measurable variables and is readily testable. There is no need at all to second-guess what commonsensers think about it, just as there is no need to second-guess what commonsensers think about the Law of the Lever. Everybody who thinks the structural-systemic-macro Profit Law is false can try to logically/empirically refute it. This is how science works. Only proof counts.

The opinion of commonsensers is traditionally the last thing a scientist is interested in: “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)

What commonsensers or myopic capitalists and workers or incompetent economists hallucinate about profit is scientifically irrelevant. Overall monetary profit is given with Qm≡−Sm in the most elementary case. This tiny formula turns whole economic libraries into waste paper.

You say about the heap of crappy profit theories: “That is my view. All of them have some degree of truth to them, all of them see different aspects, but indeed none of them are fully satisfactory.” It is a well-known fact that all false theories, including the flat earth theory, have “some truth” to them. Some truth is the same thing as worthless commonsensical plausibility which is the very opposite of scientific truth.

You will never hear a scientist saying that we have numerous concepts of energy and “all of them have some degree of truth to them”.

This is the defining difference between a cargo cult scientist and a scientist: the former tries to keep everything in the swamp of wish-wash where ‘nothing is clear and everything is possible’ (Keynes). A scientist drives every question to a final clear-cut true/false decision. This is what rigorous means and this is what all blatherers and storytellers and swamp creatures abhor and denounce most.

The pluralism of false profit theories has always been and will always be scientifically indefensible. Barkley Rosser’s methodologically confused anything-goes wish-wash is self-disqualifying.

The main issue of this thread is profit and not capital and not distribution. It should be immediately clear that traditional distribution theory falls apart because the underlying profit theory is provably false. So, there is absolutely no need to deal here in any detail with the marginal theory of distribution (the second-worst construct right after supply-demand-equilibrium) or with Piketty. #1

The profit theory is false since Adam Smith. Whether the representative economist understands the unassailable mathematical proof and its vast implications is a matter of indifference. The representative economist has always been outside of science and will never be admitted to it. Not knowing what profit is, is scientifically lethal to an economist, and degrades him to a clown in the political Circus Maximus. Barkley Rosser is a living example.

Egmont Kakarot-Handtke


#1 For more details about these issues see
► Non-existence of economic science
► A particularly silly critique
► The universal Profit Law and the multitude of unique historical circumstances
► First Fundamental Law vs. Fundamental theorem of income distribution
► The profit theory is false since Adam Smith. What can you expect from distribution theory?
► Economic policy has gone wrong because economic theory has gone wrong

Immediately preceding Profit and stupidity.

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REPLY to Barkley Rosser on Jun 30

There are TWO issues:
(i) Desai, Mirowski, Wood, Obrinsky, you, and I agree that the profit theory is false for 200+ years, that is, the representative economist fails until this day to capture the essence of a capitalist market economy.
(ii) Whether the elementary objective-structural-systemic-behavior-free-macroeconomic Profit Law, i.e. Qm≡−Sm, is scientifically true, i.e. materially and formally consistent.

Let us be content with the agreement on (i) and not get distracted by (ii). From (i) follows: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, #1, and ALL got profit wrong. With the pluralism of provable false theories, economics sits squarely at the proto-scientific level. Economics is NOT a science and neither orthodox nor heterodox economists qualify as scientists. #2

#1 “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
#2 Economics: 200+ years of scientific incompetence and fraud

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REPLY to Barkley Rosser on Jun 30

Isn’t it curious that in economics NOT ONE of the basic concepts ― profit, income, capital, money, etcetera ― is properly defined. A fact that did not escape the notice of von Neumann: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.”

Needless to emphasize that economists have an explanation=excuse for their failure in general and in every particular case. #1 The Pavlovian argument is that in “other sciences”, too, things are not defined precisely (meteorology, biology, psychology etcetera). Stupid as they are, economists have never realized that with these excuses they catapult themselves out of science. Feynman killed this silly argument long ago: “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.”

Rule #1: When you cannot define your subject matter precisely you are a priori OUTSIDE of science. This applies to the so-called social sciences which Feynman re-categorized as cargo cult sciences. And this is why economics has to be re-defined as systems science.

This is the current state of economics: “economists cannot claim to know anything about it” or as Clower put it: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” What has been produced instead of scientific knowledge is endless blather, political hot air, folk philosophy=utilitarianism, folk psychology, folk sociology, silly semantic games, sitcom stories, and white noise.

Ask an economist what profit is and you get these answers: Smith: Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. Ricardo: … profits would be high or low in proportion as wages were low or high. Senior: In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. Mill: The cause of profit is, that labour produces more than is required for its support. Marx: Hence, if a commodity is sold at its value, a profit is realized, which is equal to the excess of its value over its cost-price, or equal to the entire surplus-value incorporated in the value of the commodity. Jevons: I think that in the equation Produce=profit+wages, the quantity of produce is essentially variable, and that profit is the part to be first determined. Marshall: The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. Knight: The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation. Schumpeter: And since the new combinations which are carried out if there is ‘development’ are necessarily more advantageous than the old, total receipts must in this case be greater than total costs. von Mises: The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply. Keynes: Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur. Hicks: The curve IS can therefore be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. Harrod: The relevant propositions may be stated in the form of truisms or tautologies, such as that the price of an article is equal to the sum of rewards to all persons contributing to its production, ... Shackle: Thus it seems that we might select decision-making and uncertainty-bearing as the economic roles to perform which men come forward because of the prize of profit in the sense we have been discussing. Samuelson: GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP. Debreu: … the consumers own the resources and control the producers. Thus, the ith consumer receives the value of his resources … and the shares … of the profit of the 1st, …, jth, …, nth producer. … Consider a private ownership economy E . When the price system is p, the jth producer tries to maximize his profit on Yj. Suppose that yj does this; the profit pj(p) = p • yj is distributed to shareholders. Arrow and Hahn: Given a set of prices for all commodities, it is possible to calculate for each activity its profit, the excess of the values of its outputs over the value of its inputs; … The assumptions of perfect competition imply that … each firm chooses an activity that yields it at least as much profit as any other possible. Kaldor: Income may be divided into two broad categories, Wages and Profits (W and P), where the wage-category comprises not only manual labour but salaries as well, and Profits the income of property owners generally, and not only of entrepreneurs; Kalecki: Gross profits = Gross private investment + Capitalists’ consumption. Sraffa: This is because the surplus (or profit) must be distributed in proportion to the means of production (or capital) advanced in each industry; and such a proportion between two aggregates of heterogeneous goods (in other words, the rate of profits) cannot be determined before we know the prices of the goods. Boland: The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that 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. Minsky: The simple equation ‘profit equals investment’ is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure. Barro: Households receive income in four forms: profit …, wage income, rental income, and interest income. Wickens: Implicit measure of profits Πt = −kt+1 +(1+θ)kt. Ljungqvist and Sargent: In each period, the representative firm takes (rt, wt) as given, rents capital and labor from the households, and maximizes profits: Π=F(kt, nt)−rtkt−wtnt. Nadal: ... the budget constraint of consumers may be undetermined because it incorporates their share of firms’ profits, which may not be defined. Keen: … net annual income in this simple model equals the sum of wages plus profits.

ALL, repeat ALL, these authors got it wrong and nothing proves the idiocy of economists better than the endless list of provably false profit definitions.

Overall profit is with the precision of two decimal places given by the macrofounded Profit Law, which reads in the most elementary case Qm≡−Sm. This formula immediately tells anyone who can read and think that the monetary economy is NOT an equilibrium system but will break down with mathematical necessity ― not because of human errors/mistakes/ misbehavior but BECAUSE of the inescapable Profit Law.


#1 Failed economics: The losers’ long list of lame excuses

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REPLY to Barkley Rosser on Jul 1

(i) The ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme).

(ii) Scientific knowledge is defined by material AND formal consistency. Accordingly, refutation consists of proof of empirical or logical inconsistency.

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

(iv) Knowledge takes the form of a materially/formally consistent theory which is the best mental representation of reality that is humanly possible.

(v) Barkley Rosser has never understood what science is all about. This, he has in common with the vast majority of economists who are 2000+ years behind the curve.

(vi) All human beings are born into an intellectual swamp. The vast majority stays there for the rest of their lives, only the tiny intellectual elite of scientists tries to get out: “We are lost in a swamp, the morass of our ignorance. … We have to find the roots and get ourselves out! … Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen) #1

(vii) The methodological bootstraps of science are formal and material consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

(viii) ALL profit theories since Adam Smith are logically/empirically false. Strictly speaking, this proto-scientific rubbish does not deserve the title theory. Laypeople constantly confound hypothesis (= guess, start of the process) with theory (= truth, end of the process). Profit theory never rose above the guessing stage. #2

(ix) There is only ONE true theory. The pluralism of false theories is scientifically indefensible: “It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)

(x) In their defense of the comfort zone of stupidity ‘where nothing is clear and everything is possible’ (Keynes) swampies regularly invoke Heisenberg’s uncertainty principle, Schrödinger’s cat, or Gödel’s proof. #3 Barkley Rosser is no exception. Needless to emphasize that his understanding of physics and logic is even worse than his understanding of profit.

(xi) By invoking quantum mechanics in order to defend the logical inconsistency of economics he again makes a fool of himself. Schrödinger’s cat is “The most misunderstood thought experiment in all of Science. The cat is used as an illustration of the fallacy in applying quantum mechanical principles to macroscopic objects. Cats cannot exist in a superposition of alive and dead.” #4

(xii) Because economics cannot exist in a superposition of true and false, all false profit theories have to be eliminated. Economists have failed at this task until this day. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

(xiii) Barkley Rosser is defending the indefensible. He always was and still is outside of science. #5


#1 Getting out of the economics swamp
#2 Economics: a science without scientists
#3 How economists shoot themselves non-stop in the methodological foot
#4 Source
#5 Economists: The Trumps of science

***

REPLY to anne on Jul 2

Economics in its four incarnations ― Walrasianism, Keynesianism, Marxianism, Austrianism ― is one of the worst scientific scandals in human history and you and Barkley Rosser are part of it. #1

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

***

REPLY to Dennis Pickard on Jul 3

You say: “It seems to me your equation relates to changes in inventory, not profits.”

This is NOT the case. Changes of inventory have been explicitly excluded with the condition X=O in footnote 2 above. #1 Inventories have been dealt with at length elsewhere. #2

Note that there is monetary profit and nonmonetary profit. In order to keep the discussion FOCUSED, inventories, nonmonetary profit, distributed profit, retained profit and related phenomena have ALL been left out here. Of course, they have been dealt with elsewhere. This is why references are given.

The sole point to PROVE here is that profit/loss is (in the most elementary case) the mirror image of dissaving/saving and that it has NOTHING to do with what capitalists, workers, laypeople, commonsensers, or scientifically incompetent economists have hallucinated since Adam Smith/Karl Marx it is.

Profit is NOT the income of capital.

Your attempt to de-focus the issue again by taking in a ‘surplus of utility’ and then making a measurement problem out of it is futile. Monetary profit is (in the most elementary case) tangible cash in the box and measurable with the precision of two decimal places. Qm≡−Sm is a testable proposition #3, utility is a NONENTITY. To mix the two concepts is the sure way to scientific failure. #4 By putting utility into the Walrasian axioms=microfoundations economists are for 150+ years on the way to the inescapable final delirium.


#1 Link to footnote 2
#2 Primary and Secondary Markets
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
#4 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist

***

LINKS at Angry Bear on Jul 4

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:
Profit and stupidity
Economists: scientists or political clowns?
and cross-references Profit

***

LINKS at Mike Norman Blog on Jul 4

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:
Profit and stupidity
Economists: scientists or political clowns?
and cross-references Profit

***

COMMENT on John Vertegaal, Dennis Pickard on Jul 5

Barkley Rosser takes it upon him to explain the macrofoundations approach. Needless to emphasize that he fails.

(i) He argues: “This implies certain things that neither you nor he mention, that such a firm would have enormous monopoly power, hence an ability to arbitrarily change price, and price certainly matters for all this.”

This is inaccurate. In the most elementary case, the conditions of market clearing and budget-balancing hold and in this case the price as the DEPENDENT variable is given as P=W/R. For details see True macrofoundations: the reset of economics.

If the firm sets any other price then the quantity becomes the dependent variable. In this case, the market does NOT clear and inventory changes happen. Note that the macrofoundations approach deals with the systemic properties and the behavior of the economy. There is NO vacuous second-guessing of human behavior at all. This is the whole point of the paradigm shift.

(ii) He asserts: “Egmont claims inventories are irrelevant.” This is NOT the case. Inventories have been dealt with at length elsewhere. See for example Essentials of Constructive Heterodoxy: The Market.

(iii) He asserts: “His accounting and axioms imply equilibrium conditions that he does not admit he is doing”. This is NOT the case. Equilibrium, clearly, is a NONENTITY and all theories/models that apply the equilibrium concept are a priori false. For details see Equilibrium and the violation of a fundamental principle of science.

To apply the condition of market-clearing or budget balancing has NOTHING to do with equilibrium. It is the other way round, equilibrium implies market clearing and budget balancing. This is hard to understand for confused confusers.

(iv) He mentions: “… just as in fact the NIPA of the US simply impose the accounting identity that savings equal investment.” The proof has been given that the IS-identity is false. See The Common Error of Common Sense: An Essential Rectification of the Accounting Approach and The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment.

Barkley Rosser is lost in yesterday's economics and simply cannot get his head around the methodological imperative that economics has to be macrofounded.

***

COMMENT John Vertegaal, Dennis Pickard on Jul 5

Barkley Rosser does not get the simplest of all economic configurations. These three axioms constitute the macrofoundations: (A1) Yw=WL, (A2) O=RL, (A3) C=PX. For a start, two conditions hold: market-clearing X=O and budget-balancing C=Yw. This yields the price as dependent variable P=W/R. Monetary profit is defined as Qm≡C−Yw and is ZERO under the condition of budget balancing. Changes in the wage rate change the market-clearing price in the same direction but do NOT affect monetary profit. This is an unassailable mathematical fact that can be checked by national accounting. Note that ALL variables of the axioms are measurable.

The start configuration is a limiting case and the two conditions are lifted in the course of further analysis. Who does not understand the simplest case, though, is unfit for understanding the general case with non-market-clearing (= inventory changes) and non-budget-balancing (= saving/dissaving).

The interesting thing is that the two conditions market-clearing X=O and budget-balancing C=Yw also appear in equilibrium models and this means that equilibrium models are zero profit models. The representative economist is seldom aware of this implication.

“The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. 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)

“Some economists hold that although the profit motive is necessary in a business economy, actual profit is unnecessary, and that in fact pure profits are zero in a competitive economy.” (Murad)

Needless to emphasize that the manifest CONTRADICTION between zero profit in equilibrium models and non-zero macroeconomic profit/loss, in reality, has been buried under a gigantic heap of confused blather. In the real world, macroeconomic profit is NON-ZERO for hundreds of years because of the Profit Law which says Qm≡−Sm in the most elementary case.

Because the profit theory is false since Adam Smith ALL economics textbooks from Samuelson to Mankiw and Rodrik are false. #1 The logical blunder is right before everybody’s eyes. As Barkley Rosser recommends: “Look at any Principles of economics textbook.”

Because the profit theory is false Econ 101 is false. #2 Economics students, though, swallow this proto-scientific garbage generation after generation without turning a hair. This gives one a reliable and precise metric of the abysmal stupidity of the folks that populate the universities.


#1 The father of modern economics and his imbecile kids
#2 For details see cross-references Econ 101

***

REPLY to Barkley Rosser on Jul 6

(i) Barkley Rosser misquotes: “So he identifies ‘market clearing’ which (ahem) he assumes, as being given by X=0.” Actually, it is X=O, that is, quantity bought X = output O. Barkley Rosser should have immediately recognized that X=0 makes NO sense at all. Obviously, he does NOT understand what he is commenting on.

(ii) The condition of market-clearing X=O does NOT imply equilibrium, while equilibrium implies market clearing. The idea of equilibrium entails that the system moves towards this end-state. Nothing of the sort happens in the economic system as defined by macrofoundations.

Equilibrium is a NONENTITY. The economic system evolves but neither towards a short-run nor a long-run equilibrium. In fact, the proof has been given that the market economy is INHERENTLY UNSTABLE. #1 There is NO such thing as general supply-demand-equilibrium. The whole of equilibrium economics from Marshall to DSGE is PROVABLE false. #2

(iii) I have NOT “discovered that profits are zero (in equilibrium)”. This is a feature of Walrasianism. I have indeed discovered that monetary profit is ALWAYS non-zero, i.e. Qm≡−Sm in the most elementary case. Profit is zero in the analytical limiting case of household sector’s exact budget balancing, i.e. C=Yw, which practically never happens.

(iv) Barkley Rosser summarizes: “To close this out, aggregate profits in the US are currently about $1,8 trillion, about 10% of US GDP, and far above Egmont’s zero.” I NOWHERE said that profit is zero in the US or elsewhere. Just the contrary. The macrofounded profit theory unambiguously states that total monetary profit is given by Qm≡Yd+(I−Sm)+(G−T)+(X−M). #2 This is a testable formula that holds also for the US.

In sum: Barkley Rosser cannot get out of his self-created confusion. Who cannot handle three simple equations (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and the definition of total monetary profit (Qm≡C−Yw) is forever outside of economics. Note that ALL variables in ALL equations are unambiguous and measurable. There is NO room for interpretation and blather.


#1 The market economy is inherently unstable and economists never grasped it
#2 First Lecture in New Economic Thinking

***

REPLY to Barkley Rosser on Jul 7

You say: “I find it weird that you seem to think it is a big mystery or might be extremely unusual that wages and profits might be inversely related.”

Now, this is as old as Ricardo: “… profits would be high or low in proportion as wages were low or high” and it is FALSE. It is the old mistake of mentally retarded economists to generalize the results of partial analysis. For a single firm, it is true that a reduction of the wage rate increases profit but for the economy as a whole this does NOT hold. #1

It is the Fallacy of Composition all over again.

The most elementary economy is given with three equations Yw=WL, O=RL, C=PX, two conditions X=O, C=Yw and the definition of total monetary profit Qm≡C−Yw. #2 This yields P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is equivalent to W/P=R (2), i.e. the real wage is equal to productivity. This holds, no matter how the wage rate is set. A wage reduction leads to a proportional fall in the market-clearing price. Profit Qm does NOT change because the budget is balanced, i.e. C=Yw, and from this follows Qm=0.

So Ricardo was wrong: from a lower wage rate does NOT follow a higher profit for the economy as a whole. There is NO inverse relationship between wages and total profit in the most elementary economy. Where, then, does profit come from? Not from higher productivity either! Productivity changes lead to inverse changes in the market-clearing price according to (1).

It was Marx who asked the right question: “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.”

Trivially true. #3 As long as the budget is balanced, i.e. C=Yw, total monetary profit Qm is zero. Because we know already that the macroeconomic Profit Law states Qm≡−Sm it is quite obvious that the business sector as a whole can only draw more out of the circulation, i.e. C greater Yw, if the household sector throws more into the circulation, in other words, if the household sector dissaves, i.e. if Sm≡Yw−C is negative, i.e. if C is greater than Yw.

From nothing comes nothing, even economists understand this.

So, Marx asked the right question but gave the wrong answer because he was fixated on the labor theory of value and not very good at logic and math. #1 Those who came after he was even worse.


#1 Profit for Marxists
#2 For details see Profit theory in less than 5 minutes
#3 How the Intelligent Non-Economist Can Refute Every Economist Hands Down

***

REPLY to Anonymous on Jul 8

Your conclusion: “I’d hazard a guess that it’s founded on differences of subjective opinion rather than facts” is entirely beside the point. First of all, science is NOT a matter of opinion (= doxa) but of knowledge (= episteme). Scientific knowledge is well-defined by material and formal consistency.

Now, every economist knows the following:
(i) Economics is a failed science, that is, the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent.
(ii) The foundational concept profit is ill-defined (see Desai and others)
(iii) The concept of capital is ill-defined (see Cambridge Capital Controversy)
(iv) The concept of equilibrium is ill-defined: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug), see also (Ingrao et al.), (Ackerman et al.)

Therefore, ALL theories/models that apply the traditional concepts of profit, capital, equilibrium are A PRIORI false. And this provides the implicit consensus of every worthwhile economic discussion: there is NO USE at all to stir this 200+-year-old rotten soup one more time. The only worthwhile task for the economist/scientist has been defined by Joan Robinson: “Scrap the lot and start again.”

Clearly, a paradigm shift is the last thing Barkley Rosser wants. Being a lifelong loudspeaker in the economics swamp where “nothing is clear and everything is possible” (Keynes) he attempts to defend his natural habitat with the tried and tested rhetorical means of a confused confuser.

What has been accomplished in this thread is:
(1) A paradigm shift from obsolete microfoundations to correct macrofoundations.
(2) The consistent derivation of total monetary profit from the most elementary set of macroeconomic axioms.
(3) The clarification of the OBJECTIVE nature of profit and the refutation of the familiar SUBJECTIVE interpretations.
(4) The irreversible final debunking of Barkley Rosser.
(5) The presentation of the complete macrofounded Profit Law Qm≡Yd+(I−Sm)+(G−T)+(X−M). This is a testable equation that holds for all countries. Theoretical economics has done its job, now national econometricians can do theirs.

Everybody who wants to refute the macrofounded profit theory ― which fully replaces all profit theories since Adam Smith/Karl Marx ― has a straightforward task: to prove that the Profit Law is either logically or empirically inconsistent.

Science is NOT a matter of opinion but of proof. Everything else is brain-dead blather of soapbox economists.

***

REPLY to Barkley Rosser on Jul 9

(i) You say: “So, when Qm = Sm, they are positively related, but when you provide your more general equation, it is (1−Sm) that is entering on the right-hand side. This implies a negative relationship. So, are they positively related or negatively related, …”

This is a typo of your OWN making. It always holds and I always write Qm=−Sm. #1 As usual, the contradiction is only in your muddled head.

(ii) You say: “And that more complicated equation is very close to a Keynesian formulation, but, of course, you have denounced Keynesian economics as totally and utterly false.”

I have not only “denounced Keynesian economics as totally and utterly false” but I have PROVED it. #2 Allais has done this before #3: “Toutes ses [Keynes’s] deductions, à notre avis, manquent absolument de rigeur. … L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” In plain English: Keynes was scientifically incompetent. Among economists, though, this defect is rarely noticed because it is the old normal since Adam Smith.

(iii) Standard economics is based on the Walrasian axiom set = microfoundations: “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)

Everybody knows by now that equilibrium is a NONENTITY: “Just as classical General Equilibrium Theory has never been able to provide a definitive account of how equilibrium prices come to be established, so Rational Expectation Theory has not shown how, starting from relative ignorance, everything that can be learned comes to be learned.” (Hahn)

Because of this, microfoundations have to be fully replaced by macrofoundations. The most elementary version consists of the three axioms (A1) Yw=WL, (A2) O=RL, (A3) C=PX. It is as clear as the day, except for the muddled head of Barkley Rosser, that macrofoundations (A1) to (A3) do NOT contain the concept of equilibrium in marked contrast to microfoundations HC1 to HC5.

So: “Because equilibrium is a NONENTITY, ALL equilibrium models fly out of the window, no matter whether they are Walrasian or Keynesian equilibrium models. From the fact that equilibrium is a NONENTITY follows logically that disequilibrium, too, is a NONENTITY. Because of this, all disequilibrium models, too, fly out of the window. The economy is an evolving system and neither the concept of equilibrium nor disequilibrium is applicable.” #4

Walrasianism and Keynesianism are materially/formally inconsistent proto-scientific garbage, and it is nowadays only defended by a rearguard of incorrigible muddleheads.


#1 You can check this with Ctrl+F and entering Qm in the search field
#2 For more details, see Keynesianism ― the economists’ senile dementia
#3 How Keynes got macro wrong and Allais got it right
#4 Productivity and the zombie apocalypse

***

REPLY to Barkley Rosser on Jul 10

You say: “… but they are what get you from your three empty accounting identities to your wonderful condition of Qm = Sm, …”

Again. This is a typo of your OWN making. It always holds and I always write Qm≡−Sm. The minus sign is easy to overlook, so perhaps this helps Qm = ―Sm.

But the real issue is not the typo; the issue is UNDERSTANDING. The verbalization of the equation reads: “It always holds Qm+Sm=0 or Qm=−Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.”

Barkley Rosser cannot get out of his self-created muddle. Who cannot handle three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (Qm≡C−Yw, Sm≡Yw−C), and UNDERSTAND IMMEDIATELY that Qm≡−Sm, i.e., that business profit and household saving are NEGATIVELY related, is OUTSIDE of economics.

When the pivotal concept of profit is not properly understood, the rest of the analytical superstructure of economics falls apart, and there is NO use at all to filibuster about capital and equilibrium. The best the representative economist can do for the welfare of humanity is to get out of the way.

***

WRAP-UP for Barkley Rosser on Jul 13

Rewarding to see that you have drawn the consequence of a rare flash of insight and left economics altogether. #1

Your true competence has always been insightful comments on the sex life of the House of Sa’ud and other celebrities, as demonstrated in two recent pieces:

• Muhammed Bin Nayef Bin Abdulaziz Al Sa’ud Confined To His Palace
• Was Thomas Jefferson A Monstrous Rapist?

Economics has never been your thing. Good for society to learn that you have left profit, capital, equilibrium, and other NONENTITIES behind for good and dedicate your talent now fully to Sexual Research.

May the rest of the scientifically failed economists follow your example.

#1 Economists: scientists or political clowns?

***

REPLY to Barkley Rosser, vertegaa, Anonymous on Jul 14

Barkley Rosser argues: “You can read about this stuff in the book I already cited by me, as well as several of my other books, and also in standard grad level micro theory textbooks like Varian or Mas-Colell, Whinston, and Green.”

Note that standard economics is axiomatically false, and because of this, the textbooks mentioned are scientifically worthless. #1

The standard axiom set #2 consists of blatant nonentities, but each student generation has swallowed it for 150+ years without turning an eyelid. In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. Taken together, all axioms and auxiliary assumptions crystallize to SS-DD-equilibrium or what Leijonhufvud famously called the Totem of Micro/Macro.

Needless to stress that ALL THREE elements of the standard tool (SS-function, DD-function, equilibrium) are NONENTITIES. Any discussion about forward- or backward-bending supply curves or stable/unstable equilibria is as vacuous and ridiculous as any discussion about dancing-angels-on-a-pinpoint. #3

All standard textbooks are false because microfoundations and the definition of profit/income are provably false ― there is NO NEED AT ALL to read or quote this stuff.

This is the challenge of economics: “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.)


#1 The father of modern economics and his imbecile kids
#2 “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)
#3 All models are false because all economists are stupid

***

REPLY to Anonymous on Jul 15

There is the quantity produced per period = output O. There is the quantity sold per period X. These two quantities are different. But it is logically and practically possible that they are equal. If they are not equal the stock of hitherto unsold output of the business sector (= inventory) changes.

To write down X=O is to say that the market is cleared in the given period. For the purpose of analysis, X=O can also be used as a condition.

The concept of the equality of two quantities is different from the concept of equilibrium. Equilibrium, IN ADDITION, implies that there is some force (= Invisible Hand) that makes the quantities eventually become equal.

This, though, is NOT the case for the economic system. It has NEVER been proven that the monetary economy is an equilibrium system. #1 The fixpoint theorem is an existence proof (i.e. it is possible that X = O) but does NOT prove that X = O is realizable.

Time to take notice that equilibrium is a dead concept; in fact, it has already been dead in the Jevons/Walras/Menger cradle 150+ years ago. This is common knowledge.

“The mathematical failure of general equilibrium is such a shock to established theory that it is hard for many economists to absorb its full impact.” (Ackerman)

“To conclude, the proof of existence concerns a state of the economy that cannot be attained by the individual actions of the self-aggrandizing and decentralized agents originally specified for the general equilibrium model.” (Nadal)

“Gerard Debreu in his classic Theory of Value states that his theory is concerned with the explanation of prices. Others as distinguished as Kenneth Arrow and Frank Hahn deny that general equilibrium theories are explanatory. Moreover, some prominent economists and philosophers have argued that work in general equilibrium theory is not empirical science at all.” (Hausman)

“The fact that it has not been possible to build a process for the formation of equilibrium prices is disastrous when it is recalled that the fundamental task of theory is precisely to make coordination in the market intelligible.” (Benetti et al.)

“Just as classical General Equilibrium Theory has never been able to provide a definitive account of how equilibrium prices come to be established, so Rational Expectation Theory has not shown how, starting from relative ignorance, everything that can be learned comes to be learned.” (Hahn)

Equality X = O is NOT the same as equilibrium. Equality is logically and practically possible, but equilibrium is a NONENTITY. No competent economist applies it any longer. Somehow, this seems to have escaped Barkley Rosser and you.


#1 Just the contrary, see Could we, please, all focus on the key question of economics?.

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REPLY to Anonymous on Jul 16

PROVABLY false
• profit theory, for 200+ years,
• Walrasian microfoundations (including equilibrium), for 150+ years,
• Keynesian macrofoundations (including I=S, IS-LM), for 80+ years.

ALL theories/models that contain profit, maximization-and-equilibrium, or I=S/IS-LM are a priori false and this is more than 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks of renowned authors since 1948.

By implication, ALL posts that contain these concepts are proto-scientific garbage. This includes your exchange with Barkley Rosser.

You may not have heard it, but Barkley Rosser has now left economics for good and dedicates his talent to sexual research, gossiping about academic celebrities, name-dropping, and reputation management.