Wednesday, June 28, 2017

Comments on Profit and Capital

Yeah, I know, Marx wrote three volumes on this, and in 2014 Piketty published in English a more than 700 page book on it that ended up on the bestseller list, although neither of these resolved the long-running debates about the nature of profit or of capital, which continue to swirl.  We have seen recently someone claiming that distinguishing between retained and distributed earnings is the key to understanding profit, and failing to do so means all of economics as we know it is wrong. But then there have been many other views that this view does not remotely address.  Regarding capital itself, which profit is usually thought of as being one of the sources of income related to, let me quote the following that notes a range of views out there.

"What really is capital and what does it mean for value, growth, and distribution?  Is it a pile of produced means of production?  Is it dated labor?  Is it waiting?  Is it roundaboutness?  Is it an accumulated pile of finance?  Is it a social relation?  Is it an independent source of value?  The answers to these questions are probably matters of belief."

From Catastrophe to Chaos: A General Theory of Economic Discontinuities, Kluwer, 1991, p. 125.

I leave it the imagination (or googling) of the reader as to who the author of that book is, although I note that the quotation appeared in the second edition of the book that came out in 2000.


So there are surface issues regarding the nature of profit and capital, and there are deeper issues.  This quotation lists some of the deeper arguments that have been made by different schools of economics. The "pile of produced means of production" is basically a Principles textbook orthodox position, which rules out financial definitions, with many "people in the street " thinking it is an "accumulated pile of finance," a later answer in the list.  People teaching intro econ courses like to pound on wrongness of this popular view, ultimately falling back on the argument that capital is a "factor of production," which means that whatever it is one must be able to use it in actual production processes." Machinery and buildings and other such "produced means of production" do that, so they count, and the building of them is what "real investment" is, not just somebody using some money to buy some financial assets, which is what the person in the street usually means by "investing my capital."  We spend lots of time disabusing them of their delusions, we who know that "money is an illusion," and that while finance is very important in the functioning of modern economies, piles of money or financial assets do not in and of themselves actually produce something.  Rather they are indicators and means for determining who gets to own those actually productive forms of "real capital," oh to throw out another term.

So some of the later definitions seek to get at the foundations of where this producing of these productive means of production come from, all that "real capital investment."  So, if we are inclined to a Ricardo or Marx labor theory of value view, then all we see about is either produced by current or past labor.  That truck over there was put together by workers with machines in a factory, with those machines made by worker and some other machines, which in turn were made further in the past by yet other workers and other machines, and so on and on until we can reduce all of those produced means of production to being really a bunch of current labor plus a whole string of past labor going way back into the depths of time from many many now-dead workers.

Curiously, although the Austrians abjure the labor theory of value, the theory of "roundaboutness" is theirs, notably Bohm-Bawerk anyway, and he derived it precisely from looking at this sort of Ricardo-Marx argument that I laid out.  So past time gets dragged in, with the longer that stream of past labor goes into the past, well, the more roundaboutness, and this is what he said was capital, and to get at another question raised, how it came to be an "independent source of value," from just current labor time.

But dragging in time gets us to"waiting," which also drags in finance, given that we are talking about saving, which is usually done by piling up financial assets of one sort or another, some of which may pay yet another source of capital income, namely interest.  Proto-neoclassical, Nassau Senior, got on this one, although this is deeply part of the official neoclassical canon, which in the formulation of Irving Fisher had the real rate of interest being that which established the intertemporal equilibrium between the willingness to wait by not consuming today, and effectively the marginal product of infestment, or capital is you prefer, coming from the production side, those produced means of production, with an implicit assumption that what does not get consumed and so saved, ends up being invested to create that "real capital," waiting being crucial to all this.

Of course the "social relation" answer is the deeper Marxist view, the part that distinguishes Marx from Ricardo.

Quite aside from this there is the surface aspect of profit and capital, which turns out to be quite complicated, even the trivial surface matter of accounting to measure it.  I said in an earlier post that it is at one level simple, for a firm at least, profit is revenues minus costs.  But agreeing on the proper accounting measure of that gets messy, even for the simplest of firms.  One has to pick a time unit, although a year is pretty conventional for tax reasons, if nothing else.  But what gets counted as revenues?  Sales?  How about money gained from lawsuits?  How about money from illegal bribes that is unreported?  

But it is on the cost side where things get really hairy, and some of those disputes end up with the schools of economics also.  So, we know that since Marchall standard economists have counted the "opportunity cost of capital" and indeed of other factors in principle, as costs, with accountants most definitely not counting those. Accountants like things to be easily measured and straightforward, whereas deciding what is the "niormal rate of return" throws one into much messier territory without a definite answer.  But even avoiding that sort of thing, there are competing schools of accounting. So does one look af FIFO or LIFO?  In looking at the costs of a machine, is it the original amount paid for it or the cost of replacing it, and so on?  In short, even the surface matters of accounting are a huge mess once one looks beneath the surface at all, 

And none of this, not the deeper issues, nor even the surface accounting issues, are remotely resolved by declaring that one must focus on the division between retained and distributed earnings.  Heck, that does not even fully explain firm investments, as only about half of the funding for investments comes from retained earnings, at least in the US economy.  But, maybe this does not matter if one is trying to build a general theory of all economics on such a shallow and empty accounting identity.

Addendum:  There is far far far more I could talk about here, but let me add just a few remarks on one issue that has had a lot of attention recently, the rising share of capital income at the aggregate level, which,  whle not the whole explanation of it, has correlated with the rising income inequality going on in most nations of the world during the last several decades.  Of course this was the main theme of Piketty's book.  He had the data, but his theoretical  explanations drew lots of criticism, including from me.  He fell back on his r> g argument, which was good for marketing the book, but was easily shown not to do the trick  to explain the rising capital income share even on a garden variety aggregate neoclassical production function analysis.  Of course, Cobb-Douglas such functions are useless in this matter as they generate constant factor shares.  And then there is the whole Cambridge capital theory critique of aggregate capital and aggregate production functions,  ironically a critique at least partly shared by more sophisticated Austrian economists as well.   Many dumped on him for throwing in land with the capital stock and returns to land as capital income, which some have argued carries a lot of the weight on the empirical findings.  In the end when pushed, he has tended to fall back on waving his hands about politics and the collapse of unions and social-political power trends for at least part of his explanation, which looks to me to  be playing a big part of it.  Needless to say, focusing on the division between retained versus distributed profits does not remotely address the question of how much of national income is going to capital forms of income.

Barkley Rosser
  

68 comments:

Peter Dorman said...

I'm not sure what motivated this, Bark, but you left out the piece of the story that I think is most central to understanding capitalism as an economic system, the central role of wealth in providing the capacity for the implementation of private economic plans. Firms are essentially organizations for the formulation and execution of plans, understood as coordinating activities that surpass the limits of decentralized contracting in nonconvex environments. Capital's role derives from the laws, conventions, expectations (coordinating equilibria) that invest those who own or manage wealth with the capacity to engage in this planning.

That doesn't mean that other perspectives are "wrong", of course.

rosserjb@jmu.edu said...

I just added more, without seeing your comment, Peter, but there is so very much more that I have not even touched on, quite aside from the superficial once over scrape regarding the issues I did touch on. But then I think you know that part of my motivation is to make it clear how totally vacuous and useless a certain individual's hyperventilating comments on this matter are, especially given that in fact I have been publishing on this stuff for nearliy 40 years. Been at it for awhile, and I do know at least some of what I have not spoken of.

Oh,and your point is very well taken, :-).

AXEC / E.K-H said...

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

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008). This translates into: after 200+ years economists still do not know what profit is.

Barkley Rosser quotes Marx, Piketty, Ricardo, the Austrians, and the textbooks in order to show how economists have dealt with profit and closely related concepts. Yes, all economists/schools had their own definition of profit which only proves, in Popper’s words: “This shows that they are not all true. For if they conflict, then at best only one of them can be true.” In fact ALL are provable false.#1

In his lengthy post Barkley Rosser throws in a host of phenomena that are superficially related to profit (capital, machinery, depreciation, waiting, roundaboutness, risk, profit distribution, etcetera) and thus thoroughly messes the whole issue up. This is the tried and tested swampification strategy of confused confusers. In order to determine profit all these related phenomena have to be put aside in the first round for reintroduction at a later stage. The lethal analytical mistake is to automatically couple profit and capital. Both have to be properly kept apart. Barkley Rosser’s methodological incompetence reveals itself already in the thread’s title.

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.#2 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.

In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.

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.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Note that profit has NOTHING at all to do with capital. To mindlessly couple profit and capital has been the crucial analytical blunder of the founding fathers from which economics has not recovered until this day. These 200+ years of analytical sloppiness and confusion are a telling metric for the scientific incompetence of economists.#3

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, capital, power, waiting, risk, greed or the smartness of capitalists. Overall profit/loss is determined in the most elementary case by the change of the household sector’s debt.#4 This is a testable proposition.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741

#2 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start it holds X=O.

#3 See also ‘How the intelligent non-economist can refute every economist hands down’
http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

#4 For more details see cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html

rosserjb@jmu.edu said...

Egmont,

I am not going to get into a long debate over this, mostly because I have pretty much said most of what I have to say on this to you, but a couple of points need to be made.

The first is that you regularly quote Meghnad Desai from the Palgrave dictionary on "A satisfactory theory of profits is still elusive." You think this somehow proves that all of your insults about economists from the past (and present) trying to figure out and understand these things are justified and true. You think that Desai agrees with you and sujpports your views.

Sorry, Egmont, but I am the one he agrees with, not you. Of course I am the author of the quote put early in the post, and it represents my view. And what is that? That there have been all these theories put forward, and none of them completely satisfactory. Desai's essay in fact does something like what I did, going through a bunch of theories noting how they might offer something, but also observing their limits, how it is that none of them are indeed fully satisfactory. 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. That is the Desai view, not that they are all just a bunch of idiotic unscientific garbage, as you claim.

So you put links to your silly paper about Adam Smith that claims without a shred of empirical evidence that your "profit ratio" theory about retained earnings explains income distribution. It does not remotely begin to do so, Egmont. It says a big fat zero about the question of the division of income between labor and capital, only about a division within capital income itself, and in fact you do not explain that, you simply show how to measure it using very simplistic accounting. Your profit ratio "theory" (it does not even deserve to ve called a theory) has nothing to contribute to the big question that Piketty struggled to answer, what determines the share of profit or capital income more generally in the economy, not a thing.

I have no doubt that if Desai were to see your "theory," which perhaps he has, he most certainly would not view it as overcoming the problems he sees in all of those other theoriess. Yours is even less satisfactory than those. Sorry about that, but it is true.

reason said...

I love infestment! I think economics needs some new words (too many of the essential words it uses - like savings and investment and capital - have multiple meanings - and this causes no end of confusion). Maybe we can find a use for it.

Anonymous said...

This still doesn't get to grips with earned and unearned profits, the latter being economic rents. Tax away economic rent and it becomes obvious that wages and earned profits rise and fall together, inversely to the quantum of privatised economic rent. In Australia at the moment, as in many other nations, we're rueing the decline of wages. May I respectfully suggest profits aint doing too well either (with few exceptions) if we were to subtract super-profits/economic rent in banking, real estate, mining, spectrum, etc., generated by the community and owed back equally to everyone. It aint capitalism that rolls land in with manufactured capital: it's increasingly rentierism, the FIRE sector, about which Michael Hudson has spoken so persuasively. Tax away economic rents and watch wages, profits, people and economies thrive! Piketty, Schmiketty...!

rosserjb@jmu.edu said...

reason,

You are right that both "capital" and "Investment" have multiple meanings and uses, which is tied to all this wrangling about these different views of them. I note that the etymological origin of the word "capital" is from Latin meaning a "herd of cattle," and indeed many of the issues regarding capital and investment can be thought of as relating to the management of a herd of cattle. Some have argued that the original form of capital investment was saving seeds from a crop to plant the following year, thus making ancient pottery the original form of a bank, although one not paying any interest.

Anonymous,

Well, I have often, usually in Principles textbook discussions, not in articles or more high-powered books, broken down into a bunch of categories that vary along the lines you are suggesting. So we have some hypothesized "pure return to capital" that is riskless, and in some sort of super-duper Senior-Fisher-Hayek intertemporal equilibrium equates the intertemporal marginal rate of substitution (marginal disutility of waiting) with some sort of intertemporal marginal productivity of investment or capital, this supposedly "earned" even if Marx might disagree. Then we have some that is a return to risk, with this also supposedly more or less earned. Then we get returns to entrepreneurship, which of course also involves risk, but supposedly is the return to introducing a newly desired product or cost-reducing innovation, although this may involve some at least temporary monopoly power, but again, many saying this is mostly earned, and then monopoly power, which would be your unearned rents, pure and simple.

Of course, when Piketty throws land in with capital, as he does, then this explicitly ups the rent component of the supposed "capital income," and its clearly unearned component.

Of course, worrying about retained versus distributed earnings contributes a big fat zero to determining any of this.

Oh, and for the record, although it has been a long time since I have seen him, I actually happen to know Lord Meghnad Desai, and a very smart and wise economist he is.

AXEC / E.K-H said...

Economists: scientists or political clowns?
Comment on Barkley Rosser on ‘Comments on Profit and Capital’

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 nonissue, 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 until this day to capture the essence of a capitalist market economy. And these scientific nullities dare to open their mouths and to 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-macro Profit Law true or false, with truth defined as formal and and material consistency. Scientific truth is NOT established by an opinion poll among economists.

The structural-systemic-macro 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 not 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: we have numerous concepts of energy and “all of them have some degree of truth to them”.

See part 2

AXEC / E.K-H said...

Part 2

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 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 provable 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.*

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 out of science and will never be admitted to it. Not to know 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

* For more details about these issues see
Non-existence of economic science
http://axecorg.blogspot.de/2015/01/non-existence-of-economic-science.html

A particularly silly critique
http://axecorg.blogspot.de/2015/01/a-particularly-silly-critique.html

The universal Profit Law and the multitude of unique historical circumstances
http://axecorg.blogspot.de/2015/01/the-universal-profit-law-and-multitude.html

First Fundamental Law vs. Fundamental theorem of income distribution
http://axecorg.blogspot.de/2014/12/first-fundamental-law-vs-fundamental.html

The profit theory is false since Adam Smith. What can you expect from distribution theory?
http://axecorg.blogspot.de/2014/12/the-profit-theory-is-false-since-adam.html

Economic policy has gone wrong because economic theory has gone wrong
http://axecorg.blogspot.de/2016/04/economic-policy-has-gone-wrong-because.html

rosserjb@jmu.edu said...

Nope, sorry, Egmont, you lose again. All that fresh set of people you quoted agree with me, including good old Phil Mirowski. Go read my quote in the original post. I do not say that we have resolved what the theory of profit is, not remotely.

As for your theory, which you have now given the pompous-sounding name "structural-systemic-macro profit law," it remains entirely based on a vacuous accounting identity of little interest even to tax accountants. And at best only about half of real capital investment is funded by retained earnings, and the rate of retained earnings (or 1- rate of distributed profits) says a big fat zero about the far more important matter of the share of profits or capital income more broadly in the economy, a big fat zero, nothing, nada, zip.

As for your weird argument that facts do not matter in science, only logic, well, the only economist I know of pushing such a line is the late Ludwig von Mises, with his "a priorism," which amounted to saying that economic reality was what he thought it was by thinking rationally about it, although I suppose some hard core Misesian would dispute that intepretation. But they got on Hayek's case for questioning his a priorism after his mentor died, shame on him! But, if you talk to any hard scientist, they will tell you that facts and data are supreme and that testing hypotheses on facts and data is the bottom line of the scientific method, not cloud nine a priori fantasizing.

John Williams said...

Maybe capital doesn't have to have a single, clear definition to be a useful concept? Consider biological species. There is a definition that works fairly well but not perfectly for animals, less well for plants, and much less for bacteria. My impression is that biologists, who value data more than models, have quit worrying about it and moved on.

AXEC / E.K-H said...

Barkley Rosser

There are TWO issues:
(i) Desai, Mirowski, Wood, Obrinsky, you and I agree that the profit theory is false since 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-behaviorfree-macro 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

Egmont Kakarot-Handtke

#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 See also ‘Economics: 200+ years of scientific incompetence and fraud’
http://axecorg.blogspot.de/2017/06/economics-200-years-of-scientific.html

rosserjb@jmu.edu said...

Sorry, but no, Egmont. That a bunch of us agree that no profit theory that has been put forward is completely satisfactory, thereby leaving the matter "elusive," to stick with Desai's formulation, does not mean that all those theories are strictly false. And it is not unscientific to say that more than one theory is partly true. John Williams points out the matter of defining a species in biology, and I would note the also well-known matter of whether or not light is a particle or a wave. Well, it is sort of both.

As for your ii) it is not true that household savings equals monetary business profit. The National Income and Product Accounts of the US make it true that savings equals investment, drawing on Keynes's ideas, but this is ultimately an accounting convention arbitrarily imposed that is empty and tautological and tells us nothing useful about the functioning of the economy. It would be no big deal to replace it with some other empty accounting identity, such as you Qm = Sm, which says nothing useful at all about the economy, and which is not true under the current conventions of accounting. But that is the problem, Egmont, you have yourself all lost in a bunch of pointless and useless accounting exercises. Really.

AXEC / E.K-H said...

Barkley Rosser

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 has 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 OUT 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 system 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.

See part 2

AXEC / E.K-H said...

Part 2

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.

See part 3

AXEC / E.K-H said...

Part 3

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 provable 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.

Egmont Kakarot-Handtke

#1 See ‘Failed economics: The losers’ long list of lame excuses’
http://axecorg.blogspot.de/2017/01/failed-economics-losers-long-list-of.html

rosserjb@jmu.edu said...

Sorry, Egmont, they all got it partly right, and I am unaware of anybody who thinks your empty and arbitrary accounting identity that fails to resolve any of the interesting issues about profit and capital is THE right answer, with all of the above that you have so laboriourly listed being totally wrong.

It remains that they are all partly right, with the reality of capital being some combination of them, including even your vacuous and completely unimportant accounting identity.

Regarding Ricardo, he had rent in there too, and given that wages were simply subsistence level, his falling profit rate was driven by a rising rent theory driven by rising population.

And as for Arrow-Debreu general equilibrium, profit was of no importance, a mere epiphenomenon.

rosserjb@jmu.edu said...

Oh, and regarding Feynman, physics is full of things that are both true and false. I already pointed out how light is both a wave and a particle, but quantum mechanics, which was not Feynman's specialty in physics, is also full of them, with the famous Schrodinger cat case being a prime example, the cat in the box that is both dead and alive until you open the box. So, Egmont, hard science is full of things that are fuzzy and not so well defined and have multiple realities attached to them, just like profit and capital.

AXEC / E.K-H said...

Barkley Rosser

(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 the 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 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 an 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)

See part 2

AXEC / E.K-H said...

Part 2

(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 out of science.#5

Egmont Kakarot-Handtke

#1 See also ‘Getting out of the economics swamp’
http://axecorg.blogspot.de/2017/05/getting-out-of-economics-swamp.html

#2 See also ‘Economics: a science without scientists’
http://axecorg.blogspot.de/2016/10/economics-science-without-scientists.html

#3 See also ‘How economists shoot themselves non-stop in the methodological foot’
http://axecorg.blogspot.de/2017/03/how-economists-shoot-themselves-non.html

#4 Source
https://arstechnica.com/civis/viewtopic.php?t=179158

#5 See also ‘Economists: The Trumps of science’
http://axecorg.blogspot.de/2016/11/economists-trumps-of-science.html

rosserjb@jmu.edu said...

Egmont and everybody else, I am not going to comment further on this thread, or at least not in response to posts by Egmont. If somebody else pops up and says something of interest, I might respond, but I am done for now with this particular going back and forth with Egmont.

John Vertegaal said...

Hi Barkley, long time no interaction and so you might not remember me from our days on pkt*. Most interesting subject you brought up, and I'd like to jump into the discussion from a different perspective than Egmont's with an I believe novel concept of capital/profit introduced a few months ago on pen-l; so some of you no doubt will be familiar with it already. I've been hanging out there for the past 10 years or so, but since that group seems to be slowly dying, I just checked back here at the EconoSpeak blog. Glad to see it alive and well.

Consider a thought experiment of a vertically integrated economy with a single capitalist owning the entire capital "stock", including its banks, in existence. To make it just a bit more realistic, let's add a government levying taxes as well. Prices are set on a cost-plus basis. Economy-deep costs, profits, and the taxes borne by our capitalist are passed on down to the retail level, where those with cost-derived including transfer incomes effect an exchange among themselves to obtain their standard of living; while thus doing their part to equilibrate the economy dynamically to the best of their ability and keep the system going in an unencumbered fashion.

Where do the systematic profits come from in this economy? Obviously, with the level of wages being totally irrelevant to its workings, unless our capitalist either spends directly to the full extent of the charged profits or, from receipts, hires an equivalent portion of the as yet unemployed to do the direct spending instead, retail becomes insolvent, the economy will fail to equilibrate and shrink to the same extent. Enter the fundamental significance of Egmont's retained profits. So unless it can be shown that such an economy is essentially different from ours in its having a plethora of capitalist owners, all conventional economic thought and regardless of any underlying belief systems about the efficacy of capital is wrong and thus unable to provide a basic guidance as to sourcing profitability and growth. Or am I missing something indispensable here? Note that borrowings by cost/transfer-income earners to take up the slack of deficient capitalist direct spending doesn't solve the dilemma of how profits get realized over time; and government deficit spending for the time being is outside the scope of this argument.

Doesn't this show, at least rudimentarily, that in a dynamic economy in equilibrium over time, value, both in terms of the level of wages and the return on investments, is indeterminate at any particular time? A capitalist system doesn't "exist" as conventional economics through its equations invariably portrays it to be, but instead is always only in a state of becoming (to either exist, or as having seeded its collapse). Moreover the supplied elements of all economic systems that are based on double-entry bookkeeping, thus where waste matters and everything isn't accumulated on a big pile to be taken from as seen fit, are accounted for as to be resolved negatives or expenditures over time and not as depletable positive assets in time. Regardless of the subservient accounting considerations you listed, capital is always situated on the liability side of balance sheets.

to be continued...

John Vertegaal said...

As deduced from my set of first principles, an economy isn't on a linear or chaotic path from here to there, but exists in a space acted upon reciprocally for an end purpose that lies outside of that space; with the entire economy being reduced to a set of indeterminately valued means only, netting to zero before a transcendence of final output into that exogeneity takes place. It's only at those points that determination gets into the picture, but, unfortunately for economists, only in terms of non-economic values-in-use and thus useless for determining any ex ante positive capital valuations. And last but not least, since the physical or material values of means of production inclusive of knowledgeable human resources are all impervious to an economic collapse, the latter concerns a breakdown of its map and not of its territory. The working economy, as we know it, is a set of accounts in terms of exchangeable numeraires; with higher math being just as redundant in an economics that matters to the well-being of our society as it is in cost accounting.

Hope this contribution, as to the nature of profit and capital, has been interesting enough to elicit a comment.

John V

*) Does anyone here know if its archives have gone to cyber heaven? They seem inaccessible.

Dennis Pickard said...

Egmont: It seems to me your equation relates to changes in inventory, not profits. After all, it there were no end period=0 inventory balance, then consumption could not exceed production in period=1, and it seems absurd to assume than any production in period=1 not consumed should simply disappear. Also, it is clearly possible for businesses, both individually and in aggregate, to both increase accumulated inventory and generate both accounting and economic profits in any particular period.

Taking a stab at a definition of "profit" for consideration/discussion - seems to me "profit" in economic terms ought to be taken as the surplus of utility derived by market participants over the utility input by those participants. So in addition to the accounting profits (over cost of capital and proprietor's labor input), it ought to also include the net utility derived by wage labor after deducting for the disutility of working for wages.

Of course, measuring these things in terms of money is much easier than in terms of utility. So maybe we have more of a measurement problem than a definitional one?

AXEC / E.K-H said...

Dennis Pickard

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 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 since 140+ years on the way to the inescapable final delirium.

Egmont Kakarot-Handtke

#1 Link to footnote 2
http://econospeak.blogspot.de/2017/06/comments-on-profit-and-capital.html?showComment=1498685206707#c7200209168958184034

#2 See for example ‘Primary and Secondary Markets’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1917012

#3 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415

#4 See also ‘Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2207598

rosserjb@jmu.edu said...

John,

For the pkt archives, you should ask Ric Holt.

Your vision of the economy is more or less what Egmont is looking at, the entire economy, indeed, the entire world economy supposedly, as a single firm. 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. If wages are held constant and prices are raised, profits will rise.

Dennis,

Egmont claims inventories are irrelevant, but if you waste your time reading his more extended discussions, indeed he does drag in inventories and changes in them to determining profits. You are basically right, and what he does here is impose a hidden equilibrium condition. His accounting and axioms imply equilibrium conditions that he does not admit he is doing, including "the market clears," even as he denounces all other equilibrium models as illogical and unscientific, that is what he is playing with, a collection of accounting identities that are sitting on top of an assumed equilibrium. Part of that equilibrium, of course, is that inventories do not change.

His supposedly testable hypothesis, is really an equilibrium condition, although it could easily be just an accounting identity always true, just as in fact the NIPA of the US simply impose the accounting identity that savings equals investment. You can test it all you want, and it is always true. But it is true only because they have defined it to be true.

Note that Egmont does not have a theory of the determination of profit, aside from imposing arbitrary equilibrium conditions, as well as leaving the determination of certain things (like price) completely up in the air (set so market clears, ahem). What he really focuses on is the division between retained profits and distributed profits, with no theory of what determines overall profits, which since nothing determines them in his system, he can make the ridiculous sorts of claims he makes such as how wages and workers have nothing to do with profits, which, of course they do.

AXEC / E.K-H said...

John Vertegaal, Dennis Pickard

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 holds 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’
http://axecorg.blogspot.de/2017/05/true-macrofoundations-reset-of-economics.html

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’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547098

(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’
http://axecorg.blogspot.de/2017/06/equilibrium-and-violation-of.html

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 equals 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’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415
and ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792

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

Egmont Kakarot-Handtke

rosserjb@jmu.edu said...

Oooooh, see kids, if price is not set at the right level, which depends on W and R, although, hey, W has nothing, I repeat, nothing to do with profits or anything. But, hey, if P is not at the right level based on W and R, both of them completely arbitrary and without any source, certainly nothing to do with those pesky workers, well, there might be a change of inventories, heavens no! and that cannot happen, and prices MUST change so that we no longer have such unallowed changes.

But, kids, in all other kinds of economics, both at the micro and the macro levels, the sign or equilibrium, or supply equals demand, we know that this condition is achieved when there are no changes in inventories, exactly the same condition that Egmont provides for us. But somehow he foolishly and ridiculously denies that what he is imposing and assuming is an equilibrium condition. But it is. Everybody who is not a drooling lunatic or a complete moron knows this. Sorry to be so blunt about it, but this is true. Look at any Principles of economics textbook. It is just that simple and basic.

So all of Egmont's denunciations of and denial of equilibrium are just total rank and screaming hypocrisy of the totally worst sort. He just cannot face how totally out of touch with reality he is.b

AXEC / E.K-H said...

John Vertegaal, Dennis Pickard

Barkley Rosser does not get the simplest of all economic configurations. This 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 of the wage rate change the market clearing price in the same direction but do NOT affect profit. This is an unassailable mathematical fact which 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 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. (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 since 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.

Egmont Kakarot-Handtke

#1 See ‘The father of modern economics and his imbecile kids’
http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html

#2 For details see cross-references Econ 101
http://axecorg.blogspot.de/2015/11/cross-references-econ-101.html

rosserjb@jmu.edu said...

OK, unless John or Dennis or some other non-Egmont person now shows up to comment, this will be my last comment on this thread, which is getting really tangled up, and I fear that Egmont is beginning to contradict himself as well as to make completely nonsensical assertions. Let me also apologize for getting overly annoyed in my last comment.

I think he has forgotten what some of his variables are. So he identifies "market clearing," which (ahem) he assumes, as being given by X = 0. But he then also has C = PX. X is supposed to be goods purchased by consumers. But if X is zero, well then C is aero, and then also, under his budget balancing assumption, Y also becomes zero. In short. This is a zero economy with nothing happening, not of much interest. To be really proper, X should be unplanned changes in inventoryies, as firms try to maintain an optimal level of inventories, which may change over time.

This brings us to "market clearing" that he shamelessly imposes while continuing to vacuate over how unscientific and illogical the very concept of equilibrium is. While he does not quite identify them as everybody else does, he admits that both "market clearing" and "budget balancing" "also appear" in equilibrium models, not that market clearing is equilibrium as everybody else knows, which, since he wants to quote Boland, suddenly become worthy of discussion. So he indeed drags out Alfred Marshall to argue that in the long-run competitive model, "excess profits" are zero, which indeed is in pretty much all Principles textbooks (and which is why in a full Walrasian Arrow-Debreu-McKenzie GE, profits are an epiphenomenon).

In my original post above, I noted this as one of those issues in defining profits, that accountants differ from Marshallian economists in defining profits because Marshall and all the textbook writers want to count opportunity costs of factors, especially capital, as costs. But, besides quoting Boland on this without any of the accompanying explanation I just provided, Egmont provides us with this, falling back on a full-blown long-run competitive equilibrium of the sort that he has repeatedly dismissed as "unscientific" and "illogical" to supposedly score his point that he has discovered profits are zero (in equilibrium).

Let me address this matter of inventories and profit. It is indeed a standard part of corporate accounting that for a firm, ceteris paribus, if the firm experiences uplanned inventory declines its groos profis should increase. This is simply trivially true, but of little other interest. As it is, once one looks beyond that trivial case it turns out that in general there is no relation between profits and inventory changes. If one studies the matter empirically at the level of firms or industries, one finds that firms seek indeed to maintain what they consider to be optimal inventories that minimize costs over time. Inventory turnover is negatively related to profits empirically, but there is no, I repeat, no empirical relationship between the direction of inventory changes (which tend to average out to zero over time anyway) and profits, despite that simplistic and limited accounting identity.

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. He is empirically and scientifically simply wrong, very way off wrong.

AXEC / E.K-H said...

Barkley Rosser

(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. 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 which 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 out of economics. Note that ALL variables in ALL equations are unambiguous and measurable. There is NO room for interpretation and blather.

Egmont Kakarot-Handtke

#1 See ‘The market economy is inherently unstable and economists never grasped it’
http://axecorg.blogspot.de/2016/05/the-market-economy-is-inherently.html

#2 See ‘First Lecture in New Economic Thinking’
http://axecorg.blogspot.de/2017/05/first-lecture-in-new-economic-thinking.html

John Vertegaal said...

Thanks for your suggestion regarding the pkt archives, Barkley. I don't have Ric's email address but yesterday found out something that Ric perhaps isn't aware of. At least a part of the archives has moved from archives.econ.utah.edu back to UoC, Boulder, under the mailing header Debt@CSF.colorado.edu rather than pkt@csf.colorado.edu we used to write to. But regardless of some likely interesting connotations, at this point it's all just of peripheral interest to me.

Am having a hard time believing your answer though. Have you turned into a supply-sider while I haven't been checking? Where pray-tell does the increased effective demand come from when you keep wages the same? Or for that matter, who's been spending to originate the rise in profits? Or do the latter somehow appear out of a vacuum? Problem with your boilerplate inverse proportionality of wages and profits are its non-stated assumptions like an economy on a path from here to there with "a hidden equilibrium condition", whose elements are all determinate at every step of the way. The picture you paint in your last sentences only results in a greater disequilibrium in the “real” world as modeled, with yet more to consume via charged and received profit income to maintain a dynamic equilibrium. The whole point of my reductio ad absurdum indirect formal proof is that in the absence of any newly hires, it's the final-output consumption by our capitalist that determines profits in equilibrium and not the power of price-setting, (i.e) differentiating the level of profit and wage income, by the monopolist; and that in advance of such determination taking place, the economy's elements, inclusive of capital, are of indeterminate value. Not to more than mention that when reducing the supply side to a single capitalist, profits, defined as returns greater than expenditures become unambiguous, as obtaining them at the cost of losses elsewhere disappears.

But be all that as it may, the capital/profit conundrum originates on a deeper level of the economy, or better said, is a problem of map validation with respect to its territory; so, as far as I'm concerned, not much point in revisiting the above.

Through the application of double-entry bookkeeping on values to our existence, a mapped space (or field) in terms of a unit of account is unwittingly created within the natural world with its resources that we value and put a price on. When, under those particular accountancy rules, we import the latter into that space and act _reciprocally_ on them for a yet natural purpose located outside of that space, the reality that we as natural and non-economic human beings perceive to be true becomes inverted within that space, now called an economy, and thereby counter-intuitive. "Doing" economics on the basis of a natural and thus non-inverted or straight causation process is in conflict with the ruling accounting system. It might work in an economy ruled by single-entry accounting but that's not the crisis-prone economy we _make_ a living in, and isn't of much interest to me.

to be continued in a bit more detail...

John Vertegaal said...

When we act on our motivations in the natural/physical world (i.e. the one we _live_ in), cause and effect of a production activity follow one another repetitiously without a space or time for anything to worm itself in between to make an effect indeterminate from a given cause. But our motive to get out of bed in the morning to go to work and be active isn't to produce something. For whatever we produce as effect is totally valueless to cause us to produce anew, keeping the system going, and no one would ever engage economically. Also, holding that such investment activity, both from the motives of an employee and an employer, is equilibrium inducing is absurd. Instead, as an employee, our motivation to cause output to happen is fed by the prospect of obtaining a tiny share of output effected from a whole lot of other producers that happens to have been booked similarly using a double-entry accounting system. The reality of cause and effect within the as such mapped space has been inverted from the reality of the physical/natural world. Labour and its output at the point of production is of indeterminate value and booked as an expense, to be resolved over time on penalty of default and economic extirpation, and so is labour-embedded capital.

I know from my own experience that it's exceedingly difficult as a non-economic human being, and that includes economists, to get one's head around capital, profit, funds, disbursed income, etc., as strictly being someone's expended and to be resolved negatives and not as quantities of produced depletable positives. However, in order to understand economic equilibrium in a dynamic sense, it's a must; and disequilibrium inspired heterodox economists should be able to do so. The alternative is adhering to a reality, principles and all, of their own making; and, as crises escalate, becoming ever more irrelevant.

John V

rosserjb@jmu.edu said...

John,

You are welcome for sending you in sort of the right direction of the now apparently renamed pkt archives.

I am sorry, but I must confess that I am unable to make out the meaning of what you wrote beyond about the middle of the second paragraph of your first post.

Regarding the part that did make sense to me, I do not see how you decided I was presenting supply side econ. You ask how agg D can rise if wages are constant? Easy. The capitalists spend their profits on capital investment, although if you are drawing off Egmont's incoherent model, he has nothing like that going on.

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. While I can cook up cases (usually involving underemployment of both labor and capital that then both expand) where both wages and profits might rise together, the vast majority of models have them inversely related, although dragging in other forms of income such as for land can of course alter that. Certainly at the macro level of national income that Egmont says is the only important thing, when shares of national income going to profits plus interest plus rents, then shares going to labor decline. Period.

Oh, Egmont, since JV got in again, very briefly. So fair enough, X is output, not zero. But you still have the problem that "market clearing" is market equilibrium in every book but yours. Declaring that equilibrium is a "NONENTITY" does not undo that, and an equilibrium can be unstable. As for your definition of possibly non-zero profits, one minute it is Qm - Sm, but then Qm is a long equation in which Sm enters negatively. So, is SM positively or negatively related to Qm?

And if your equation is quantifiable, then I suggest you go estimate it and see if in fact it equals the $1.8 trillion of after tax profits the US economy currently is generating.

rosserjb@jmu.edu said...

John,

There should be a "rise" in there after "shares of national income going to profits plus interest plus rents." When those rise, the share going to labor falls.

AXEC / E.K-H said...

Barkley Rosser

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 the productivity. This holds, no matter how the wage rate is set. A wage reduction leads to a proportional fall of 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 a higher productivity either! Productivity changes lead to inverse changes of 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 is balanced, i.e. C=Yw, total monetary profit Qm is zero. Because we know already that the 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. Sm≡Yw-C is negative, i.e. C greater 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 him were even worse.

Egmont Kakarot-Handtke

#1 See ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

#2 For details see ‘Profit theory in less than 5 minutes’
https://axecorg.blogspot.de/2017/07/profit-theory-in-less-than-5-minutes.html

#3 See also ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395

Anonymous said...

I note in reading through the comments and Barkley's responses, that Barkley never actually addresses the commenter's well stated basis, but circumscribes them without addressing them.. which is to say Barkley effectively just dispatches those arguments that oppose his own. I believe this is more succinctly described as "I'm far more learned and smarter than you so I can't be bothered with explaining why your unintelligent trivia is false."

This is only possible to get away with when the subject matter is founded on subjectivities or when one or another of the proponents of either side of a subjective topic refuse to actually engage with the detailed arguments made by the opposing side.

In short obfuscation is the method used when the argument made has little or not objective foundation. And yes, effective communication requires mutual effort and time.

rosserjb@jmu.edu said...

Anonymous,

I have posted lots of stuff about Egmont's theory, but in many posts I have pointed out serious contradictions and weaknesses in his theory. It is lata at night now, so I do not feel like repeating long posts I have made previously on this, but for a bottom line I shall point to the really big contradiction his stuff. He rants and raves about how equilibrium is, and I quote, a "NONENTITY," but his theory depends crucially on "market clearing." Well, Anonymous, do you think that market clearing is not exactly the same thing as equilibrium? I do, and I do not know of anybody besides Egmont who does not think it is. Do you think that "market clearing" is not "equilibrium"? If you are unable to say they are different, then you are faced with the main point I have been stating, which is that not only is Egmont's theory empty and empirically false, but it is contradictory, and his discussion has been massively hypocritical due to his assuming equilibrium while denouncing it. You want to disagree with this, or just make abysmally stupid remarks at this late stage of the game?

Anonymous said...

I will only offer my unlearned knowledge that "market clearing" is either a) at one moment in time and the next moment it cannot be cleared if there are any additional transactions, or b) an economic concept rather than a measure.

I would think that economists would have been able to show "market clearing" data if it existed in fact.

Another of my unlearned observations is that equilibrium in markets is a concept which in fact doesn't exist at all. At some measure which is undefined for equilibrium to exist A must = B precisely... hence A has the value of B, precisely. That occurs only momentarily on completion of a single transaction at a single moment in time on each such transaction. In the next moment A does not equal B but now equals C, etc. through time, therefore equilibrium cannot exist in the macro economic sense. Perhaps you are predicating it on a narrower view of economics.

Anonymous said...

Excuses, excuses:
"it is late now"
"I don't feel like..."
etc.

I understand reasons for not addressing these things in detail. But they are still excuses.

If you've addressed them in detail before then apparently you and others, as well as Egmont, are not communicating to arrive at precisely where each is diverging from the other and precisely why that divergence exists. I note that John made some compelling arguments which in essence supported much of Egmont's arguments. I also note that Peter (1st commenter) identified omissions in your posted content that are quite relevant and central but that your changes in your post didn't actually address Peter's points, nor did your response to him.

Perhaps this is ideologically driven divergence (political / social belief systems). Perhaps it is based on deep seated economic tradition, but there's nothing in this series of comments on your posted topic that you address with sufficient detail to pin down the source and cause of divergences, though from what I have read in detail in the comments others are trying to get you to pin down the sources of differences.

I doubt either side will find peace with the other's or be able to reconcile where the precise divergences occur. To do so both sides to have incentive to do so. If either side or the other does not have that incentive then identifying the sources of divergence is never going to happen because there's an intent of not wanting to identify them at their basis.

I'm sure or I'm probably sure you feel under attack by persons not learned enough to know what you know, and thus who are unjustified in attacking your position or basis. But from a disinterested party (me) that's neither here nor there ... what I'm interested in and I'm sure others as well, is how you reconcile or where reconciliation is impossible: What foundation point in economics provides the first point of divergence. I'd hazard a guess that it's founded on differences of subjective opinion rather than facts.

AXEC / E.K-H said...

Anonymous

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 PRIORY false. And this provides the implicit consensus of every worthwhile economic discussion: there is NO USE at all to stir this 200 years 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 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 soap box economists.

Egmont Kakarot-Handtke

John Vertegaal said...

Barkley,

Appreciate your confession, since it gave me the incentive to dig a bit deeper into the issue at hand. The meaning of that paragraph (written because we know that the economy is dynamic, and the static identities Y = C + I and S = I as Keynesian points of departure in time have been disappointing and insufficient in allowing us to clear up the mystery of how an economy works over time) is a dynamic expression of the functioning system at its core in equilibrium as: C = I, due to the influence of Y over time. Or in other words consumption, as the economy's end and sole purpose (a notion btw. explicitly condoned by Keynes, and hopefully as such at least in the back of blog readers' still open mind) determines the value of all investments having been made previously toward that goal.

This approach, if it works as being complete in explanatory power and without introducing paradoxes, is far superior to the expressed hubris of designating (I) as a determinate factor, without having a comprehensive theory of capital to back it up. And furthermore, with the subsequent discovery of paradoxes having stymied the acceptance of Keynesianism by the ruling Mainstream, and a consequent thwarting of otherwise rational Keynesian policy advice from being implemented, the result has been a slow but steady deterioration of society's economic health. High time to turn this around, don't you think? This new paradigm would turn economists into macro-accountants. It's a term I came up with in the mid-90s, thus even before becoming active on pkt, that btw. independently (as far as I know, though he may have gotten it from me) has been brought forth as valid by Randy Wray as well.

Regarding the "easy" part. First off, rejecting as a rule the validity of determinate math within a domain being enumerated in terms of an elastically valued unit of account, I don't draw on anything that Egmont professes. I do find many of his conclusions remarkably close to mine though, and suspect that your disagreements with him could well be founded in your points of departure being the static identities as per above, and him having his own set of axioms, (and as I have mine). As Paul Davidson used to say on pkt: "what are your assumptions?" Second, after an understanding of what the above paragraph in question is all about, you can perhaps also see why I thought you were presenting a supply side of econ. Because the reinvestment of capitalist profits was already explicitly dealt with in my model, and valid _until there is nobody left to hire_, all profit-induced and ex post determinate growth from the demand side of the system has to come to a stop and rather soon too; unless of course the impossible occurs and our monopolist, through consumption of his share, effects a dynamic equilibrium.

Given C = I dynamically, the double-entry booked system is one of to be resolved previously made expenditures, debits or its alter ego systemic debt, in which the profits made at each economic level are yet to be resolved costs at levels further down; with a final resolution and equilibrium determination only possible at the retail level. And with the value of allocated shares, just like everything else within the economy's domain that's held to have value, being indeterminate in advance of a final resolution taking place; they cannot have an inversely proportional or otherwise determinate relationship with each other.

to be continued...

John Vertegaal said...

I guess that about covers my part of your missive. But since your suggestion to Egmont, to do some extensive research in support of his position, would apply to me as well, I'll take the liberty to answer it with a question or two, whose answers would only require a bit of logic on your part and no empirical research at all. When capitalists, presumably for expected growth considerations, spend their profits on capital investments which you maintain they do (btw. counter-indicated by increases in industry value-added as a percentage of GDP having been flat or negative for a while), and it has been found empirically that returns on capital amount to about 10% of GDP lately, how do your assumptions ((Y = C + I and S = I)?) account for a yearly net growth in GDP these last few years, of not much more than about 1%? Perhaps retained profits do play a far greater roll in economic disequilibrium than your side of the earlier exchanges with Egmont seems to indicate?

John V

rosserjb@jmu.edu said...

Anonymous,

Sure, lots of markets are only in equilibrium briefly, and some are never in equilibrium. But some are in equilibrium pretty much all the time. Markets vary.

The issue here is that Egmont is completely contradicting himself. On the one hand he denounces the concept of equilibrium repeatedly, with "ill-defined" his latest entry on that, but then he turns right around and makes a long-run equilibrium assumption in his wonderful theory that is supposed to explain all of economics and replace all those supposedly totally wrong theories of economics that went before (not all of which depend on using the equilibrium concept, btw).

Of course this is where matters of definition matter, and Egmont obfuscates by using the term "market clears" and sort of suggests that somehow or other it means something other than "the market is in equilibrium." But, sorry, that is exactly what it means, Anonymous.

Oh, whether or not particular markets (or the maacroeconomy) are actually in equilibrium or not, we do know how to measure it. A market clears (is in equilibrium) when the quantity supplied equals the quantity demanded, and we know that this is true when there are no unplanned changes in inventories, a definition that Egmont actually agrees with. So, it is not ill-defined at all. We know exactly how to measure it and we know exactly how to tell when it is holding or not. There is simply no issue here other than Egmont engaging in both denouncing the use of the equilibrium concept and then turning right around and using it himself as a centerpiece of his supposedly wonderful theory that explains all of economics.

Egmont,

You just repeated a bunch of your usual drivel again, but you have failed to answer the latest question about more nonsensical contradictions in your ridiculous theory. 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, and if somehow the relation changes when one goes from the simple case to the more complicated case, why does that happen? (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.)

Sorry, John V., but C =I is not an equilibrium concept in anybody's model or theory of macroeconomics or any other kind of economics. If you are going to proceed along such lines, you are just totally wasting everybody's time, including your own.

As for my answer about capitalists spending their profits on capital investment, I did not say that this is what they do, I said that it is what they can do, as you were just totally mystified how there could be any increase in aggregate demand in Egmont's silly model without wage increases. So I told you. As it is, we know the answer to what you ask, but it is a big mess. So, about half of private capital formation is financed internally by retained earnings. However, portions of retained earnings get used for other things that are not strictly speaking real capital investment, such as buying back stock. But, again, your question was one of how could AD increase without wages rising, and that is how they could, not they necessariy do fully, which I never claimed.

So, as far as I am concerned, neither Anonymous nor John V. have anything further useful to add here. Both have run into silly and pathetic dead ends. If Egmont wants to admit that he has been repeatedly lying to everybody about his use of the equilibrium concept or perhaps would like to provide an explanation of how Sm both positively and negatively relates to Qm, well, maybe he might have something useful to add here. Otherwise it will probably be more repetition of his vacuous and ridiculous assertions, which I expect we shall get more of, sigh...

AXEC / E.K-H said...

Barkley Rosser

(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 muddle 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 PROVEN 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 muddle head 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 is materially/formally inconsistent proto-scientific rubbish and it is nowadays only defended by a rearguard of incorrigible muddle heads.

Egmont Kakarot-Handtke

#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’
https://axecorg.blogspot.de/2017/07/keynesianism-economists-senile-dementia.html

#3 See ‘How Keynes got macro wrong and Allais got it right’
https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html

#4 See ‘Productivity and the zombie apocalypse’
https://axecorg.blogspot.de/2017/05/note-on-zombie-apocalypse.html

vertegaa@vcn.bc.ca said...

Barkley,

The way you come across in your intro, you must have lots of examples to point to how those models have been the cause of real positive contributions to the actual well-being of society. No? Maybe just a few? 1 or 2? Or perhaps you're still hoping for better luck in the future and never mind Einstein's definition of insanity? Non of your precious models are dynamic at their very core, as all have components that are assumed to have static values or prices, singularly or in aggregates, at given points in time. Holding that wrt. an inherently dynamic economy, and regardless their track records, my model should yet somehow conform, only proves an unadulterated hubris.

Do you actually read posts of people who disagree with you? Or do you just glance over them so you can pontificate later? I've only been here a short time but I've never seen you answer any pointed question. Come to think of it, Anonymous noticed the same habit. Actually it's been even worse on my account, because you make up impertinent answers to an AD increase supposedly based on someone else's silly model, but that in fact were asked on the basis of a reductio ad absurdum model of a capitalist system at its core; where your: “do”, “can do”, “partly”, or “fully”, are all totally irrelevant. Now the latter model may very well be "silly" too. But instead of using logic to point out why; your kind of answering, to say the least, is disingenuous. Congrats though, you're the only economist in the 20 odd years of me having discussions with them, who felt it necessary to ridicule after an argument. Puts you in a league all by yourself.

I guess Planck was right and Upton Sinclair an optimist. Instead of the latter saying that "[i]t is difficult to get a man to understand something, when his salary [or sense of self-worth] depends on his not understanding it", "well-nigh impossible" would have been far closer to the mark; especially, or so it seems, when it involves economists.

So to all you bloggers out there: if I've made any useful contributions, please let me know and I'll gladly stay. But if I've been wasting my time, I'll take a non-response and Barkley's opinion at heart.

John V



rosserjb@jmu.edu said...

Egmont,

No typo on my part. This time you have conveniently left off your market clearing and budget balancing conditions that you added before, but they are what get you from your three empty accounting identities to your wonderful condition of Qm = Sm, so you are lying again, or at least covering up. You even have the nerve to write that you "always write" Qm = Sm, but to do so you need that equilibrium assumption that you in this latest message describe three times as being a "NONENTITY." What a worthless hypocritical liar you are, Egmong, a liar.

Now, in one of your earlier comments here you provided the more complicated equation that supposedly holds when you might not have market clearing or budget balancing and that brings in a foreign sector and a government sector. That equation is the following, which I am directly copying from your post above (and previous ones you have made, not to mention your dumb papers you constantly link to). It is

Qm = Yd + (I- Sm) + (G - T) + (X -M). Now some might get confused by all the parentheses, but none of the signs on any of the variables changes if we remove them, so let us do that just to make it crystal clear what is what here. So, without parentheses this becomes

Qm = Yd + I - Sm + G - T + X - M.

So, there it plainly and unequivocally is, a nice fat negative sign in front of Sm. This completely contradicts the positive sign that is in front of the Sm when you write (as you "always" do, Egmont)

Qm = Sm.

Got it? No typo on my part, more like what would get you an F in intro algebra in junior high school, a screaming contradiction in your model that is supposed to replace all of previous economics. This really is truly pathetic.

John V.,

So why are you imputing that I was using as some criterion for comparing the various models and theories about capital and profit how their respective uses would contribute to the "well-being of society"? No, I did not. I am trying to figure out which helps us understand society better. Most of them are or have been used in a variety of ways in society, including day to day accounting and assessing and so on that constantly go on. But this is not my criterion, and if you read carefully you should see that aside from dissing aggregate neoclassical production functions, I do not really come down hard for or against most of them. This, of course, has been one of Egmont's complaints, that I do not declare one of them to be the champion. But then if I had done so, he would have simply declared me to be an unscientific idiot because I was not presenting his empty and contradictory set of accounting identities as The One True Theory Of Capital And Profits.

Maybe you are annoyed with my tone, but my reply to your query about how AD can rise when wages do not was not only reasonable, it is factual. Businesses do use retained earnings to finance a portion of their real capital investment, and that does increase aggregate demand. This is simply a fact, so dragging in Planck and so on may make you feel good, but my bottom line is that I have yet to see you make a single remark on this thread that has moved the discussion forward in any useful way. Sorry about that.

AXEC / E.K-H said...

Barkley Rosser

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 OUT of economics.

When the pivotal concept 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.

Egmont Kakarot-Handtke

rosserjb@jmu.edu said...

Got it, Egmont. There is a negative sign there, not that easy to see. I apologize for calling you a liar on that matter. My bad eyesight.

You still have the problem that to get to that condition, you assume market clearing as well as budget balancing. The former is an equilibrium condition, much as you deny it, and the latter rarely holds and for governments does not ever need to hold.

vertegaa@vcn.bc.ca said...

Barkley,

I have no idea what gave you the impression that I was imputing anything of the kind you're accusing me of doing. No criterion to compare various models, nor their respective uses toward effecting a betterment of society was at stake. What I was trying to get across is that irrespective of the models used, and which you required me to emulate to some extent to be taken seriously by you, non of its practitioners can point to having been instrumental in an economic success story. So that rather than being hemmed in by their premises, it could be expedient for society that some out of the box thinking and thereby bypassing conventional economics were attempted; which perhaps, at least theoretically for the time being, generates different results.

I would venture to guess that the great majority of professions are entered into, with as one of the entrants' motives being, to leave society a little better off because of their particular kind of output; and that if the latter weren't the case, those jobs would be very unsatisfying. And because the field of economics deals with the big picture, even micro supposedly is universally applicable, the betterment of society as a whole would be at issue to give economists their job satisfaction. However that doesn't seem to be the case with you. Your goal seems to be the studying of society as an end in itself, and you even go as far as denying there to be a further purpose to that studying. Odd... I wonder if this attitude of yours in some way is related to the findings of the well-known empathy experiments done with economics students.

Your irrelevant answer, as to how AD can rise when wages do not, is indeed factual; but only within the artificial reality made up by economists. Because, for it to be true, a whole lot of assumptions are required. First, the economy has to be in equilibrium both before and after an AD rise takes place. Then, ceteris paribus conditions are imposed on the rest of economic factors. And finally, with the above listed most likely being incomplete, there is the umbrella assumption that this reality conforms with the reality of the economy in the real world.

My model, you know the one you either pretended not to understand, or, giving you the benefit of the doubt, your "thinking like an economist" prevented you from understanding, and that you neither considered as a cut-down-to-the-bone but possibly valid representation of a capitalist economy in the real world, nor showed it by logic to be fundamentally different from the latter, needs non of those assumptions for showing the very opposite. To wit, that with all the possibilities of share distribution yet on the table, such AD cannot rise; because, within given _dynamic_ instead of static equilibrium conditions of capital and profit, the final determining basket is already empty. Now while it is of course well within your rights within the reality of blog discussions, both to not want to go there and to set yourself up as the judge and executioner of infidels to the true faith(s); this will quickly turn to have been tragi-comical posturing, whenever such blind faith in the validity of comparative static economic analyses becomes exposed to be nothing but at best formalizing a bag of hot air (Keynesianism) and at worst one filled with inane but yet society-debilitating tricks (neoclassicism). No need to be sorry about your bottom line toward me however, I'm glad you recognized that a blustery debate doesn't need to degenerate into incivility.

I guess that about does it for now, and I'll stay for a while longer after all.

John V

rosserjb@jmu.edu said...

1) I do want to help society, but indeed in this post I was examining how well these theories of capital and profits explain society, with it implicit that those that explain better might be better at helping society as well. As you should know by now, I did not pick one as being the winner for either criterion.

2) Sorry, but you are absolutely wrong that your supid idea that capitalist using retained earnings to buy capital goods can only expand AD under "an artificial reality made by economists" and that this depends on "a whole host of assumptions." Note, you accepted that it is a fact. It happens all the time in the real world, no assumptions, no equilibrium. Please stop trying to prove a completely wrong argument with stupid garbage like this (obviously I have completely lost patience with you by now; we are now at 50 comments in, and neither you nor Egmont is saying anything new or worthwhile at all, just pure idiotic crap).

3) Your "model"??? You have not presented a model. At least Egmont has a model, even if it is a bunch of basically unpublishable vacuity, he does have one. You have not presented a model, not even close, so do not pretend that you have. And I am not going to apologize for being uncivil, which I am, although I shall apologize when I falsely accuse somebody of something, which I did with Egmont. But with you, John, I am afraid I have not done so so far, and frankly I have had it way beyond up to here with this thread. I would ask you, please, to post nothing further on it. Really. Good night and good luck.

Anonymous said...

I make two simple obervations:

1. A market cannot be in equilibrium all the time unless and until no further transactions occur or if every transaction (buy-sell) is precisely equal in every transaction. Empirically then there's no market in perennial equilibrium since offer to buy is not equal to offer to sell, and thus one or the other must change to make a transaction. If either changes, then it's not the same as the preceding transaction in either or buy or sell price. Thus there is no equilibrium except momentarily, thus there's not such think as a market always in equilibrium.

2. A market is a composite of all transactions. Thus a market in oranges is one market and a market in apples is another. But both are part of the produce market. Taken to macro market level then all single product markets combined are in composite a single market.

And even in the oranges market there are sub-oranges markets: Navel Oranges, Valencia, and dozens of others. Within each of those markets are other sub-markets: Pre-ripe, ripe, full ripe, blemished, larger than x, smaller than x, etc, etc.

So to speak of a single market makes no sense when in fact there is only one market of all things being transacted at each moment in time.

Therefore I fail to see how an economist can assert a condition that some markets are in equilibrium "all" the time, others only "some" of the time and yet others "never." To make such assertion requires explicit detail of a precise single market with no sub-sets remaining as well as defining time to be a single transaction.

In macro there's no such thing as a single market as best I can determine unless that single market is the composite of all markets. You can say for example Texas crude oil and North Sea Crude are separate markets but they are just subsets of the oil market, which is a subset of fossil fuels market which is a subset of the energy market and then energy markets break down into electrical energy, transport energy, industrial energy, etc... each of which have several subsets themselves. And each subset market affects it's parent, and those their parents, etc. all the way back up to all subsets of all parents to one single composite market.

Thus there is no such thing as equilibrium in the market unless the global condition is static in every respect. But it's not.. there's weather, and accidents, and natural geological events, and people born, and people dying every single micro-second, nano-second, pico-second, femto-second, etc. Thus there can be no equilibrium in a market. Thus there can be no measure of it either.

rosserjb@jmu.edu said...

Anonymous, there are some markets that are nearly always in equilibrium, or are only very briefly out of equilibrium, with some financial markets being that way. You see prices moving, but they do so almost immediately to reassert supply equaling demand. OTOH, there are other markets that stay out of equilibrium for extended periods of time or simply never are in equilibrium.

Going to the aggregate is no big deal. We can and do track the balance of aggregate supply and demand by looking at aggregate changes in inventories that are simply the sum of all those changes in the more micro level markets, which can be defined downwards to be as micro as you want. We almost never see zero aggregate changes in inventories, but we do see them tending to oscillate between positive and negative, meaning that the macro aggregate equilibrium operates as a center and attractor in the dynamical situation. And, of course, although we rarely see it, it is possible to have aggregate macro equilibrium without a single micro market being in equilibrium. All that has to happen is that the surpluses in some markets exactly counterbalance the shortages in other markets, with all micro markets having either one or the other.

Let me throw a bone to John V., to whom I have been overly snarky. let me be more specific about how I think it is not all that useful to consider different theories of capital and profits according to "how good they are for socieity" rather than how useful they are for understanding society, as I argued. So, let us just look at one of them, the labor theory of value. So, it may well be useful for analyzing deep socio-economic relations, how capitalista exploit workers, or more broadly how owner-controllers of any means of production exploit those working with those means of production but are not owner-controllers. So, it has also been the case that the labor theory of value has been used for ideological and political organizing against capitalism. This played a role in the Bolshevik Revolution, and after the revolution labor hours accounting was used in parts of the economy, particularly in agriculture after Stalin collectivized it. Of course, Stalin also killed millions of people in his gulags and elsewhere. What does all of that say about how good or not good using the labor theory of value has been for society?

Anonymous said...

So what you're doing is making up a definition of equilibrium which you define as an average of disequilibrium over time. Or did I miss something?

If you can show that the average is constant over all time then you still have disequiibrium over all time.

If you find the average trends down over time period P1, an up again over period P2, where the magnitude of up were not equal to down then over periods P1 through P2 there's still no equilibrium.

By your definition of equilibrium meaning an average of disequilibrium over time then the definition hinges on the magnitude of time you use to find an average value of disequilibirum.

Since time becomes the pre-requisite, then equilibrium by your definition can only exist over a defined time ... and it can only average to zero (hence your definition of equilibrium) therefore only when P1 = P2 AND Disequilibrium 1 = - Disequilibrium 2.

This leaves at least two questions:

What is the defined constant time period, P, by which you measure a Disequilibrium condition?

Is the Disequilibrium constant over period P? And if not then you must use multiple successive periods Pi until the disequilibrium averages to zero.

If time period P is not a fixed constant Time (T2-T1) then what is the selection criteria to define an equilibrium over two periods P1 and P2 ... how do you select the two time Periods lengths?


I cannot figure but what you're defining "equilibrium" to be an arbitrary period of time over which you average the magnitudes of disequilibrium UNTIL you find an average = 0.

In any case by averaging you're simply canceling the disequilibrium (deviations of differences in transaction buy-sell differences in each subsequent back-to-back transaction)... then calling that average to be in equilibrium when it is simply an accumulation of disequilibrium.

But if there's a trend over time period P1, then you cannot define an equilibrium until there's a future reverse trend over some other timer period P2 that averages with P1 to zero.

Thus at any given successive moments in time defining Period 1, you have no idea what the equilibrium is at the latest moment in time. The most you know at that moment is what the equilibrium used to be n the past, where the past is some set of successive periods prior to the present which average to zero when including the present.

But if that's the case then you have no means of knowing the present equilibrium other than by the single and only most recent transaction in composite of all markets. I have no idea how you can possibly assert that this is a remotely measureable transaction.

One thing I find interesting is that you may propose a theory of equilibrium but can never use an hypothesis to test the theory since you can never measure an equilibrium over time that is constant, and if there's no constant over time then there's no equilibrium. .. which also means the market never clears.

I also can't figure out your definition of equilibrium as an average of disequilibrium = 0 when the variance of the elements averaged isn't also equal zero. If the variance is non-zero than your definition of equilibrium must have a defined limit of variance (standard deviation) > 0... What is that limit to your definition of equilibrium? Elementary statistics says that if std dev >0 with mean = 0 then you're using a non-zero variance as either an assumed measurement error only, or you're simply hiding the disequilibrium under the average.... and it's still a function of time (or number of successive transactions required to obtain the average ... but what time is it you use? or what number of successive transactions?transactions) eebr , or there's no such thing as equilbirum.ss to ourour the ffinmirum is word play.not du[oatiibrium rbuAlso i think you


vertegaa@vcn.bc.ca said...

Barkley,

Okay, I'll bite. If one's goal is to understand society better, by whatever measure, I'd say there are much more appropriate disciplines to follow; like anthropology and sociology. Economists ought to have their hands full with understanding the process of turning natural resources into standard of living with a minimum of waste. Also, the study path to become a PhD in the former disciplines, as far as I know, is significantly longer than the latter. So where does the hubris come from, that an almost infinitely complex and dynamically existing organism like a society can be more usefully understood by means of applying a minuscule set of comparative-static economics principles to it? Unless I'm misstating your position, the whole idea is malarky and bizarre. Even more to the point though, again given that I understood your argument, why should society pay economists' salaries for their gaining a more useful understanding, when there both isn't anything in it for its members (at least it not being your criterion) and it could get the job done by academics much more qualified?

I don't follow your specific argument that the LTV "may well be useful" to understand society either. For if on the one hand it parametrically defines a more equal society, while on the other, possibly having been instrumental in the murder of millions; the opposite, i.e. confusing our understanding of society, would make more sense, no? Frankly, I think that by making your criterion a more useful understanding of society, you're clasping at straws in trying to absolve economists from their responsibility of finding a logically applicable path, from a generally acceptable set of first principles, to creating desirable wealth as a means to live. And the latter transcribes into doing some good for society, whether you like like it or not.

As long as all existing economics' theories are either static or comparative-static based, there is indeed not much point in differentiating between them. I never did so, and your repeating of the argument that I was imputing that notion to you is a straw man. Arguably though, the LTV has had some effect in the past, both in shortening the work week and in the rise of wages; but it's evidently well past its effective date by now. As it stands, there is little or no hope of accomplishment, wrt. the above set-out criterion of my own, by building on what's out there now. Anyway, I thought that you'd be susceptible to some alternative thinking, given your own works, but I obviously misjudged.

John V

rosserjb@jmu.edu said...

Anonymous,

I did not "define" equilibrium as some average of surpluses and shortages over time. I defined it as a condition in a market of zero unplanned inventory changes. It is hard to measure the level of planned inventory changes, but this is usually a small number, so just looking at data on inventory changes usually is a pretty good measure of the condition of whatever market one is looking at, whether extremely micro, such as that for thin crust pizzas in Harrisonburg, Virginia (for which the data may not be publicly available) or the entire macro US economy, for which the data is available.

Equilibrium has nothing to do with it not changing, quite the contrary, unless one wants to get into defining a long-run equilibrium, but I stayed away from that, my Keynesian propensities tending to take more seriously short-run equilibria, which keep changing as circumstances change. And again, that we may not observe an equilibrium in a market or economy, does not mean that it does not exist. Equilibria can be unstable, but still exist, and there are plebnty of markets where we think equilibria exist, but the markets are oscillating around a lot. if we see a pattern such as with the aggregate macro economy where it looks like we are seeing such an osciallation that averages out to zero more or less, then it is reasonable to suspect that what we are seeing is what I described, a market or economy that is oscillating around an equilibrium that is probably moving without settling on it ever, aside from briefly passing from surplus to shortage category and back again.

Now, while of course nonexistence of equilibrium is a possibility in a market in which we always see unplanned inventories changing (and thus the market never in equilibrium), as far as I am concerned the more interesting anomalous case is not non-existence of equilibrium, but existence of multiple equilibria, which can become a source of complex dynamics.

So, one way this can happen is if a micro market has a backward bending supply curve. It is well known that we can see this in renewable resource markets such as fisheries. If this is the case, then catastrophic discontinuities can arise as the market shifts from a zone of attraction towards one equilibrium into that of a more distant one, which is a widely accepted explanation for what is going on when we see fisheries suddenly collapse, which we have seen many times, although this can be due to other reasons. I also note that chaotic dynamics can arise in these situations as well.

This is a matter that I have published on a number of times, with various coauthors. One paper on it is by me and Cars Hommes, "Consistent expectations equilibria and complex dynamics in renewable resource markets," Macroeconomic Dynamics, April 2001, 5(2), pp. 180-203. I also have a much more extensive discussion of al this in my most recently published book, _Complex Evolutionary Dynamics in Urban-Regional and Ecologic-Economic Systems: Beyond Catastrophe and Chaos, Springer, 2011.

rosserjb@jmu.edu said...

Gosh, John V., funny you should go on about natural resources and how infinitely complex they are and then proceed to accuse me of dealing with comparative static solutions. I suggest you look at the book I cited in my post just put up replying to Anonymous, or, heck, just go to my easily accessed website at http://cob.jmu.edu/rosserjb and start looking at some of the papers.

Apparently you are unaware of the fact that I am probably most well known in the economics profession as being a "complexity economist." Go look at the Wikipedia entry on "complexity economics," which I had nothing to do with, and you will find me being cited and quoted extensively. Look at my papers, look at several of my books. I am one of the leading figures in dealing with all this, although apparently you have no idea of the fact.

As it is, I think we really have come to the end of having any useful dialogue. You may well be right that anthropology and sociology are superior disciplines both for "uunderstanding society" and also coming up with morally wonderful axioms or foundations for achieving some wonderfully virtuous and politically correct society. So, fine, I am not going to make any effort to dispute that with you. You are right, so go bother all the people on the anthropology and sociology blogs to get your answers as to how to do all these wonderful things you want. Obviously nothing I have to say or offer will suffice.

Goodbye and good riddance.

Anonymous said...

I have not been able to reconcile your statement that

"Going to the aggregate is no big deal. We can and do track the balance of aggregate supply and demand by looking at aggregate changes in inventories that are simply the sum of all those changes in the more micro level markets, which can be defined downwards to be as micro as you want."

With your statement that

"I did not define equilibrium as some average of surpluses and shortages over time. I defined it as a condition in a market of zero unplanned inventory changes.

How can you "track" the balance of supply with demand by "looking at the sum of all the changes in the more micro level markets"?

Tracking means that there's some succession of events, conditions, measures that change with time (if you're tracking over time). And if you're not using time, then what import of economics state(s) of "equilibrium" since humans live in a time domain.

And since you cannot measure "all the changes" instantaneously, then you must be using some number of changes to make a measurement over a non-instantaneous successions of time.

What appears to be the difference in your definition of equilibrium and the standard definition of it, is that you're assuming an equilibrium exists in the market (or any given sub-market) without being able to actually measure it.

Continued in Part 2.

Anonymous said...

Part 2
Let me define equilibrium from a science point of view which is the general understanding by people who use the term.

A state of equilibrium exists when all Ai equal all Bi, equal all Ci, ....equal all ji, for i from 1 to n where 1 is the most prior moment in time at which the measure is begun, and n is the most recent moment in time, for j from A to m where me is the limit of all variables associated with the system in equilibrium.

Variables A to m which are the independent variables constituting the system in equilibrium include those we can control by specific action and inputs, those which are physical constants, and those variables we have no control over or for which we don't exercise control --- in my prior comments I used weather, natural geological changes, baby's born, people dying as those variables over which we have not control.

The system can only remain in equilibrium when all variables are constant. The moment any variable changes, the system is in dis-equilibrium. It remains in disequilibrium until 1) a new and different state of equilibrium is established by changing some of the variables, and 2) all variables are again constant.

In economics, there are uncountable and immeasurable variables for which there is no control, uncountable variables which are measurable, and intentionally controlled and measured variables.

Each of these uncountable and immeasurable and uncontrolled variables are changing in dynamic fashion instantaneously in time through all
time so the economic market can never be in equilibrium other than for one instant in time (pico-second???).


Thus your use of the term "equilibrium" must necessarily include a time period and a level having no direction and only a magnitude during that time period which is constant.

If the time period changes or the magnitude is not constant at every moment in time over the defined time period, then the only way to describe a "constant" state of equilibrium is by averaging the variations of magnitude and direction changes over that time period to find the period of time over which the average of the vector changes (magnitudes and directions) equal zero.

By the way, summing them to obtain a sum equal zero change is the same as averaging them to obtain a mean equal 0 change. In either case the period over which summed to zero must necessarily include non--zero changes in the vectors, which is then a state of dis-equilibrium.

So what you state as equilibrium doesn't match with what equilibrium is unless you have a definition of equilibrium which is not that which has any meaning over time... like I said, humans live in the time domain, and thus if it has no meaning over time then what import to humans?

rosserjb@jmu.edu said...

Well, Anonymous, this is beginning to go in circles. As you do not identify yourself or your background, I am not sure what I am dealing with in terms of either your knowledge or intellectual ability. But I must tell you that you are obfuscating something that has already been explained. Frankly, I cannot make sense of your definition of equilibrium. It certainly is not useful at all for economics, whatever discipline you are dragging it in from, and I will note that there are many definitions of "equilibrium" in different disciplines, including several different ones in physics as I discuss in my 1991 book, drawing on the work of Alfred J. Lotka.

Also, you keep getting hung up on some idea that somehow an equilibrium can only exist if somehow it persists over some period of time. Sorry, but this suggests you really do not know what you are talking about. Let me repeat, an equilibrium can exist but be unstable. If it is unstable you will never see it, but that does not mean it does not exist.

Indeed, it has been well known since the days of Walras and Marshall that if you have three equilibria due to a backward bending supply curve such as can be found in fisheries, the two outer equilibria will be stable, but the middle one will be unstable. This is a general relation now known as the index theorem. 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. You can also find it in many of my papers that you can easily find papers by me discussing this stuff in full mathematical detail at my website, http://cob.jmu.edu/rosserjb .

So, let us return one more time to basics. While it is actually a bit more complicated, basically equilibrium in an economic market is when supply equals demand. Have you heard that one before or ever run into it in a principles of economics class you might have taken or maybe just overheard in some converstion somewhere sometime? Yes, that is it, supply equals demand, that simple.

So how do we know when supply equals demand? It is indeed as I have repeatedly said, when unplanned inventory changes are zero. Maybe we need to go over this just a bit more so that you can understand exactly why this is exactly what tells us whether or not supply equals demand. If supply exceeds demand, a surplus, more is being produced than is being bought (demanded). That rising unbought supply shows up in inventories, which is the pile of stuff that has been produced but has not been bought. Wherever those inventories are being kept, they are increasing. When demand is greater than supply, well then there is more going out the front door of the store than is coming in the back door from the production facilities to enter the inventories, a shortage. So the inventories are being drawn down.

When the inventories are not changing, then the amount being supplied and is going in the back door to the storage facility where the unsold inventories are kept will exactly equal the amount being demanded, that is the amount going out the front door and leaving the inventories when people buy the stuff. So, the inventories do not change. That is it, and all there is to it.

Also, all your whining about time periods and levels is a big nothing burger. It does not matter if you are talking a nanosecond or 100 years; it does not matter whether you are talking about cheeseburgers with relish in Timbuktu or the entire world economy totally aggregated. It is all the same. If there is equilibrium, then supply equals demand and there will be no change in inventories. Period.

Got it finally?

vertegaa@vcn.bc.ca said...

As if complexity theory and not comparative static econ has been your leitmotif in this debate! Enjoy, while it lasts, your career of bluster; (i.e.) that complexity theory with its determinate math is fully compatible and thus relevant to our economic system that's based on accounting for debits and credits, where every booked activity is indeterminate until either its determination takes place due to the booked activities of others later, or it never was economic to begin with. You're right though, there is absolutely no common ground between our assumptions for any meaningful discussion. Over and out.

John V

AXEC / E.K-H said...

Barkley Rosser, vertegaa, Anonymous

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 since 140+ 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 is provable 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.)

Egmont Kakarot-Handtke

# 1 See also ‘The father of modern economics and his imbecile kids’
http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html

#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 See ‘All models are false because all economists are stupid’
https://axecorg.blogspot.de/2016/09/all-models-are-false-because-all.html

rosserjb@jmu.edu said...

OK, folks, this is it. I have really had it. This will be brief, and will be my final post on this thread.

JV,

One minute you berate me for not appreciating infinite complexity and all that, but then when I drag it out and provide a few references and some brief discussion of where it might fit in on parts of this discussion, you dismiss it. This is beneath contempt. As in fact I have written on this stuff extensively in connection with the original post, I could have dragged it in upfront, but I really do not like to load this site down with lots of fancy math that many do not understand or just get ticked off about. But, going out the door, I shall link it to the original post by noting my 1983 article in the Journal of Economic Theory, "Reswitching as a Cusp Catastrophe," the argument regarding which appears in Chap. 8 of my 1991 book, the one where the quote I used appeared originally.

Egmont, you are just repeating yourself for the umpteenth time. I am not going to comment further other than to remind anybody still watching that while perhaps Ingrao is right that we need a new conceptual approach, but what you have proposed and endlessly propagandized here about is most definitely not it. Bye, you all.

Anonymous said...

My interest in Barkley's statements asked me

"Well, Anonymous, do you think that market clearing is not exactly the same thing as equilibrium? I do, and I do not know of anybody besides Egmont who does not think it is. Do you think that "market clearing" is not "equilibrium"? "

My response was

"I will only offer my unlearned knowledge that "market clearing" is either a) at one moment in time and the next moment it cannot be cleared if there are any additional transactions, or b) an economic concept rather than a measure."

AND

"Another of my unlearned observations is that equilibrium in markets is a concept which in fact doesn't exist at all. At some measure which is undefined for equilibrium to exist A must = B precisely... hence A has the value of B, precisely. That occurs only momentarily on completion of a single transaction at a single moment in time on each such transaction. In the next moment A does not equal B but now equals C, etc. through time, therefore equilibrium cannot exist in the macro economic sense. Perhaps you are predicating it on a narrower view of economics. "


The ensuing response didn't address these simple observations or even specifically show why they are wrong, rather kept insisting that "market clearing" is the same thing as "equilibrium".

Try as could to understand how either market clearing or equilibrium could only exist other than at a moment in time (I used pic-second) Barkley never made any effort to bridge the issue of time or any definition of defined time or resolution of "equilibrium" = 0 or that disequilibrium must exist in all moments other than the one infinitesimally tiny moment.

It seems therefore to me that Barkley has, as a trained economist, accepted as axiomatic from some prior assertion by some prior economist that markets clear and equilibrium exists as the normal without ever questioning how that could possibly be true in any real world of transactions in multiple simultaneous markets where each market has an effect on another, etc. infinitely over time periods which are indeterminate and > zero.

I attempted to define a state of equilibrium with an example of it bt the dictionary definition is more concise:

"a state of balance between opposing forces or actions that is either static (as in a body acted on by forces whose resultant is zero) or dynamic (as in a reversible chemical reaction when the rates of reaction in both directions are equal)"
https://www.merriam-webster.com/dictionary/equilibrium

In economics the opposing forces are buyers and sellers, and there are uncountable numbers buyers and sellers (transactions) in every moment which of course changes the balance after each transaction, thus other than a purely static economic environment where nothing changes (no weather, no natural geographic conditions, no births, no deaths, no famines, no wars, indeed no motion at all) a state of constant disequilibrium exists, and thus markets can only clear over time, if ever.

Thus I have to conclude that Barkley is operating in a fictional non-real world with definitions of common terms he applies, indeed perhaps all economists apply with a meaning unrelated to the real world. By so doing then the basis they use of economic principles or laws or behaviors are themselves also fictions.

I had hoped Barkley could bridge this gap from a fictional world to the real one with some meaningful relationships or empirical evidense, but alas, my hope was not realized.


AXEC / E.K-H said...

Anonymous

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 that 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.* 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 140+ 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.

Egmont Kakarot-Handtke

* Just the contrary see ‘Could we, please, all focus on the key question of economics?’
http://axecorg.blogspot.de/2016/05/could-we-please-all-focus-on-key.html

Anonymous said...

AXEC/E.K-H

Perhaps I haven't been clear. I was questioning Rosser's posted statement and in particular the concept (my word) of market clearing and thus market equilibrium. In my best efforts of analysis (as my posts make clear) I can't see how either exists in the real world and thus they are (apparently) a fictional axiom used to construct a system of economic behavior and it's consequence.

I was asking Rosser to explain why or how market clearing and/or it's dependency, equilibrium actually exist since I couldn't find a rational basis for their existence in economics. From my best effort or an effort.. I can do better), time is an major element of either and if time is an element then both market clearing and equilibrium take time to achieve. Thus if they exist then what time period is required to achieve these conditions. And if that time period varies what is the variance (stnd deviation)?

You are citing references which negate the (apparent) axiom entirely while Rosser insists it exists but will not or has not made any attempt to explain how to reconcile or show its existence with reality.

Another outgrowth of this axiom is that equilibrium can only change by exogenous inputs which also implies no buyer or seller can modify the existing equilibrium UNLESS in response to an exogenous event. This brings to question what constitutes an exogenous event. I'm reminded of the creation of OPEC and it's use to change the entire structure of economics by affecting energy supply / demand as a response to a war in which the U.S. primarily was supporting the Israeli's in opposition to the Arab States (who controlled the oil).

So was OPEC's creation (well prior to the war) the exogenous event? or was the invasion by the Arab States the event, or was the U.S. support the exogenous event?

The implications of the answers determine whether OPEC's formation was the exogenous event since it didn't conform to the conditions required to define a free market economic principle (theory). Indeed, if OPEC hadn't been formed well before the war then there would have been no mechanism to radically alter oil supply/demand and thus upset whatever equilibrium might have existed prior. In that case then simply the formation of OPEC can be argued to have been an exogenous event.

I can take this further but if there's no precise definition of events described as exogenous, then anything can be said to be exogenous and if anything is exogenous then there's no such thing as endogenous. It all seems very wishy-washy by definition and thus I question economics operation as described by economists in general.

AXEC / E.K-H said...

Anonymous

PROVABLE false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 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 1947.

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, namedropping and reputation management.

Egmont Kakarot-Handtke

Anonymous said...

Egmont,
Seems to me, judging from history since humans kept records, profit can be inferred to have been a primary driver of human endeavors since tribes created chiefs. Certainly since records have existed.

If profit has been a major element of economics since then, it seems to me profit maximization has been a major aspect of profits.

In its most fundamental form, profits are a form of or means by which future security can be more likely achieved as well as the means of securing yet more profits. Visit the Mauserturn (umlaut u) for a specific historic example, which, judging only by your name, you may be familiar with, or the Burg on the hillside overlooking it.