Thursday, July 13, 2017

Peter Cooper — Short & Simple 7 – A Fundamental National Accounting Identity

The reason real output (or real GDP) is measured in monetary terms is that there is no good way to add up physical quantities of different goods and services to arrive at a single number. For example, imagine an economy that produces just three goods with the following physical output:
Physical Output = 50 computers + 75 motor vehicles + 40,000 apples
We cannot add up these quantities to arrive at a single measure of physical output. The goods have different units of measurement. They are incommensurable.
But if we know prices, we can express the output of each good in monetary terms. All output will then be measured in a common monetary unit and can be added together.
Obvious maybe, but what are the implications?

heteconomist
Short & Simple 7 – A Fundamental National Accounting Identity
Peter Cooper

28 comments:

AXEC / E.K-H said...

Macro for dummies
Comment on Peter Cooper on ‘Short & Simple 7 ― A Fundamental National Accounting Identity’

The heteconomist Peter Cooper maintains: “Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.”

Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists in the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the MOST ELEMENTARY configuration, that is, the pure consumption economy which consists of the household and the business sector.#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. The product market is cleared, i.e. X=O.

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, at the heart of the monetary circuit 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. It follows directly from the profit definition Qm≡C-Yw and the definition of household sector saving Sm≡Yw-C.

Loss or profit are NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3

Economists are too stupid for the elementary mathematics of accounting.#4 The statement total income equals total spending is simply false because of the all important phenomenon of credit. Equipped with credit the household sector can spend more than its period income (= dissaving in accounting terms).

Egmont Kakarot-Handtke

#1 For details see ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395

and ‘Keynes’s Missing Axioms’ Sec. 14-18
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

#2 The elementary consumption economy is given by three macro axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start holds X=O.

#3 See ‘Essentials of Constructive Heterodoxy: Profit’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110
and cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html

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

SDB said...

I fail to see EKH's point.
In this context, it doesn't matter that credit allows the household sector to spend more than its income. So what? That spending just results in income for the business sector. Total spending still equals total income. It's logically impossible for any spending to not "go somewhere" and result in income somewhere else.
Perhaps EKH has an idiosyncratic definition of income?

AXEC / E.K-H said...

SDB

You say: “It’s logically impossible for any spending to not ‘go somewhere’ and result in income somewhere else.”

This is the usual vague blather.

The pure consumption economy is for a start clearly defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C). No vagueness here.

The condition C=Yw says that consumption expenditures C are initially equal to wage income Yw. Or in the words of Peter Cooper: total spending is equal to total income.

Now it is logically and practically possible that consumption expenditures C are LESS than wage income Yw, i.e., total spending is NOT equal to total income.

What happens in the two sectors follows from the definitions. For the business sector it holds Qm≡C-Yw. Clearly, Qm bears here a negative sign (C less than Yw), which means the business sector makes a loss.

It is pretty obvious that the firm’s loss is something quite different from income. Wage income is a flow from the business sector to the household sector. Loss is the DIFFERENCE of two flows. Methodologically, it is NOT admissible to use the same term for entirely different phenomena. So it is inadmissible to speak of loss as a type of income. This blunder is called category mistake.

With ‘loss income’ this is clear because it sounds already weird. But it is also inadmissible to speak of ‘profit income’ because profit, too, is the difference of flows, i.e. C-Yw, and not a flow like wage income Yw. Wage income and profit are NOT two different forms of income.

So the blunder of the representative economist consists in confusing a balance with a flow.

The parallel to wage income is distributed profit income or dividend. Needless to emphasize that the representative economist cannot tell the difference between profit and distributed profit either.

Egmont Kakarot-Handtke

AXEC / E.K-H said...

Take-away for non-economists

The fact that the simple statement ‘Total spending equals total income’ is still a commonplace in economics has far reaching implications.

(i) After 200+ years economists have NOT figured out that the statement is false. This is a straight metric of scientific incompetence.

(ii) Since 200+ years the two fundamental economic concepts ― profit and income ― are ill-defined. By consequence, all theories/models that contain these concepts are false. In other words, the whole analytical superstructure of economics is false.

(iii) This applies to the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism. Economics, therefore, is nothing but the mutually accepted pluralism of provable false theories.#1 Economics lacks the true theory.

(iv) This applies also to National Accounting#2 which is lethal because National Accounting is pivotal for empirical testing. The correct FUNDAMENTAL IDENTITY of National Accounting is NOT spending = income but Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s deficit (= loss) equals the household sector’s surplus (= saving) and vice versa, i.e. profit = dissaving.

(v) The claim that economics is a science is false and amounts to a misguidance of the general public and the government bodies that are responsible for economic policy.#3

Egmont Kakarot-Handtke

#1 For more details 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

‘Tricky business’
https://axecorg.blogspot.de/2015/06/tricky-business.html

‘Where MMT got macro wrong’
https://axecorg.blogspot.de/2017/04/where-mmt-got-macro-wrong.html

‘Heterodoxy, too, is scientific junk’
https://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html

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

#3 See ‘Economics is not a science, not a religion, but proto-scientific rubbish’
https://axecorg.blogspot.de/2017/07/economics-is-not-science-not-religion.html

wilwon32 said...

I am confused. If I understand EK-H's point, he argues that MMT theoretical concepts are inadequate/incorrect (?) because they omit arguments regarding profit. Have the MMT theoreticians accepted EK-H's arguments; if so, why do they continue to ignore them; if not, why don't they explain that his profit-related argument(s) problems are irrelevant?

Where are comments from MF, TH, or others at this blog site commentariat?

Matt Franko said...

Will,

I've never seen Egmont take issue with the NIA like this before so I'm thinking about this for now...

SDB said...

As best I can tell EKH is confusing a simple barter model for the real world. While his elementary case of a pure consumption economy has simplistic beauty and logical coherence, it's not an accurate view of the way the world actually works. Yes, in a barter economy "Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s deficit (= loss) equals the household sector’s surplus (= saving) and vice versa, i.e. profit = dissaving."

But sorry charlie, a barter economy doesn't capture the dynamics of the real world....

In the real world we have a monetary production economy; profit is simply a mark-up over cost.

Perhaps one might ask where the money comes from to pay for the profits above costs? Cause in a Barter economy it can only come from the household sector dissaving, as EKH correctly points out... over, and over, and over again!

In the real world the source of money that sustains profits over costs comes from the endogenous generation of money, largely in the form of credit creation through the financial system, which is backed by and convertible at par into the States unit of account; and then there is also the State's deficit spending which is constantly adding money to the economy and propping up the price level.

AXEC / E.K-H said...

SDB

(i) You say: “As best I can tell EKH is confusing a simple barter model for the real world.”

The confusion is obviously on your side: (i) the title of this thread explicitly talks about national accounting, (ii) national accounting is about NOMINAL magnitudes, NOT real magnitudes, (iii) from all magnitudes that appear in the formal description of the pure consumption economy FOUR reappear in national accounting, viz. C,Yw, Qm, Sm.#1

(ii) The pure consumption economy is NOT a barter model but the simplest possible instantiation of what Keynes called the ‘monetary theory of production’.#2

(iii) You say “profit is simply a mark-up over cost”. This microeconomic definition translates for the consolidated business sector into the MACRO equation Qm≡C-Yw.

(iv) You say “Perhaps one might ask where the money comes from to pay for the profits above costs?” Indeed, this question has been asked and already answered: “In order that profit comes into existence for the first time in the pure consumption economy the household sector must run a deficit at least in one period. This presupposes the existence of a credit creating entity.”#3

Fact is that you are ill-informed and way behind the curve. Your best is simply not good enough.

Egmont Kakarot-Handtke

#1 The pure consumption economy is for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C).

#2 See ‘The irreparable unreality of all ‘real’ models’
https://axecorg.blogspot.de/2015/11/the-irreparable-unreality-of-all-real.html

#3 See ‘Essentials of Constructive Heterodoxy: Profit’ p. 7
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110

Magpie said...

It is pretty obvious that the firm’s loss is something quite different from income. Wage income is a flow from the business sector to the household sector. Loss is the DIFFERENCE of two flows. Methodologically, it is NOT admissible to use the same term for entirely different phenomena. So it is inadmissible to speak of loss as a type of income. This blunder is called category mistake.

With ‘loss income’ this is clear because it sounds already weird. But it is also inadmissible to speak of ‘profit income’ because profit, too, is the difference of flows, i.e. C-Yw, and not a flow like wage income Yw. Wage income and profit are NOT two different forms of income.

So the blunder of the representative economist consists in confusing a balance with a flow.


Please note carefully the passage above, especially the bits in bold.

I suppose we are all agreed on something: the world's population as of a determined moment is a stock or balance or level (those are synonyms). Say, according to the World Bank, the world's population was 7.355 billion people in 2015. By 2016 that figure had increased to 7.442 billion people. [*]

The difference between both figures (i.e. 0.087 billion people added in the 365 days between the end of 2015 and the end of 2016) is called population growth and I suppose we'll also agree it is a flow or rate: you add 0.087 to 7.355 to get 7.442, you subtract 0.087 from 7.442 to get 7.355.

Clear, yes? So far, I hope, there's little difficulty in understanding that. That's neither rocket science nor an object of deep philosophical controversy. It's a matter of simple arithmetic.

NEWS FLASH!

Population growth is the difference of two flows: an inflow and an outflow, namely the number of births minus the number of deaths (both also in the 365 days between the end of 2015 and the end of 2016). Both quantities are expressed in the same units: billion people/year.

Population growth is a net flow: 0.087 billion people/year.

There's no "methodological" reason why the addition or subtraction of flows is forbidden. Nobody will turn into dust for doing that. Following EK-H's practice, for details see Dimensional Analysis [**]

----------

To paraphrase: So the blunder of Egmont Kakarot-Handtke consists in confusing a balance with a flow.

Considering that Michal Kalecki is credited with the witticism that economics is the science of confusing stocks with flows, one can conclude that Egmont Kakarot-Handtke truly is a practitioner of scientific economics. :-)

[*] http://data.worldbank.org/indicator/SP.POP.TOTL?page=2
[**] https://en.wikipedia.org/wiki/Dimensional_analysis

AXEC / E.K-H said...

Magpie

You say: “To paraphrase: So the blunder of Egmont Kakarot-Handtke consists in confusing a balance with a flow.”

You are simply ill-informed. There are two balances of flows: X-O the difference between quantity X sold and and quantity produced O per period. This balance changes the inventory = real stock. The other balance is C-Yw, i.e. the difference between consumption expenditure C and wage income Yw. This balance changes the stock of money. The stock increases in the case of saving, i.e. C - Yw greater zero, and decreases it in the opposite case of dissaving.

Mathematically it holds: the business sector’s stock of products and the household sector’s stock of money is determined by the sales ratio (X/O) and the expenditure ratio (C/Yw). So the relation of stocks (numerical integrals) and ratios (numerical derivatives) is well defined for the case of discrete flow variables.#1

Your gloating [Considering that Michal Kalecki is credited with the witticism that economics is the science of confusing stocks with flows, one can conclude that Egmont Kakarot-Handtke truly is a practitioner of scientific economics. :-)] is premature.

For my take on Kalecki see the cross-references.#2

Egmont Kakarot-Handtke

#1 See ‘Primary and Secondary Markets’ Section 2 (Residuals and the emergence of stocks)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1917012

#2 Cross-references Kalecki
https://axecorg.blogspot.de/2015/02/kalecki-cross-references.html

Tom Hickey said...

Where are comments from MF, TH, or others at this blog site commentariat?

Neither MF or TH are economists so what we says is irrelevant.

I have previously said that the term "profit" doesn’t denote some naturally existing essence. It has ordinary language meanings complicated by history, e.g., "What does it a profit a person if.…"

In scientific modeling, which economic purports to do, fundamental assumptions are stated and key terms define in terms of the model being constructed. Then testing the model becomes at empirical issue wrt to data.

Economists adopt different assumptions and define key terms differently. The question then becomes how closely the model accounts for what it purportedly represents. How fundamental assumptions and key terms are used in this endeavor is basic to controversy in economics as a purportedly scientific discipline.

The question is whether any particular approach to economics is science or science fiction. Work that purports to be scientific has to conform to tight criteria for the scientific community to accept it. Science fiction just has to tell a good story that plausible enough to engage readers. The line between them is often blurred in economics, even when formalized.

Pointing matters like this out falls within the purview of philosophy which is my field. The basic method of philosophy is logic in the broad sense of semiotics, which includes syntactics (rules for use of signs), semantics (use of signs as symbols employed in representation), and pragmatics (sign use in addition to syntactic and semantics in communication, e.g, prescriptive and normative uses).

Modeling goes off track when modelers are not careful about observing the logic of the model or bend the logic illicitly to make at ideological point or otherwise to persuade. "Profit" is weasel word in this regard.

Magpie said...

AXEC / E.K-H said...


You are simply ill-informed.

Very well. Instruct us properly, then. Answer this extremely simple question. Considering that, in your own words,

Loss is the DIFFERENCE of two flows. Methodologically, it is NOT admissible to use the same term for entirely different phenomena. So it is inadmissible to speak of loss as a type of income.

If loss, as you clearly wrote above, is not a flow, then what on earth is it?

A stock? If it's not dead, then it must be alive. If it's not even then it must be odd. If it's not a flow then it must be a stock.

Is there another possibility? Say, loss is a non-flowing flow? A Kakarotian variable which is neither a flow nor a stock? What?

Teach us your science.

Magpie said...

I'll summarise my exchange with Egmont Kakarot-Handtke:

(1) Faced with the demonstration that his claim Loss is the DIFFERENCE of two flows. Methodologically, it is NOT admissible to use the same term for entirely different phenomena. So it is inadmissible to speak of loss as a type of income. is false and amateurishly absurd, EK-H reaction was to leave the counterclaim unanswered and say that it's I who am "ill-informed".

(2) Asked the very simple question If loss, as you clearly wrote above, is not a flow, then what on earth is it? Professor Kakarot-Handte's response, as of writing this (almost three hours waiting since my question), was: nada, nichts, rien, niente, nothing. Silence.

----------

I rest my case:

(1) So the blunder of Egmont Kakarot-Handtke consists in confusing a balance with a flow.

(2) Kalecki was right. I'll add: When it comes to the science of confusing stocks and flows, Egmont is the Einstein of economics. Heights unattainable by any other mortal. :-)

Good night everybody!

AXEC / E.K-H said...

Tom Hickey

You say: “In scientific modeling, which economic purports to do, fundamental assumptions are stated and key terms define in terms of the model being constructed. … Economists adopt different assumptions and define key terms differently.”

And here you have it: the muddle heads of economics define what they please without taking care whether the definitions fit consistently together. In economics, Humpty Dumpty calls the shots: “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”

And this is why economics is since 200+ years not more than confused blather. Not even the foundational concepts profit and income are properly defined. This is like medieval physics before the concept of energy was defined and understood. The representative economist does not understand what profit is and has never realized that the statement ‘total spending for the economy as a whole equals total income’ is abysmal logical crap.

Science proceeds differently. The foundational concepts including the dimensions of the magnitudes are consistently defined: “The most basic rule of dimensional analysis is that of dimensional homogeneity.”#1

The tried and tested means to establish coherent talk and dimensional homogeneity is since 2000+ years axiomatization: “The often heard rule that concepts are to be defined before they are used in a discussion is much too simple minded pre-Hilbertian. The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)

And here you have it: The pure consumption economy is for a start clearly defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C).#2

The axioms and definitions can be reduced to one equation, the First Economic Law#3, which is dimensionless and satisfies the Buckingham π theorem.#4

You say: “Profit is weasel word”. Did it never appear to you that this is the most damning characterization of economics? The first thing scientists do is to eliminate weasel words. Economists have not achieved this in the past 200+ years. They are simply too stupid for consistent scientific modeling.

Egmont Kakarot-Handtke

#1 Wikipedia Dimensional analysis
https://en.wikipedia.org/wiki/Dimensional_analysis

#2 For the complete verbal and graphics supported description of the pure consumption economy see ‘How the intelligent non-economist can refute every economist hands down’
http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

#3 Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC06.png

#4 Wikipedia Buckingham π theorem
https://en.wikipedia.org/wiki/Buckingham_%CF%80_theorem

AXEC / E.K-H said...

Magpie

You say: “Answer this extremely simple question.”
(i) Loss is the DIFFERENCE of two flows.
(ii) If loss, as you clearly wrote above, is not a flow, then what on earth is it? (A stock? … If it’s not a flow then it must be a stock.)

Wage income Yw is a flow from the business to the household sector. Consumption expenditure C is a flow from the household to the business sector. Loss is the difference of these two flows Qm≡C-Yw if C is less than Yw. Loss diminishes the stock of money of the business sector.

So we have the flow, the difference of flows and the change of stock. Loss is so to speak the first derivative of the stock of money. Or, vice versa, the stock of money of the business sector is the numerical integral of loss/profit.

Egmont Kakarot-Handtke

AXEC / E.K-H said...

Magpie II

You say: “I rest my case: So the blunder of Egmont Kakarot-Handtke consists in confusing a balance with a flow.”

The confusion is still on your side (see preceding answer) and I am quite satisfied that it remains there.

Egmont Kakarot-Handtke

Matt Franko said...

The "deficit too small!" thinking also misses Egmonts point about the difference of two flows...

SDB said...

EKH, going back to an earlier comment of yours, you said:

"The other balance is C-Yw, i.e. the difference between consumption expenditure C and wage income Yw. This balance changes the stock of money. The stock increases in the case of saving, i.e. C - Yw greater zero, and decreases it in the opposite case of dissaving."

I have two questions:

(1) I see how that could be true in period one of the base model you describe, but many periods and decades and generations later, after accumulation of savings is widespread, then profit of the business sector/dissaving of the household sector can occur without a change in the stock of money. Yes? It's a shift if deposit balances from the household to the business sector, with no change in the stock of money.

(2) I still don't understand your problem with the notion that total spending = total income. To have a problem with this, either (a) some spending does not count as income, or (b) some income is not the result of spending. Can you clarify what you're saying on this topic?

Magpie said...

AXEC / E.K-H said...

So we have the flow, the difference of flows and the change of stock. Loss is so to speak the first derivative of the stock of money. Or, vice versa, the stock of money of the business sector is the numerical integral of loss/profit.

Give me a break, E.K.-H. You just keep on digging yourself deeper.

I was ready to leave this discussion, but I can't resist that. :-)

If flows are like first derivatives, so to speak, as you say, then one should expect of them that they can be added and subtracted: first derivatives, I'm sure you know (don't you?) are additive:

d(f(x)+g(x))/dx = d(f(x))/dx + d(g(x))/dx

Egmont, the Einstein of economics and elemental, high-school maths, too.

For details, see rule 4
http://www.math.brown.edu/utra/derivrules.html

AXEC / E.K-H said...

SDB

(i) You say: “… after accumulation of savings is widespread, then profit of the business sector/dissaving of the household sector can occur without a change in the stock of money. Yes? It’s a shift if deposit balances from the household to the business sector, with no change in the stock of money.”

No. In the simplest case money consists of the debit side of the central bank’s balance sheet. If the household sector dissaves profit of the business sector goes up and BOTH sides of the central bank’s balance sheet get longer by the SAME amount. Money has been dealt with elsewhere at length.

(ii) You say: “I still don’t understand your problem with the notion that total spending = total income.”

Start with total spending C = total wage income Yw. In the next period the household sector takes up credit from the central bank and total spending C is greater than wage income Yw. So the statement total spending = total wage income is obviously not generally true.

What happens is that the profit of the business is now Qm≡C-Yw. But profit (or loss as the case may be) is NOT income so the statement total spending = total wage income changes for the GENERAL CASE to total spending C is numerically equal to total wage income Yw plus/minus profit/loss Qm (to recall Yw is a flow, Qm is a balance).*

From the accountant’s perspective only Qm≡C-Yw is the 100 percent correct statement, i.e. if spending C is equal to wage income Yw profit is zero, otherwise there is a profit or loss. Everything else is layman’s babble.

Egmont Kakarot-Handtke

* See also the Figure 5 in ‘Keynes’s Missing Axioms’ p. 25
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

SDB said...

Why is profit not income for the business sector? Or to put it another way... why can a household earn an income but a business cannot?
I go back to my first comment: "Perhaps EKH has an idiosyncratic definition of income?"
It seems that you're treating businesses as non-entities, as if persons are the only entities with economic agency.

AXEC / E.K-H said...

Magpie

You say: “If flows are like first derivatives, so to speak, as you say, then one should expect of them that they can be added and subtracted: first derivatives, I'm sure you know (don’t you?) are additive.”

First of all, I do NOT say ‘flows are like first derivatives’. Time to learn reading!

In economics we are in the world of discrete variables. And because there are no underlying continuous and differentiable functions we speak in analogies. So the stock of money of the business sector is the numerical integral = sum of discrete period values of profit/loss. Profit/loss, i.e. the change of the stock of money, in turn is a difference of flows. The change of stock is ANALOGOUS to the first derivative (see the graphic in the working paper Primary and Secondary Markets.)

I do NOT say ‘flows are like first derivatives’ I say ‘difference of flows are like first derivatives’.

Needless to emphasize that the formalism of calculus does NOT one-to-one apply to discrete period variables. This does not matter at all because the analogy holds.

So we have the flow, the difference of flows = the change of stock, and the stock, that is, we have perfect stock-flow consistency for discrete variables.

Egmont Kakarot-Handtke

AXEC / E.K-H said...

SDB

You ask: “Why is profit not income for the business sector?”

To say profit is income for the business sector is like saying a whale is a fish. It is simply scientifically incorrect.

If you subscribe to anything goes and freedom of speech and the human right of ignorance you can say profit is income of the business sector, if you subscribe to scientific principles (material/formal consistency, dimensional homogeneity) you cannot. To lump income (= flow) and profit (= difference of flows = accounting balance) together is a category mistake.

The fact that the representative economist cannot until this very day tell the difference between profit and income is the proof of utter scientific incompetence since 200+ years.*

Egmont Kakarot-Handtke

* See also ‘Economists: scientists or political clowns?’
https://axecorg.blogspot.de/2017/06/economists-scientists-or-political.html

JK said...
This comment has been removed by the author.
SDB said...

I understand what you're getting at now...
For wage earners, what we call income is their inward periodic flow of money. Say, $5000/month. Not taken into account is their outward flow of consumption expenditure. When we do take that into account, we refer to the difference as savings.
For businesses, what we call income is the difference between there inward periodic flow (revenue) and their outward period flow (costs). This difference should not be called income. The corollary of savings for the household sectors are profits for the business sector. As savings go down, profits go up. Vice versa.

That's an interesting point. You might be on to something.

Ok, so my question now is, is there such a thing as "income" for the business sector? It would seem that revenue in the business sector is the corollary to wage-income in the household sector.

So do you prefer the edit: total spending = total revenue? (instead of total spending = total income).

Hmmmm, but "income" also means the monetary value of the real output, final goods and services sold during a period of time. That's why people say total spending = total income, meaning total spending is equal to the monetary value of of goods and services sold during a period of time, the output. But that number is revenue.

(thinking out loud)

AXEC / E.K-H said...

SDB

(1) I have translated the argument into accounting. It is self-explanatory:

(a) National accounts, two sectors, initial period C=Yw, consumption expenditures = wage income
https://commons.wikimedia.org/wiki/File:AXEC94.png

(b) National accounts, dissaving C > Yw, consumption expenditures greater than wage income, profit Qm = dissaving -Sm
https://commons.wikimedia.org/wiki/File:AXEC95.png

(c) National accounts, saving C < Yw, consumption expenditures less than wage income, loss -Qm = saving Sm
https://commons.wikimedia.org/wiki/File:AXEC96.png

(2) You ask “So do you prefer the edit: total spending = total revenue? (instead of total spending = total income).”

Absolutely. From the perspective of the household sector C is total spending, from the perspective of the business sector C is total total revenue. The accounts make it clear that this is ALWAYS the case because it is two views of the same thing.

Egmont Kakarot-Handtke

wilwon32 said...

To what extent are definitions of terms the basis for disagreements between E K-H and various economists from other English-speaking countries? It is widely acknowledged that such may come into play as all are aware of such problems involving putative English-speakers from the USA, UK, Australia, Canada, etc.

I wonder whether the argument(s) put forth re integrity of theory underlying MMT be postponed/canceled until the definition problems are resolved to the satisfaction of all?

AXEC / E.K-H said...

wilwon32

(i) You are right, the definitions of terms can easily degenerate into wordplay and give rise to misinterpretation. For example:
• TRUE Total spending (of the household sector) is total total revenue (of the business sector).
• FALSE Total spending for the economy as a whole equals total income.
• FALSE Income = value of output.

It is the second statement which has become known as fundamental accounting identity. This is the exact point where the whole of macro went wrong.

(ii) Most famous example: Keynes
This is the piece of evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit.

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false. This includes MMT.*

(iii) All language problems are eliminated by turning to mathematical formalism and/or graphical representation.

(a) National accounts, pure consumption economy, two sectors, initial period C=Yw, consumption expenditures = wage income
https://commons.wikimedia.org/wiki/File:AXEC94.png

(b) National accounts, dissaving C > Yw, consumption expenditures greater than wage income, profit Qm = dissaving -Sm
https://commons.wikimedia.org/wiki/File:AXEC95.png

(c) National accounts, saving C < Yw, consumption expenditures less than wage income, loss -Qm = saving Sm
https://commons.wikimedia.org/wiki/File:AXEC96.png

The balances Qm/Sm change and redistribute the stock of money in the economy.

(iv) From the accounting graphics it is immediately obvious that Keynes’s foundational identity “Income = value of output” is false.

This seemingly commonsensical identity is the biggest methodological blunder in all of economics because it led to the treatment of profit as income of capital.

Because the profit theory is false since Adam Smith ― “... one of the most convoluted and muddled areas in economic theory: the theory of profit” (Mirowski) ― economics became the failed science that it is today.

(v) The scientific incompetence of the representative economist is documented by the fact that he cannot tell the difference between profit and income until this very day. Economists have NO idea of the foundational concepts of their subject matter.

Egmont Kakarot-Handtke

* Where MMT got macro wrong
https://axecorg.blogspot.de/2017/04/where-mmt-got-macro-wrong.html