Wednesday, February 14, 2018

Sandwichman — No Other Way of Keeping Profits Up

David Ricardo.

No Other Way of Keeping Profits Up

See also

Michael Kalecki
Political Aspects of Full Employment 
Political Quarterly, 1943 




AXEC / E.K-H said...

Ricardo, too, got profit theory wrong. Sad!
Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

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

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

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

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

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

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

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

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

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

See part 2

AXEC / E.K-H said...

Part 2

Monetary profit for the economy as a whole is defined as Qm≡C−Yw (C consumption expenditures, Yw wage income) and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing C=Yw total monetary profit is zero.

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

• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.

• Macroeconomic profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup setting, nor on risk-taking.

• In order that profit comes into existence for the first time in the pure production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit creating entity.

• Profit/loss is, in the most elementary case, determined by the increase and decrease of household sector’s debt.

• Monopoly power/rent-seeking is irrelevant for macroeconomic profit and affects only the DISTRIBUTION of total profit BETWEEN firms.

• There is no relation at all between profit, capital, marginal or average productivity.

• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.

• Profit is a factor-independent residual and qualitatively different from wage income (difference of flows vs flow). Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#4

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

Egmont Kakarot-Handtke

#1 Blackwood’s Magazine (courtesy EconoSpeak)

#2 Westminster Review

#3 The profit theory is false since Adam Smith

#4 Profit, income, and the Humpty Dumpty Fallacy

AXEC / E.K-H said...

Tom Hickey

Kalecki, too, got profit theory wrong. For details see:

Kalecki got it wrong, Allais got it right

Egmont Kakarot-Handtke

Six said...

“Ricardo, too, got profit theory wrong. Sad!”

Whoa ... Egmont is channeling Trump!

AXEC / E.K-H said...

Ricardo and the invention of class war
Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false.#1

By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war.

In the following the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.

The pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#2

Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#3

Monetary profit is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.

In the pure production-consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because C=Yw. All changes in the system are reflected by the market clearing price. As a matter of principle, the pure production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined alone by the productivity.

Obviously, there is NO such thing as an antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up the market clearing price goes up according to (1) and the real wage remains unchanged according to (2).

This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx who built on Ricardo.

See part 2

AXEC / E.K-H said...

Part 2

The business sector is now split into two identical firms and firm 1 is supposed to cut the wage rate W1 arbitrarily by half. From this follows that the market clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down ― profit up. This fits the time-honored stereotype of wages and profits as antagonists.

The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm and this is known as Fallacy of Composition.

If profit has been zero in the initial period because of budget balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.

Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers. A global wage rate change leads under the condition of budget balancing and market clearing only to a price hike.

For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false Marx’s theory of class war is false. What looks like exploitation, is in fact, cross-over exploitation WITHIN the Marxian classes.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.

As One of the Old School put it in 1829 “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”#5

Egmont Kakarot-Handtke

#1 Ricardo, too, got profit theory wrong. Sad!

#2 For details see ‘Profit for Marxists’

#3 Wikimedia, Pure Production-Consumption Economy

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

#5 The real problem with the economics Nobel

AXEC / E.K-H said...

Barkley Rosser, Sandwichman
Summary of ‘No Other Way of Keeping Profits Up’*

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

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

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

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

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

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

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

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

See part 2

AXEC / E.K-H said...

Part 2

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

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

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

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

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

Egmont Kakarot-Handtke

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

#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist

#3 Karl Marx, fake scientist

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

#5 How economists shoot themselves non-stop in the methodological foot

#6 The insignificance of Gödel’s theorem for economics

* For details see