###
Brian Romanchuk — Primer: The Kalecki Profit Equation (Part II)

*This article continues the discussion of the Kalecki Profit Equation (link to Part I). The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively. The previous article noted that investment creates a pro-cyclical self-reinforcing loop between it and profits. This article discusses two factors that normally act to moderate the business cycle: the fiscal deficit, and the external sector.*

*As in the previous article, the treatment here is aimed at the simplified economic model accounting, and not the full details of the national accounts. If one wanted to apply the accounting identity to real world national accounts, there are a great many smaller terms that would need to be added in in order to get the full accounting identity....*

## 13 comments:

The first to leave the sinking MMT ship?

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part II)’#1

Brian Romanchuk asserts: “The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables.”

Brian Romanchuk simply parrots one of economists’ many brain-dead slogans. Get it, there NO such thing as a “statement that is true by definition”. In science, the truth of a statement is established by the proof of material and formal consistency.

It has been shown in earlier posts that Brian Romanchuk’s grasp of scientific methodology is rather weak.#2

The good news is that he now gets the macroeconomic profit equation right. The bad news is that he fails to notice that this equation flatly contradicts the MMT balances equation. The MMT balances equation reads (I−S)+(G−T)+(X−M)=0, from the correct profit equation follows (I−S)+(G−T)+(X−M)−(Q−Yd)=0.#3

Only one of the equations can be true. It is quite obvious that the MMT balances equation is false. Because Brian Romanchuk is a senior MMTer the question is whether he is the first to leave the sinking MMT ship.#4

Egmont Kakarot-Handtke

#1 Sequel to ‘Profit: after 200+ years, economists are still in the woods’

http://axecorg.blogspot.com/2018/06/profit-after-200-years-economists-are.html

#2 For an overview see

The curious non-existence of profit in economics

https://axecorg.blogspot.com/2018/03/the-curious-non-existence-of-profit-in.html

MMT and grassroots movements

https://axecorg.blogspot.com/2018/01/mmt-and-grassroots-movements.html

Macroeconomics for retarded economists

https://axecorg.blogspot.com/2018/01/macro-for-retarded-economists.html

The final implosion of MMT

https://axecorg.blogspot.com/2018/01/macro-for-retarded-economists.html

Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?

https://axecorg.blogspot.com/2018/01/macro-for-retarded-economists.html

Mathiness is NOT the problem — scientific incompetence is

https://axecorg.blogspot.com/2016/04/mathiness-is-not-problem-scientific.html

Economists: only good at excuses

https://axecorg.blogspot.com/2017/08/economists-only-good-at-excuses.html

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

https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#4 The Kelton-Fraud

https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

Because Brian Romanchuk is a senior MMTer the question is whether he is the first to leave the sinking MMT shipAgain, wrong facts.

To set the record straight for readers, BR is not "a senior MMTer." That would be Warren Mosler, Randy Wray and Bill Mitchell. BR is not even in the relatively small cohort of MMT economists like Stephanie Kelton, Scott Fulwiller, Pavlina Tcherneva, and other academics that came along later and who are now recognized by the senior MMTers as also representing MMT at a professional level, with publications that demonstrate it. Anyway, BR is an applied mathematician rather than an economist.

Tom Hickey

I have changed ‘senior MMTer’ to ‘outspoken promoter of MMT’. Your details about the MMT pecking order are immaterial for the proof of inconsistency.

Egmont Kakarot-Handtke

Getting attribution right is important.

MMT: How mathematical incompetence helps the Kelton-Fraud

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’

Under the title “Kalecki Profit Equation”, Brian Romanchuk, presents 5 equations of increasing complexity referring to monetary economies of increasing complexity. This approach is obviously based on two of my posts.#1, #2 Insofar it is correct, however, Brian Romanchuk still gets some essentials wrong.#3, #4 As a result, with his mathematical incompetence, he in effect helps the Kelton-Fraud.#5 Needless to emphasize that a mathematician is supposed to detect and correct logical errors/contradictions and to secure formal consistency by strictly applying the axiomatic-deductive method.

To make matters short, a concise formal summary of the main points, which have been elaborated at length elsewhere, is given on Wikimedia.#6

• Macroeconomic profit has to be derived from consistent macrofoundations. All microfounded profit theories are a priori false.#7

• First of all, the distinction between monetary profit (coll. money-in-the-cashbox/bank balance) and nonmonetary profit (coll. paper profit) is essential. Eq. (i)

• To speak of the “Kalecki Profit Equation” is utterly misleading. Kalecki’s equation is formally defective and this has been demonstrated already in a 2011 working paper.#8 The correct “Kalecki” equation is given with Eq. (v).

• Eq. (iv) refutes all Keynesian and After-Keynesian I=S/IS-LM models from Hicks to Krugman and beyond.#9

• From the axiomatically correct Profit Law for the open economy with government and profit distribution, Eq. (vi), follows the AXEC balances equation, Eq. (vii), (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which directly compares to the MMT balances equation (I−S)+(G−T)+(X−M)=0.

• The MMT balances equation features prominently in MMT presentations#10 for hiding the macroeconomic fact that Public Deficit = Private Profit.#11

Whether Brian Romanchuk does not realize that his Model 5 equation is inconsistent with the MMT balances equation or whether he intentionally obfuscates the issue is a matter of indifference. What counts at the end of the day is that he is in effect promoting the scientific and political fraud of MMT.#5

Egmont Kakarot-Handtke

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

https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#2 Rectification of MMT macro accounting

https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#3 Profit: after 200+ years, economists are still in the woods

https://axecorg.blogspot.com/2018/06/profit-after-200-years-economists-are.html

#4 The first to leave the sinking MMT ship?

https://axecorg.blogspot.com/2018/07/the-first-to-leave-sinking-mmt-ship.html

#5 The Kelton-Fraud

https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

#6 Wikimedia, AXEC Profit Law and Balances Equation

https://commons.wikimedia.org/wiki/File:AXEC143c.png

#7 The Profit Theory is False Since Adam Smith

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741

#8 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803

#9 Keynes’s Missing Axioms

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

#10 Down with idiocy!

https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

#11 MMT and the magical profit disappearance

https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html

Tom Hickey

You say: “Getting attribution right is important.”

I agree. But getting post uploads right is more important. Where is my latest ‘MMT: How mathematical incompetence helps the Kelton-Fraud’?

https://axecorg.blogspot.com/2018/07/mmt-how-mathematical-incompetence-helps.html

Egmont Kakarot-Handtke

MMT: How mathematical incompetence helps the Kelton-Fraud

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’

Under the title “Kalecki Profit Equation”, Brian Romanchuk, presents 5 equations of increasing complexity referring to monetary economies of increasing complexity. This approach is obviously based on two of my posts.#1, #2 Insofar it is correct, however, Brian Romanchuk still gets some essentials wrong.#3, #4 As a result, with his mathematical incompetence, he in effect helps the Kelton-Fraud.#5 Needless to emphasize that a mathematician is supposed to detect and correct logical errors/contradictions and to secure formal consistency by strictly applying the axiomatic-deductive method.

To make matters short, a concise formal summary of the main points, which have been elaborated at length elsewhere, is given on Wikimedia.#6

• Macroeconomic profit has to be derived from consistent macrofoundations. All microfounded profit theories are a priori false.#7

• First of all, the distinction between monetary profit (coll. money-in-the-cashbox/bank balance) and nonmonetary profit (coll. paper profit) is essential. Eq. (i)

• To speak of the “Kalecki Profit Equation” is utterly misleading. Kalecki’s equation is formally defective and this has been demonstrated already in a 2011 working paper.#8 The correct “Kalecki” equation is given with Eq. (v).

• Eq. (iv) refutes all Keynesian and After-Keynesian I=S/IS-LM models from Hicks to Krugman and beyond.#9

• From the axiomatically correct Profit Law for the open economy with government and profit distribution, Eq. (vi), follows the AXEC balances equation, Eq. (vii), (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which directly compares to the MMT balances equation (I−S)+(G−T)+(X−M)=0.

• The MMT balances equation features prominently in MMT presentations#10 for hiding the macroeconomic fact that Public Deficit = Private Profit.#11

Whether Brian Romanchuk does not realize that his Model 5 equation is inconsistent with the MMT balances equation or whether he intentionally obfuscates the issue is a matter of indifference. What counts at the end of the day is that he is in effect promoting the scientific and political fraud of MMT.#5

Egmont Kakarot-Handtke

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

https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#2 Rectification of MMT macro accounting

https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#3 Profit: after 200+ years, economists are still in the woods

https://axecorg.blogspot.com/2018/06/profit-after-200-years-economists-are.html

#4 The first to leave the sinking MMT ship?

https://axecorg.blogspot.com/2018/07/the-first-to-leave-sinking-mmt-ship.html

#5 The Kelton-Fraud

https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

#6 Wikimedia, AXEC Profit Law and Balances Equation

https://commons.wikimedia.org/wiki/File:AXEC143c.png

#7 The Profit Theory is False Since Adam Smith

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741

#8 What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803

#9 Keynes’s Missing Axioms

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

#10 Down with idiocy!

https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

#11 MMT and the magical profit disappearance

https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html

Brian Romanchuk

You say: “From my perspective, the issue is straightforward: do we want to model the operation of the industrial capitalist system that we have? If so, we need to stick with the definition of profit that capitalists use, …”

False! Capitalists know as much about capitalism as fishes know about water ― nothing. This is long known: “… these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.” (Bagehot, 1885)#1

This is why scientists redefine everyday concepts rigorously: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)#2

The elementary production-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 (monetary profit Qm≡C–Yw, monetary saving Sm≡Yw–C). From this follows Qm=–Sm, that is, macroeconomic profit comes in the most elementary case from the growth of household sector debt.#3

Capitalists don’t know this. Like goldfishes, they know only how to swim in their little pond but have no idea where the water comes from.

Egmont Kakarot-Handtke

#1 Bagehot’s wisdom and the silliness of modern economists

https://axecorg.blogspot.com/2016/01/bagehots-wisdom-and-silliness-of-modern.html

#2 How to get out of the morass of ignorance

https://axecorg.blogspot.com/2016/03/how-to-get-out-of-morass-of-ignorance.html

#3 Profit theory in less than 5 minutes

https://axecorg.blogspot.com/2017/07/profit-theory-in-less-than-5-minutes.html

Roger Sparks

You say: “It is hard to distinguish whether owner income comes from investment, hours worked, skill, or some other feature associated with ownership.”

This is entirely beside the point. Obviously, you do not understand how macroeconomic profit and microeconomic profit are related.#1, #2

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, risk, greed, choice, etcetera. These factors affect only the DISTRIBUTION of profit between firms. Macroeconomic profit is in the most elementary case given with Qm=−Sm, that is, profit comes from the growth of household sector’s debt.

The crucial point is this: Brian Romanchuk’s Model 5 equation can immediately be transformed into this balances equation (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which directly compares to the MMT balances equation (I−S)+(G−T)+(X−M)=0.

Brian Romanchuk argues: “Now I have no idea what he’s going on about the MMT equation. If I am not mistaken, the MMT equation is a sectoral balances equation, and does not tell us about profit. People who care about accounting identities argue that the ‘senior MMTers’ are pulling some technical legerdemain with the definition of saving used. However, I do not deeply care about accounting identitities, so I really never looked into this alleged controversy.”

So-called accounting identities are elementary algebra. If Brian Romanchuk does not see that his profit equation ⇒ balances equation directly contradicts the MMT balances equation he is an incompetent mathematician.

Worse, the MMT balances equation obscures the fact that Public Deficit = Private Profit and is used to politically deceive the ninety-nine percenters.#3 Either Brian Romanchuk is an incompetent mathematician or he is complicit in the MMT fraud.

Either way, his two posts about the “Kalecki Profit Equation” go down the scientific drain.

Egmont Kakarot-Handtke

#1 Zero-sum capitalism

https://axecorg.blogspot.com/2017/07/zero-sum-capitalism.html

#2 Capitalism, poverty, exploitation, and cross-over exploitation

https://axecorg.blogspot.de/2018/04/capitalism-poverty-exploitation-and.html

#3 Down with idiocy!

https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

Truth by definition? The Profit Theory is axiomatically false for 200+ years

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’

(i) You said in the intro: “This article continues the discussion of the Kalecki Profit Equation. The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively.”

(ii) You say in your latest post: “Egmont, the expression ‘I could care less’ best summarises my views on this topic. If a ‘senior MMTer’ wrote something that contradicts standard accounting identities, feel free to take it up with said ‘senior MMTer.’ I cannot recall reading anything like that, so as far as I am concerned, you are beating up on a straw man. (The complaint I saw revolved around MMTers using ‘saving’ to refer to sectoral balances, and not the standard national accounting version. Since ‘saving’ and ‘investing’ are commonly used to refer to things not matching the national accounting definition, I view that as grasping as straws.)”

In (i) you say that you are dealing with “an account identity (a statement that is true by definition)”. In (ii) you say that there are standard accounting identities. Now, the standard identities are also known to be “true by definition”. In fact, this is a very common phrase in economics.

Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”. Economists have obviously a serious problem with understanding the elementary mathematical logic of accounting. This problem is unsolved since Keynes. After-Keynesians still claim that Keynes’ famous I=S is an accounting identity.#1

Kalecki came up with a quite different accounting identity: “The economy is closed (there is no international trade) and there is no public sector. With these assumptions Kalecki derives the following accounting identity: P+W=Cw+Cp+I where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists’ consumption, Cw is workers’ consumption and I is the gross investment that have been made in the economy. Since we have supposed workers who do not save (that is W=Cw in the preceding equation), we can simplify the two terms and arrive at: P=Cp+I. This is the famous profits equation, which says that profits are equal to the sum of investment and capitalists’ consumption.” (Wikipedia)#2

Kalecki’s profit equation is axiomatically false, that is, beyond repair.#3

In my post ‘The final implosion of MMT’ I came up with the axiomatically correct accounting equation for the most elementary economic configuration: Qm=−Sm.#4 which you commented on with ‘Fun With Accounting Identities’#5: “An article with the flamboyant title ‘The final implosion of MMT’ by Egmont Kakarot-Handtke caught my eye. As I observed at Mike Norman Economics, this was probably just an attempt to troll people. That said, I think it provides another useful example of national accounting works (or does not work...).”

See part 2

Part 2

You did not get the point then and I commented: “Which part of Qm=−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).” and summarized “The current state of economics is that national accounting is provably false and that economic theory is axiomatically defective and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.”

Now, your post ‘Primer: The Kalecki Profit Equation (Part I)’ starts with (Model 1 Profits) = − (Household savings), in symbols, Qm= −Sm.

In principle, it is a good thing that you corrected your false assertions about macroeconomic accounting and adopted the axiomatically correct Profit Law. However, you are deceiving the general reader by attributing it to Kalecki.

I hereby inform you publicly that false attribution not only constitutes a violation of the standards of scientific discussion/publication but also of Wikimedia’s ‘Creative Commons Attribution-Share Alike 4.0 International’ as well as the International Copyright © and Trademark ® Laws. The correct attribution of the Model 1 to Model 5 profit equations is to AXEC/Egmont Kakarot-Handtke.#6, #7, #8

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Refutation of I=S

http://axecorg.blogspot.com/2015/01/is-cross-references.html

#2 Wikipedia, Kalecki, The profit equation

https://en.wikipedia.org/wiki/Micha%C5%82_Kalecki

#3 Refutation of Kalecki’s profit equation

What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803

The magic circuit and how economists got it wrong

https://axecorg.blogspot.com/2016/12/the-magic-circuit-and-how-economists.html

Kalecki got it wrong, Allais got it right

https://axecorg.blogspot.com/2015/01/kalecki-got-it-wrong-allais-got-it-right.html

Kalecki: the man who missed it by a hair's breadth

https://axecorg.blogspot.com/2015/01/kalecki-man-who-missed-it-by-hairs.html

Kalecki’s wrong definition of profit and income

https://axecorg.blogspot.com/2015/01/kaleckis-definition-of-profit-and-income.html

Loanable funds ― no hoax, just breathtaking stupidity

https://axecorg.blogspot.com/2017/08/loanable-funds-no-hoax-just.html

Macro for dummies (II)

https://axecorg.blogspot.com/2017/07/macro-for-dummies.html

Economists: scientists or political clowns?

https://axecorg.blogspot.com/2017/06/economists-scientists-or-political.html

Profit and stupidity

https://axecorg.blogspot.com/2017/06/profit-and-stupidity.html

How the Intelligent Non-Economist Can Refute Every Economist Hands Down

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395

#4 AXEC, Oct 31 2016 The final implosion of MMT

https://axecorg.blogspot.com/2016/10/the-final-implosion-of-mmt.html

#5 BondEconomics, Nov 1 2016, Fun With Accounting Identities

http://www.bondeconomics.com/2016/11/fun-with-accounting-identities.html?showComment=1478091221448#c2577717684502316735

#6 Rectification of MMT macro accounting

https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

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

https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#8 Keynes’s Missing Axioms

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

Post a Comment