Tuesday, August 22, 2017

Peter Cooper — Short & Simple 17 – A Notion of Macroeconomic Equilibrium

At the macro level, equilibrium requires that total demand in product markets equals total supply. This could occur at high or low levels of output and employment. For this reason, equality of supply and demand in product markets does not imply full employment.
Short & Simple 17 – A Notion of Macroeconomic Equilibrium
Peter Cooper


Matt Franko said...

But the condition in the conditional probability (the 'S' in DSGE) is surplus... so the underlying condition is always surplus including in labor ... i.e. you always have surplus workers somewhere...

Matt Franko said...

So the economists don't understand this...

Matt Franko said...

So let's say you had a nuclear reactor that was cooled by seawater (UNlimited supply, total surplus..)...

Northern hemisphere winter lower ambient temperatures so flow is low... then summer higher ambient temperatures so your flow controller would increase flow rate for cooling in summer ....

Economists would say that the increase in seawater supply was created by the increase in the flow controller demand....

Matt Franko said...

"equality of supply and demand in product markets does not imply full employment."

It doesn't really imply equilibrium in product so it won't imply equilibrium in employment either...

Matt Franko said...

Cattle carcass prices are in the shitter and have been for a few years... I could go out tomorrow and start raising cattle (if I had the munnie) and have a huge herd in a while...

AXEC / E.K-H said...

MMT’s two shots in the head
Comment on Peter Cooper on ‘Short & Simple 17 ― A Notion of Macroeconomic Equilibrium’

MMT claims to be a new paradigm. It is NOT. A paradigm is defined by its foundational propositions and paradigm shift means, in methodological terms, to change the axiomatic foundations. Applied to economics, this requires to throw the provably false Walrasian microfoundations and the false Keynesian macrofoundations out of the window and to replace them with an entirely new axiom set.

MMT is NOT a new paradigm because it merely recombines Walrasian and Keynesian axioms that are known to be false.

(1) Walrasian Orthodoxy is defined by these axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

The Walrasian hard core contains THREE NONENTITIES ― (HC2), (HC4), (HC5). To take equilibrium into the premises and then to establish the properties of general equilibrium is a methodological blunder that is known since antiquity as petitio principii.#1

Because equilibrium is a NONENTITY, all equilibrium models fly out of the window ― including MMT. There is NO such thing as a macroeconomic equilibrium.

(2) Keynesianism, too, is built upon false premises. The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

Keynes’s lethal blunder is in the premise Income = value of output. The same blunder reappears in the textbooks since 1948: “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.” (Samuelson et al.) And finally, this blunder reappears in MMT: “Total Output = Total Spending.”#2, #3

Because the premises of MMT are false the WHOLE analytical superstructure is false, which means that MMT policy proposals have no sound scientific foundations. The proponents of MMT ― Cooper, Hickey, Mosler, Wray, Mitchell, Fulwiller, Kelton, Forstater, and so on ― are scientifically incompetent. MMT is soap box economics.#4

Egmont Kakarot-Handtke

#1 There is NO such thing as supply-demand-equilibrium

Essentials of Constructive Heterodoxy: The Market

Ground Control to David Glasner

Petitio principii — economists’ biggest methodological mistake

Why you should NEVER use supply-demand-equilibrium

Traditional Heterodoxy’s paradigmatic impotence

All models are false because all economists are stupid

The Law of Supply and Demand: Here It Is Finally

How to Get Rid of Supply-Demand-Equilibrium

#2 Peter Cooper, Short & Simple 17

#3 For the full-spectrum refutation of MMT see cross-references

#4 MMT is NOT an alternative to neoliberalism

AXEC / E.K-H said...
This comment has been removed by the author.
AXEC / E.K-H said...
This comment has been removed by the author.
peterc said...

Hi Matt. I agree that there is surplus labor. The point of the introductory paragraph is to distinguish the Keynesian conception of macro equilibrium from the neoclassical one. The Keynesian conception of equilibrium is compatible with less than full employment. Output (or the growth rate) and employment can be stable below full employment. (And, agreed, this conception of equilibrium does not imply all product markets clear. It only suggests a stability in output/employment.) In the neoclassical conception (which does imply clearing product markets and full employment), only full employment is a stable situation, since in any other situation the price mechanism (absent frictions) is thought to be working to restore full employment.

I think any economist influenced by Keynes, Kalecki or Marx (or a combination) is likely to agree that there is surplus labor, considering the Keynesian emphasis on effective demand and Marx's emphasis on labor-shedding technical innovation that continually reproduces a reserve army of labor.

Tom Hickey said...

The conventional model is based on price adjustment alone whereas the reality is not only price adjustment but also quantity adjustment and this allows clearing of supply and demand at less than full use of resources by idling some resurfaces by reducing quantity rather than price.

peterc said...

Yes, agreed, Tom.

I edited the opening paragraph of the post and inserted a short second paragraph to try to make things a bit clearer. This also meant I could shorten what was the third paragraph (now the second).

Matt Franko said...

Maybe what I'm trying to say is that there is surplus everything...

Tom Hickey said...

Capitalism 101

1. Surplus production is held off market to maintain price (profit margin aka rent). If product were to enter market with prices flexible then margins would be driven down and the profit rate would fall with reduction of rent extraction.

2. Surplus labor is created to "control inflationary pressure" by disciplining labor. If labor were not "disciplined" then wage pressure would either lead to inflation if firms tried to maintain margins or margins would fall, so some combo thereof.

Matt Franko said...

We don't need all of these people working Tom...

The whole "scarcity!" meme is false...

Tom Hickey said...

"Scarcity" is just an economic term meaning that most goods are not free goods like air and water, which themselves are actually no longer free goods in that potable water has an economic cost as does air in populated areas. Free goods are not market goods and have no price. Scarce goods are market goods and have a price based on supply and demand curves. This is Econ 101.

"Surplus" in economics means goods produced above subsistence. There are subsistence economies and surplus economies.

"Commodities" are goods produced for sale. There are no goods produced for sale in subsistence economies but only for use. There are goods produced for sale in surplus economies. All monetary production economies are surplus economies and markets determine distribution based on rationing by price.

This is not even Econ 101 (college level). It is high school econ.

Matt Franko said...

"There are subsistence economies and surplus economies."

There is only a surplus economy...

Matt Franko said...

So you are saying that if Taylor Swift limits the amount of downloads she allows for her next release that represents "scarcity!" ?

Tom Hickey said...

There is only a surplus economy...

There are still some Stone Age people, e.g., in the Amazon forest, that run on subsistence economies.

Tayor Swift's music will remains a scarce good unless she chooses to give away free.

Works in the public domain that are downloadable free are free goods.

Technological innovation has the potential to reduce the scarcity of some goods and to make some goods essentially free.

The purpose of intellectual property, licensing, etc., is to create artificial scarcity so that goods that could be distributed freely or at very low prices based on cost command a price in the market.

This understanding is basic to understanding economic rents and rent-seeking.

Unknown said...


Yes I think that's correct. I'd suggest the necessity for profits of maintaining artificial scarcity in a world where technology has increasingly abolished it is the single biggest contradiction that is sending capitalism into its grave.

The renter has run amok because rents are the only source of profit left.

Unknown said...

"renter" = rentier

AXEC / E.K-H said...

Tom Hickey

The topic of this thread is NOT scarcity or surplus or subsistence. Peter Cooper presents in Short & Simple 17* two vital elements of the MMT approach: macroeconomic equilibrium and the national accounting identity Y = C + I + G + X – M.

The proof has been given
(i) that equilibrium is a NONENTITY, that is, there is NO such thing as a microeconomic or macroeconomic equilibrium.#1 ALL equilibrium models are false.
(ii) that the national accounting identity is false.#2

Key insight: the MMT approach is proto-scientific rubbish.#3

Egmont Kakarot-Handtke

* Link to source http://heteconomist.com/short-simple-17-a-notion-of-macroeconomic-equilibrium/

#1 There is NO such thing as supply-demand-equilibrium

#2 A tale of three accountants

#3 Cross-references Refutation of MMT

Matt Franko said...

"The renter has run amok because rents are the only source of profit left."

Not quite but has been a lot of it... getting the oil price down probably took out about $75/bbl of rent this has been the biggest rent removal in the recent times and system is still adjusting to this... there are still plenty of non rent profits out there in the 10% ROE range for those who are competent/qualified and can compete...

Matt Franko said...

"equilibrium is a NONENTITY, that is, there is NO such thing as a microeconomic or macroeconomic equilibrium"

I have to agree with Egmont here... we are in perpetual surplus... have been ever since post the Flood...

Tom Hickey said...

If there is truly a general surplus then prices should fall across the board to an equilibrium level where all resources are employed and there is no longer a surplus. If there is a surplus in excess of effective demand, then there is some set of reasons that this is not happening. The obvious places to look are inadequate demand creation and creation of artificial scarcity.

Matt Franko said...

Well with the most important energy commodity having over 50% rent for over 10 years prices are going to be high then when it is removed your going to get some volatility .. now we are getting some stability ...

AXEC / E.K-H said...

Tom Hickey

You say: “If there is truly a general surplus then prices should fall across the board to an equilibrium level where all resources are employed and there is no longer a surplus.”

These are the old delusional slogans from Econ 101 and they demonstrate an utter lack of understanding how the economy and the labor market in particular works.

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia:#2

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.#1, #2

Your statement “prices should fall across the board to an equilibrium level where all resources are employed” is Neanderthal economics. Just the opposite holds. And, by the way, there is NO such thing as a micro or macro equilibrium in economics.

Egmont Kakarot-Handtke

#1 For details see cross-references Employment

#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Ignacio said...

The notion of equilibrium is stupid, goes against the law of thermodynamics.