An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Friday, September 8, 2017
Steve Roth — Why Economists Don’t Know How to Think about Wealth (or Profits)
Before 2006, the U. S. didn’t even have complete, stock-flow-consistent national accounts.
I do not claim to have researched the subject thoroughly, but the concept of national accounts were understood and utilized for economic planning during WWII. (That changed in 1946 when prevailing government practice shifted away from fiscal policy to monetary policy.) Henry Wallace's book "60 Million Jobs" utilizes sectoral balances and provides examples. Perhaps the author is quibbling over the details? [after reading the rest of the article, yes the author is quibbling over accounting details]
I personally am more comfortable with modeling dynamic systems as a black box. It starts with drawing a picture, any accounting follows from the picture. The problem with economists, from my perspective, is they don't draw pictures.
As for capital gains, how much of that is real? Real national wealth is the real stuff that a country produces, and capital gains are not real stuff. For example, what if we outlawed the stock market? Poof -- it's gone. Yet production of real stuff would be unaffected. What about public lands and public infrastructure -- that is not counted because it is not on the market, yet it is real stuff. And so forth. Don't get hung up on accounting.
Why economists don’t know what profit is Comment on Steve Roth on ‘Why Economists Don’t Know How to Think about Wealth (or Profits)’
The short answer is because economists are scientifically incompetent. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1, #2 In fact, Walrasians, Keynesians, Marxians, Austrians, and Pluralists have NO idea of profit ― the pivotal concept of their subject matter.
Both Orthodoxy and Heterodoxy lacks material/formal consistency. From the viewpoint of science, economics is a failure, from the viewpoint of the general public, economics is a fraud.
In order to establish material consistency, one needs measurement and one of the most important measurement tools of economics is national accounting. The importance of national accounting for testing of economic models is comparable to CERN for testing in physics. MMTers got the point in principle (albeit not in practice#3), yet in general, it holds that economists neither understand the significance nor the elementary mathematics of national accounting.
Economic theory and accounting are like hand and glove. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e. the axioms of economics.
Because the nominal magnitudes of accounting are a subset of a comprehensive theory which is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in national accounting.#4 Theory has to take the lead.#5
It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Fact is that Walrasian microfoundations and Keynesian/MMT macrofoundations are axiomatically false. This is why economics is a failed science.
Steve Roth names two big discrepancies between theory and national accounting, i.e. ‘The Paradox of Monetary Profits’#6 and ‘Saving and Investment’.#7 These discrepancies can only be resolved by a paradigm shift, that is, by a move from false Walrasian microfoundations and false Keynesian macrofoundations to entirely new macrofoundations.#8
Steve Roth concludes: “To quote David Glasner, ‘as much as macroeconomics may require microfoundations, microeconomics requires macrofoundations.’ … Those foundations are the technical economic terms used — because words are what we use to think together — and the mutually coherent and interrelated accounting identities that define those terms. Absent those definitions, economists quite literally don’t know what they’re talking about.” In brief: If it isn’t macro-axiomatized, it isn’t economics.#9
Egmont Kakarot-Handtke
#1 The Profit Theory is False Since Adam Smith https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
#3 Rectification of MMT macro accounting https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html
#4 True macrofoundations: the reset of economics http://axecorg.blogspot.de/2017/05/true-macrofoundations-reset-of-economics.html
#5 A tale of three accountants http://axecorg.blogspot.de/2017/07/a-tale-of-three-accountants.html
#6 For details see cross-references Profit http://axecorg.blogspot.de/2015/03/profit-cross-references.html
#7 For details see cross-references Refutation I=S http://axecorg.blogspot.de/2015/01/is-cross-references.html
#8 Keynesians ― terminally stupid or worse? https://axecorg.blogspot.de/2017/08/keynesians-terminally-stupid-or-worse.html
#9 For details see cross-references Paradigm shift http://axecorg.blogspot.de/2015/02/essentials-cross-references.html
Before 2006, the U. S. didn’t even have complete, stock-flow-consistent national accounts.
ReplyDeleteI do not claim to have researched the subject thoroughly, but the concept of national accounts were understood and utilized for economic planning during WWII. (That changed in 1946 when prevailing government practice shifted away from fiscal policy to monetary policy.) Henry Wallace's book "60 Million Jobs" utilizes sectoral balances and provides examples. Perhaps the author is quibbling over the details? [after reading the rest of the article, yes the author is quibbling over accounting details]
I personally am more comfortable with modeling dynamic systems as a black box. It starts with drawing a picture, any accounting follows from the picture. The problem with economists, from my perspective, is they don't draw pictures.
As for capital gains, how much of that is real? Real national wealth is the real stuff that a country produces, and capital gains are not real stuff. For example, what if we outlawed the stock market? Poof -- it's gone. Yet production of real stuff would be unaffected. What about public lands and public infrastructure -- that is not counted because it is not on the market, yet it is real stuff. And so forth. Don't get hung up on accounting.
Why economists don’t know what profit is
ReplyDeleteComment on Steve Roth on ‘Why Economists Don’t Know How to Think about Wealth (or Profits)’
The short answer is because economists are scientifically incompetent. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1, #2 In fact, Walrasians, Keynesians, Marxians, Austrians, and Pluralists have NO idea of profit ― the pivotal concept of their subject matter.
Both Orthodoxy and Heterodoxy lacks material/formal consistency. From the viewpoint of science, economics is a failure, from the viewpoint of the general public, economics is a fraud.
In order to establish material consistency, one needs measurement and one of the most important measurement tools of economics is national accounting. The importance of national accounting for testing of economic models is comparable to CERN for testing in physics. MMTers got the point in principle (albeit not in practice#3), yet in general, it holds that economists neither understand the significance nor the elementary mathematics of national accounting.
Economic theory and accounting are like hand and glove. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e. the axioms of economics.
Because the nominal magnitudes of accounting are a subset of a comprehensive theory which is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in national accounting.#4 Theory has to take the lead.#5
It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Fact is that Walrasian microfoundations and Keynesian/MMT macrofoundations are axiomatically false. This is why economics is a failed science.
Steve Roth names two big discrepancies between theory and national accounting, i.e. ‘The Paradox of Monetary Profits’#6 and ‘Saving and Investment’.#7 These discrepancies can only be resolved by a paradigm shift, that is, by a move from false Walrasian microfoundations and false Keynesian macrofoundations to entirely new macrofoundations.#8
Steve Roth concludes: “To quote David Glasner, ‘as much as macroeconomics may require microfoundations, microeconomics requires macrofoundations.’ … Those foundations are the technical economic terms used — because words are what we use to think together — and the mutually coherent and interrelated accounting identities that define those terms. Absent those definitions, economists quite literally don’t know what they’re talking about.” In brief: If it isn’t macro-axiomatized, it isn’t economics.#9
Egmont Kakarot-Handtke
#1 The Profit Theory is False Since Adam Smith
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
#3 Rectification of MMT macro accounting
https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html
#4 True macrofoundations: the reset of economics
http://axecorg.blogspot.de/2017/05/true-macrofoundations-reset-of-economics.html
#5 A tale of three accountants
http://axecorg.blogspot.de/2017/07/a-tale-of-three-accountants.html
#6 For details see cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html
#7 For details see cross-references Refutation I=S
http://axecorg.blogspot.de/2015/01/is-cross-references.html
#8 Keynesians ― terminally stupid or worse?
https://axecorg.blogspot.de/2017/08/keynesians-terminally-stupid-or-worse.html
#9 For details see cross-references Paradigm shift
http://axecorg.blogspot.de/2015/02/essentials-cross-references.html