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Clarence Ayres on the economic concept of capital

The excerpt below is from ‘The theory of economic progress (1944)‘ by Clarence Ayres. He argues that economists essentially understand capital as a kind of moral or even spiritual concept while they use prices to measure this moral value. He chides them for not paying attention to the difference between the asset and the liability side of the balance sheet and obfuscating the two. Today, his criticism is still valid. The modern scholar might state that his idea that, when it comes to labour, ‘skill’ is neglected is somewhat outdated as economists nowadays use the concept of ‘human capital’.

Hmmm….

But it does seem that the ‘dignity of work’, mentioned by Ayres as a core moral concept of economists, gets less attention from economists than in 1944?

The identity of these two processes­­ of capital equipment with capital funds­­ has never been established by any specific demonstration. It is rather implicit in the whole way of thinking which has been traditional in economics, and in this tradition it has been assumed rather than discovered or demonstrated. As Professor Fetter pointed out, it was assumed before the classical system of ideas was formulated and is one of the basic assumptions of that intellectual system. This is the assumption of the creative potency of funds. It finds expression in two forms: in what Veblen used to call “conjectural history,” and in the analysis of production. Nearly all economic writers have indulged at some time or other in chapters on “the progress of opulence” in which they have in imagination represented the accumulation of “wealth” as proceeding and conditioning industrial development, and professional historians have taken their cue and done their best to discover the sources of the (conjectural) funds which, supposedly, made later industrial development possible. These efforts have been notably unsuccessful, so that economic orthodoxy has never been able to cite history to its purpose at all extensively or with any great force of conviction. Nevertheless the historical assumption remains as a challenge to any other way of thinking to show how on any other basis Western society could be conceived to have developed as it has. Fortunately there is a profusion of evidence with which to meet this challenge.

But the chief preoccupation of economists has been with the analysis of production, as they have called it. In this analysis­­ the major task of classical political economy­­ there has been not thought of apology for or justification of the established order or its symbol capital. It did not even have the conscious purpose of furnishing “laws conducive to abundant and reliable supplies of capital and labor at reasonable prices.” Nevertheless it is in this main body of economic theory, if at all, that the duality of the concept of capital is explained and justified.

Economic theory has never been concerned with physical production in the sense of what goes on in factories and machine shops. Learned opinion has usually credited William Petty with a more realistically physical conception of the productive process than was true of later and maturer economic thinking because Petty analyzed production in terms of man­hours in terms of the corn necessary to the physical sustenance of the laborer. But this is plainly not job­analysis in the engineering sense. No less than later economists, Petty was fascinated by the subtleties of the pricing mechanism into which like his successors he tried to read a social meaning. Already, in the seventeenth century, the problem of economic theory was not to analyze what was actually going on in mine and factory but to establish a relationship between price and value. The problem is to establish a price equivalence between the value which is extractable from commodities in consumption and the value which has been put into them in production. Since value is by immemorial tradition a subjective phenomenon, its cost­ equivalent must also be subjective; and since for social reasons capital is the factor which is chiefly at issue, the analysis must from the outset do two things. It must identify capital with labor, and it must subjectify labor. Both of these projects were well underway by the time of William Petty. Petty’s corn has a more physical appearance than the plainly subjective “toil and trouble” in terms of which Adam Smith reckoned labor cost. But why corn? Why not skill? At no time in history could any genuine attempt to understand the physical operations of production have failed to take cognizance of labor’s “know­how” as having at least no less significance for the production of goods than spiritual anguish. Not only did Petty ignore the realities of production; the truth is that whereas later economists thought of general discomfort, Petty thought specifically of hunger as the particular form of anguish which labor incurred in the exercise of production.

From this point on, the classical analysis of the factors of production has been in terms of spiritual wear and tear. The terminology which has been generated by this effort has been encyclopedic, ranging all the way from Petty’s corn to disutility, and nowadays, opportunity. But always the effect has been the same. Many critics have noted that the so­called factors of production are really distributive, and that their relation to value is one of imputation. That is, land, labor, capital, and management are identified not by virtue of what they do in the shop but by virtue of what they receive in the division of social income under the rubrics of rent, wages, interest, and profits, payment of which imputes to their recipients some sort and degree of social value. Furthermore it is generally agreed that the problem of imputation is most acute with respect to labor and capital. By common consent the profits of management are not a fixed charge on society since they vary directly with economic frictions and might be expected to approach zero as a limit in a state of perfect competitive equilibrium. Orthodox theory has also long since ceased to concern itself with the claims of landlords. More than a century ago Ricardo proved that rent plays no part in the determination of prices but is only a differential corresponding to physical differences between different parcels of land. Unfortunately this demonstration proves too much. As a number of students have lately seen, both capital and labor can be treated in the same way. Their receipts also can be shown to vary with physical circumstances; and any one may be proved not to determine price if the theory of imputation be observed with respect to the others, as it was in the case of Ricardo’s theory of rent. But this anomaly has not been recognized by orthodox opinion generally, in which therefore capital and labor continue to stand by themselves as the major factors for consideration in the imputation of value.

The authenticity of capital was thus established by its identification with labor. For nobody challenges the moral claim of labor. In contrast to feudal attitudes modern society has all along made a fetish of the dignity of work. Contemporaneously with William Petty, Locke based his whole theory of property on the indefeasible claim which is established when man mixes his labor with the soil. The right of laborer to the product of his toil was one of those rights which seemed to the philosophers of the eighteenth century to be inalienable. So strong is this sentiment that it dominated even the mind of the revolutionary Marx, who made it the basis of the claim of the proletariat to the “surplus value” of which they had been immemorially robbed. The laborer is worthy of his hire. If the same is true of capital, it is enough.

But the complementary nature of capital and labor does not derive from the working partnership of capi talists and laborers, very fortunately perhaps. Indeed the founders of the classical tradition were singularly candid in their treatment of the actual working relations of owners and employees. “From the writings of many, if not most, of them can be culled passages expressing a benevolent attitude to the claims of labor,” as Mr. Hobson says. The truth is that whatever the spotted actuality, owners and employees must be partners, since capital and labor are complements; and they are complements not because of any actuality but by virtue of their conceptional character as intellectual abstractions. This is true of labor no less than capital. From what human quality, for example, do the supposed rights of labor devolve? Clearly they have nothing to in common with technical skill, which appears in quite another universe of discourse. Locke said nothing about property rights being established by the degree of skill with which men till the soil. The quality in terms of which labor is identified with capital is wholly subjective, a spiritual quality, a creative potency, a matter of dignity and anguish, hunger toil and trouble, disutilities endured, opportunities forgone.

In the last analysis classical political economy is a theory of final causes in the theological sense. Production having been conceived as the creation of value, the question is: By virtue of what creative potency do labor and capital contribute jointly to this process? The answer to this question is implicit in the word “virtue.” Modern usage retains this expression as a cliche, but in the past it was taken literally. To all the simpler peoples, creation is indeed a matter of virtue­­ of mana, as the polynesians say. Even today this is the popular conception of genius. In “creative” activity man mixes his personality with the inert materials of nature and so endows inanimate objects with something of his virtue. “Claims” and “rights” can be conceived in no other terms. It has often been remarked that Locke established the right of property on grounds identical with those of the rights of kings, which he denied. In this respect the virtue of labor is not only identical with that of capital; it is one with all the mystic potencies which have prevailed since the dawn of history.

Thus classical theory justified the duality of capital by extending its schizophrenia to the whole economic process. Capital means two things: the physical equipment of industry, and the funds by which control is exercised. It is the physical equipment which conditions actual industrial operations; but it is the funds which impart “value” and establish claims. In like fashion labor also means two things. It means the exercise of skill, which is the actuality of industrial production; but it also means the infusion of creative potency which likewise imputes value and establishes all rights and claims. All the terms which are used in the formulas of value theory are similarly schizophrenic. Thus for example we speak of the “productivity” of either labor or capital, meaning in some cases the ratio of physical product to number of machines or man­hours of operation, and in others the ratio of creative potency to pecuniary remuneration. It is for this reason that the anomaly of capital passed unnoticed for so many generations and continues to persist even after it has been explicitly recognized. The confusion of the concept of capital is concealed in a general confusion, and it can be resolved only by a resolution which is likewise general.

Certainly the concept of capital is not altogether responsible for this general confusion. Something of the sort was bound to result from the effort to find a meaning in the price system which it does not have, and the condition was further aggravated by the “discovery” of a conjunction between price and the metaphysics of value. But economic theory has never been merely intellectual exercise. The effort to establish a relation between price and value has been made in the interest of understanding what is happening in the economy of modern Western civilization. Two sorts of things are happening, each of which can be indicated by a single word: industrialism and capitalism. These two aspects of the modern economy are in fact quite distinct. Nevertheless in the apprehension of modern society during the past four hundred years they have been identified; and this identification, symbolized by the word “capital,” has imparted its own peculiar quality of confusion to the economic thinking of this entire period

  1. December 31, 2015 at 2:54 pm

    There should be a check mark to let you know one has read your posts. Alas, since there is not, my fingers stray far enough to suggest a third aspect of capital that resides in a similar ethereal realm with individual labor skills and applied intelligence. We have not paid much attention to that realm until now, Earth’s health, which has become a source of friction for capitalism but not necessarily for industrialism.

    You see? A simple check mark would have saved me from exposing this muse thanks to you.

  2. December 31, 2015 at 5:30 pm

    Conceptual blunder
    Comment on ‘Clarence Ayres on the economic concept of capital’

    Ayres noted back in 1944 “Certainly the concept of capital is not altogether responsible for this general confusion.”

    Indeed, it is no other than the representative economist who is entirely responsible for his own confusion (2013). In this context it is important to realize that the confusion does not start with capital but much, much earlier, that is, it in effect starts already with the elementary concepts income and profit. And it is pretty obvious that any theoretical superstructure can be shaky at best if it is built on conceptual sand.

    Criticizing Orthodoxy for age-old conceptual blunder, however, backfires because it leads to the question of why Heterodoxy has not taken advantage of the situation and come forward with a consistent set of concepts in all this time?

    The enduring general conceptual confusion among economists of all stripes is a strong indicator of what Feyerabend has called a ‘failure of reason’ (2004, p. 72), or what the man in the street might simply call stupidity.

    Egmont Kakarot-Handtke

    References
    Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598

    • January 1, 2016 at 10:25 am

      Heterodoxy has not taken advantage of the [conceptual confusion to] come forward with a consistent set of concepts because it is hooked on a false empiricism which has infected its teachers and teacher’s teachers right back to Adam Smith and the self-serving sophistry of his friend David Hume’s misinterpretation of Newton’s science in 1739-40. Feyerabend (d.1994 so 2004 seems misleadingly posthumous), appears to have ended up right, but in 1969 blocked my attempt to publish my reflections on conceptual foundations on the grounds that it was not science! The point (I now see), Egmont, is that, in order to account for change, the conceptual foundations must include the concepts of the existence, directionality, conservation and applicability of invisible energy (currently misconceived as “dark matter” rather than ‘spirit’ – Chesterton’s “wind that moved the trees” – or Bergson’s “elan vital”). The fallacy of Humean empiricism all along has been to go by appearances, discounting the invisible: not – as real scientists do – attempting with Bacon to open up the packaging, or with Chesterton to locate distant truths by triangulation and “reading between the lines” of encoding and paradoxical humour to discover intended meanings, errors and falsifications: at root the love of God versus atheism. (These are not to be judged by the appearances of godliness and scepticism).

  3. December 31, 2015 at 6:22 pm

    Ayres points out the confusion and uncertainty at the core of so called “modern” economics. But the other social sciences share this confusion and uncertainty. The confusion and uncertainty is inherent in the social sciences, including economics. When the social sciences took the road to “science” they thought necessary they also thought it necessary to strip themselves of all elements of humanistic ideas about human actions and the world for these actions. To replace these ideas the “new” sciences adopted formal behavioral thinking. That is anything that could not fit within a formal (often mathematical) logical framework was pushed out and away. This left social scientists unable to study, understand, or effectively report on many human actions, and most particularly the processes of interactions that are the root of these actions. In place of the lost understanding and effectiveness the social sciences placed “scientific” algorithms and so called “positivist” theories. But because the social scientists had largely lost touch with their objects of study, human actions and interactions there was no way for these theories to be examined and tested. Over the years the social scientists hid this flaw behind ever more logical-positivist language that became ever more disconnected and ever more self-serving and self-centered. Some social scientists are beginning to reverse this trend, slowly. Most economists have resisted its reversal. And continue to do so.

    • January 1, 2016 at 12:21 pm

      What you are saying is quite true, Ken; as to why, see my response to Egmont. To develop the argument you may find it helpful to “read between the lines” of an informal discussion of a dissident philosophy of science spelling out Egmont’s reference to Paul Feyerabend:

      http://plato.stanford.edu/entries/feyerabend/

      I found this (halfway through) particularly interesting. “In particular, [the positivist doctrines] imply what Feyerabend dubbed the “stability thesis”, that even major changes in theory will not affect the meanings of terms in the scientific observation-language. Against this supposition, Feyerabend defended what he called “Thesis I”, the idea that

      the interpretation of an observation-language is determined by the theories which we use to explain what we observe, and it changes as soon as those theories change. (ibid., p. 31).

      “Thesis I reversed the direction of interpretation which the positivists had presupposed. Instead of meaning seeping upwards from the level of experience (or the observation-language), Feyerabend had it trickling down from theory to experience. For him, theory is meaningful independently of experience, rather than vice-versa. The roots of this view clearly lie in his contextual theory of meaning, according to which meaning is conferred on terms by virtue of their participation in theoretical contexts. It seems to imply that there is no principled semantic distinction between theoretical terms and observation terms. And Feyerabend soon followed up this implication with his “Pragmatic Theory of Observation”, according to which what is important about observation-sentences is not their having a special core of empirical meaning, but their causal role in the production and refutation of theories”.

  4. January 1, 2016 at 11:54 am

    Economics as fool’s paradise
    Comment on Ken Zimmerman on ‘Clarence Ayres on the economic concept of capital’

    You say: “The confusion and uncertainty is inherent in the social sciences, including economics.” Here you have in a nutshell the triple self-deception of Heterodoxy which neatly explains its own failure.

    (i) I said “The confusion starts already with the elementary concepts income and profit.” This, clearly, has nothing to do with the distinction between social and natural sciences but only with logical consistency which applies to ALL sciences. Now, the fact of the matter is, that four heterodox economists apply four different definitions of income/profit.* Elementary logic tells one that not all four can be true (in fact all four are provably false**). This conceptual confusion is indefensible. Heterodoxy as it stands now is out of science just like Orthodoxy. The utter foolishness of Heterodoxy consists in idealizing its own unresolved contradictions as pluralism. Pluralism is a political concept which relates to opinions. In science there can be no pluralism of false theories.

    (ii) But things are far worse. When the representative economist is criticized for his gross conceptual blunders he defends them like a feudal prerogative. Both orthodox and heterodox economists subscribe to the Humpty Dumpty methodology “’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’.” (Carroll, Through the Looking-Glass).*** The utter foolishness of Heterodoxy consists in idealizing arbitrariness and sloppiness as superior methodology and praising Keynes and the Cambridge School of Loose Verbal Reasoning as role model.****

    (iii) The worst self-deception of Heterodoxy, though, is not to realize that economics, to begin with, is NOT a science of behavior (Hudík, 2011). Economics is not a social science like psychology/sociology and not a natural science like physics but a system science.***** The foolishness of Heterodoxy consists in sharing with Orthodoxy the fundamental error that economics is primarily about individual/social behavior. The not so new news is that the so-called social sciences are no sciences at all but what Feynman famously called cargo cult sciences because “By having a vague theory it is possible to get either result. … It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

    Science, to recall, is about knowledge. Waffling about things that cannot be known is left to sitcoms.

    As you correctly observe ‘confusion and uncertainty is inherent in the social sciences’. The fact of the matter is that Heterodoxy has not found in the last 100 years — roughly since Veblen — the way out of the fool’s paradise ‘where it is possible to get either result’ or, as Keynes aptly put it, where ‘nothing is clear and everything is possible’ (1973, p. 292). To the contrary, it is pretty obvious that most orthodox and heterodox economists feel well at home there.

    Heterodoxy, though, has one valid point: there is no good reason at all why orthodox fools should occupy more space in academia than heterodox fools.

    Egmont Kakarot-Handtke

    References
    Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
    Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

    * See post ‘Heterodoxy, too, is scientific junk’
    http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html
    ** See post ‘How the intelligent non-economist can refute every economist hands
    down’
    http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html
    *** See post ‘The Humpty Dumpty methodology’
    http://axecorg.blogspot.de/2015/08/the-humpty-dumpty-methodology.html
    **** See post ‘Sloppiness as economic methodology’
    http://axecorg.blogspot.de/2015/06/sloppiness-as-economic-methodology.html
    ***** See post ‘Still on the wrong track’
    http://axecorg.blogspot.de/2015/12/still-on-wrong-track.html

  5. Norman L. Roth
    January 1, 2016 at 3:04 pm

    Happy New Year Fellas !
    Still ruminating about the same stuff ?

    Actually the concept of capital has been far more developed beyond the “confusion” and “obfuscation” stage than most of you realize. Please read John Stewart Mill, Thorstein Veblen, Friedrich Hayek, Piero Sraffa, and Joan Robinson, et al on the subject. Where you will discover that “capital” is not a homogeneous substance that can be “accumulated” or just left to self-expand via the mechanism of compound interest: Or the conspiratorial manipulations of the monetary “Illuminati”. The least “helpful” obfuscations on the subject came from the fulminations of Karl Marx and his acolytes. Engels wasn’t quite so awful on the subject as old angry Karl was. {Keynes again} And the ruminations of the Social Creditors are not so far removed from Marx as the not so venerable Major Douglas would have denied. As the still great John Maynard Keynes pointed out. But Marx wrote a huge obscurantist ‘scientific’ rant on the topic. Without even once attempting to define CAPITAL or classify it. After all, how can you rant on and on {theologically ?} about a topic if it’s already been disclosed quite satisfactorily; both ontologically and epistemologically ? Obviously it’s still in the interests of Marx’s “progressive” heirs to still keep the subject obfuscated to death.

    We, at this end, strongly suggest that you make a New Year’s resolution to read TELOS & TECHNOS, especially Chapter 5, CAPITAL. And pay special interest to the sources in the bibliography. Maybe some of you might extend an invitation to yours truly, to teach the paradigm that dare not speak its name to you? I favour a didactic inter-active method that intentionally exposes its content to tests for falsification. After all, just think about whose career and academic interests are most at stake because of it.

    Please GOOGLE [1] Norman L. Roth {2} Norman Roth, Technological Time {3} Norman L. Roth, Origins of Markets {4} Norman L. Roth, Current Conception of the Standard of Life
    {5} Norman L. Roth, Economics of Work

  6. January 1, 2016 at 10:46 pm

    Yes, happy New Year, folks. We in the UK are not expecting one, with the politicians we have, but it has been satisfying to see Oxford economist Simon Wren-Lewis not mincing his words about their dishonesty: http://www.newstatesman.com/politics/2015/04/economic-consequences-george-osborne-covering-austerity-mistake.

    Yes, Norman: “Still ruminating about the same stuff”. But so are you. The nature of the obfuscation about Capital is pretty fundamental: not distinguishing reserves of resources from their fictitious and unstable monetary valuation, not even as complementary (orthogonal) dimensions of a two-dimensional entity. If you want to slag Marx, do so for still seeing these as opposite ways of progressing along the same channel going nowhere.

    Egmont too is getting more than a bit boring. Try contrasting your own scientific doctrines, Egmont, with the ruminations of Feyerabend at section 2.16 of the review I quoted above. Note its reference to philosophies rather than facts of science. The wise philosophy is the one which has the best outcome – like giving way to others when paths cross; and when trying to decipher a coded message the best method is to look for a keyword which leaves the whole message – not just a bit of it – coherent. The worst method is probably trying to guess the content of the message by attempting to deduce it from a few axioms. A fundamental theory cannot predict the future but it can help scientists to map empirical discoveries to produce the equivalent of a roadmap, giving others some idea of where to look for whatever is interesting them. I suggest that is just as much knowledge as being able to land a rocket on a space-station. Accuracy and technology are best appropriate to the need, as recognised in the truncation of unnecessary decimal digits and Schumacher’s advocacy of intermediate technology.

  7. January 3, 2016 at 11:03 am

    The future or economics: why you will probably not be admitted to it, and why this is a good thing
    Comment on ‘Clarence Ayres on the economic concept of capital’

    “… economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

    Economics is a scientific failure. Being stranded in the middle of nowhere, evidently, no one other is responsible than the confused drivers/passengers of the big omnibus themselves. These can be roughly divided into four sects: Walrasians, Keynesians, Marxians, and Austrians. What all have in common is substandard scientific abilities. Generally speaking, the four approaches are built upon unacceptable premises and therefore violate Aristotle’s first principle of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Posterior Analytics) http://en.wikipedia.org/wiki/Posterior_Analytics

    What are the premises that are accepted by the majority of economists? Krugman put it thus “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point …”. This starting point has to be abandoned because this premises are by no stretch of the imagination certain, true, and primary.

    At this critical juncture, the economist has to make up his mind: either to defend the indefensible beliefs of one of the four sects or to replace the foundational assumptions and to begin in earnest with the overdue reconstruction of the whole theoretical superstructure of economics. Based on the history of economic thought it is a fair bet that the representative economist will mess up things. However, this has to be proved, so here is the challenge.

    The most elementary economic configuration is the pure consumption economy which consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. This minimalist configuration is defined for one period by three equations.

    (i) Yw=WL wage income Yw is equal to wage rate W times working hours L,

    (ii) O=RL output O is equal to productivity R times working hours L,

    (iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

    If you cannot understand or accept these almost self-evident equations, which hold for the world economy as a whole and every closed national economy, you are out of economics. These premises are certain, true, and primary, or stated in relative terms, obviously superior to the neo-Walrasian axioms (Weintraub, 1985, p. 147) or to Keynes’s defective formal basis (1973, p. 63).

    For the graphical representation of the three equations see here https://commons.wikimedia.org/wiki/File:AXEC31.png. At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw, and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is the general case.

    Under the conditions of market clearing and budget balancing in each period the price follows from the three equations as P=W/R (1), i.e. the market clearing price is always equal to unit wage costs. To repeat, the price is here taken as the dependent variable, of course, it can be treated as an independent variable (2015). Also to mention is that money as transaction medium is left out here for brevity; for the full picture see (2015).

    The elementary consumption economy works as follows. If the wage rate W is lowered, the market clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are fully reflected by the market clearing price P. The pure consumption economy is reproducible for an indefinite number of periods.

    The changes from period to period are formally given by:

    (iv) Wt=Wt-1(1+wt) The wage rate in period Wt is given by the wage rate in the previous period Wt-1 and the rate of change for the current period wt.

    (v) Rt=Rt-1(1+rt) Analogous for the productivity.

    (vi) Lt=Lt-1(1+lt) Analogous for labor input.

    The rates of change for future periods wt, rt, lt are random variables with an a priori unknown distribution function. Because of this we cannot predict the price in period t=10 but we can test it in period t=10 or any other future period. As a matter of principle, (1) is a testable proposition.

    Given the enumerated premises and conditions, the market clearing price performs a random walk which is determined in turn by the random walks of wage rate and productivity. Equation (1) in combination with (iv) to (vi) replaces the ridiculous supply-demand-equilibrium model of econ101.

    From the premises and conditions follows for a start.

    — The elementary economy constitutes itself through the interaction of real AND nominal variables. There is no such thing as a ‘real’ economy, in other words, ALL ‘real’ models are a priori false.

    — There is no such thing as an equilibrium. The product market is cleared and the budget is balanced but the economy is not moved by an Invisible Hand towards some equilibrium, e.g. full employment. In other words, ALL equilibrium models are a priori false.

    — The commonplace quantity theory does not hold. Inflation/deflation depends initially on the development of wage rate and productivity and nothing else. If the period changes of the wage rate are exactly equal to the changes of the productivity i.e. wt=rt, absolute price stability prevails over all future periods despite the random variations of productivity and employment. Hence, price stability/inflation/deflation is not a monetary phenomenon.

    — The marginal principle, which ultimately derives from the unacceptable behavioral assumption of utility maximization, does not apply and plays no role at all for the price determination. ALL marginalist models are a priori false.

    — Supply and demand functions are nonentities. Well-behaved production functions and decreasing returns do not exist. These premises are neither required nor admissible.

    — Neither the income distribution nor the distribution of the real product depends on the marginal principle. ALL marginalist distribution models are a priori false.

    In the next analytical steps the number of firms is increased, which leads to the determination of relative prices, and the conditions of market clearing and budget balancing are lifted, which gives rise to the phenomena of inventory changes, profit/loss*, and the increase/decrease of the stocks of money and debt. It is pretty obvious that all economic phenomena can successively be derived from the three premises (i) to (iii). Stock-flow consistency is guaranteed ab initio.

    In order to develop the first economic theory since Adam Smith that satisfies the scientific criteria of formal and material consistency the unacceptable foundational propositions of Walrasianism, Keynesianism, Marxism, and Austrianism have to be abandoned. Scientists would immediately perform the necessary paradigm shift but economists are no scientists. Their acceptance of the maximization-and-equilibrium world for more than 100 years is forever disqualifying. Because of this, the still confused sorta-kinda economists are kindly asked to leave the big omnibus now.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586.

    * See ‘Profit and the collective failure of economists’
    http://axecorg.blogspot.de/2015/11/profit-and-collective-failure-of.html

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