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Trading in Myths

from Lars Syll

Pretending that the distribution of income and wealth that results
from a long set of policy decisions is somehow the natural workings of the
market is not a serious position. It might be politically convenient for
conservatives who want to lock inequality in place. It is a more politically
compelling position to argue that we should not interfere with market
outcomes than to argue for a system that is deliberately structured to make
some people very rich while leaving others in poverty.

rigged_coverPretending that distributional outcomes are just the workings of the market is convenient for any beneficiaries of this inequality, even those who consider themselves liberal …

But we should not structure our understanding of the economy around political convenience. There is no way of escaping the fact that
levels of output and employment are determined by policy, that the length
and strength of patent and copyright monopolies are determined by
policy, and that the rules of corporate governance are determined by policy. The people who would treat these and other policy decisions determining the distribution of income as somehow given are not being honest. We can debate the merits of a policy, but there is no policy-free option out there.

This may be discomforting to people who want to believe that we
have a set of market outcomes that we can fall back upon, but this is the
real world. If we want to be serious, we have to get used to it.

austerity22No one ought to doubt that the idea that capitalism is an expression of impartial market forces of supply and demand, bears but little resemblance to actual reality. Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models.

  1. August 30, 2017 at 7:53 am

    The abject failure of orthodox and heterodox distribution theory
    Comment on Lars Syll on ‘Trading in Myths’

    For most people economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters and the hardships of the honest and exploited/alienated 99-percenters. This is the soap opera view of economics.

    The scientific view is not focused on the human drama/farce/myth but on the functioning of the economic system as a whole. Economics leaves all questions about Human Nature/motives/behavior/action to psychology, sociology, anthropology, history, political science, biology, etcetera.#1, #2

    Because NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works all behavioral approaches have failed. The actual state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle.

    Therefore, economics has to undergo a paradigm shift. Economic analysis has to be based on entirely new macrofoundations and the fundamental questions have to be put again at the top of the agenda and answered with the help of better analytical tools. The key concepts of classical economics were profit, capital, exploitation, and classes. So let us, first of all, revisit profit.

    The pure 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.#3

    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 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.#4

    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 Profit Law.

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

    Now, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W1 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.

    However, this situation cannot last for long if profit has been zero in the initial period. In this limiting case firm 2 makes a loss which is exactly equal to firm 1’s profit. The arbitrary wage rate cut of firm 1 does NOT increase the profit for the business sector as a WHOLE but only REDISTRIBUTES it between the firms.

    Seen from the perspective of a single firm, the antagonism of wages and profits is 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, i.e. Qm=0, and the same is true for the household sector as a WHOLE, i.e. X=O and W/P=R. 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.

    For the economy as a whole, the classical antagonism of wages and profits is an optical illusion. This has a bearing on the POLITICAL notion of classes. There is NO distributional conflict about output between profits and wages. When classes are defined according to these economic categories the actual conflict materializes WITHIN the classes.

    When, in the limiting case, there are two groups of workers and two groups of capitalists and the first group of capitalists exploits the first group of workers by slashing the wage rate, then the exploiters OBJECTIVELY act in the interest of the second group of workers whatever their own subjective motives may be. The second group of workers has no economic interest to overcome the wage discrimination of the first group, yet the second group of capitalists has indeed because its profit is indirectly affected. On a deeper level, the relation between the two groups of capitalists is antagonistic. The same holds for the two groups of workers. What looks like exploitation is in fact CROSS-OVER EXPLOITATION WITHIN the Marxian classes. This explodes the idea of a ‘natural’ common class interest and by consequence of a ‘natural’ class war.

    The myopic agents, workers and capitalists alike, are blind to the interdependencies of cross-over exploitation and therefore prone to the Fallacy of Composition. The generalization of partial effects has the compelling logic of the profit and loss account and the irrefutable empirical evidence of firm 1 on its side. Indeed, what could be more convincing? Wages down, profits up, it works. The INVISIBLE redistribution of profit and output is anonymously effected behind the agents’ backs by the market clearing price. Neither capitalists nor workers understand how the market system works. Neither do economists since Smith, Ricardo,#5 and Marx.#3 Neither does Lars Syll.

    Because the profit theory is false since Adam Smith, both orthodox and heterodox distribution theories are false until this very day. There is no such thing as good heterodox guys and bad orthodox guys or vice versa; economists ― ALL of them ― have to be expelled from the sciences.

    Egmont Kakarot-Handtke

    #1 Economics is NOT about Human Nature but the economic system
    https://axecorg.blogspot.de/2017/05/economics-is-not-about-human-nature-but.html

    #2 Economics is NOT a social science
    https://axecorg.blogspot.de/2016/08/economics-is-not-social-science.html

    #3 For details see ‘Profit for Marxists’
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

    #4 Wikimedia, Pure Consumption Economy

    #5 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932119

  2. August 30, 2017 at 1:23 pm

    We’re not in Adam Smith’s time. Little in modern economics has to do with allocation of scarce resources, nor is the market primarily a regulator of quantities and prices (it’s a means to discover and fulfill diverse needs).

    The central problem of economics today is how to preserve the merits that our system of “autocratic survivor” firms affords, in terms of innovation and efficiency, without the crushing inequality that it spews forth.

  3. Garrett Connelly
    August 30, 2017 at 2:45 pm

    My impression is the false position that we live in democracies with free markets is brainwashing.

    No amount of brainwashing can change the reality that capitalism leads to extinction of humanity possibly followed by a sterile biosphere.

  4. September 2, 2017 at 10:54 am

    We need to separate the window dressings of capitalism from what defines capitalism and makes it what it is. At its core capitalism is the investment of money in the expectation of making a profit. And the larger the profit the better for the investors. The secret of making high profits is to secure monopolies by any means possible, exclude competition, and control markets in all ways possible. The coalescing of these ways of performing economics was in large part historical accidents. In other words, capitalism is not natural and is not the result of an explicit plan. Over time other things are attached to this core. “Free’ market mythology, scarcity, wage labor, preferences and utility maximizing, property laws, and more math than any sane person can deal with. Capitalist ways of life will literally convert everything into a resource – something that can be exchanged for profit in a never-ending process. Capitalism began in the UK for lots of reasons. Mostly because the UK was the center of world trade and industrialization, and had an established relationship between landlords, tenants, and peasants that mirrored the capitalist/labor arrangements of capitalism. Capitalism expanded and spread rapidly, because as wealth became ever more concentrated, it became easier for those who amassed mammoth profits from capitalism to control the form of future human societies. Today we live amidst the world this process has created. From basic dichotomies like capital/labor to the fundamentals of law making and family life capitalism is the foundation of western life today.

    • robert locke
      September 3, 2017 at 8:23 am

      Ken, your statement about capitalism is convincing, if one stays inside the prison of Anglo-America. But you must know about German Ordoeconomics, the Freiburg school whose thought underpinned the German Social Market economy, under Adenauer and Erhard.

      I used their ideas, especially those of Wilhelm Roepke, when asked to give a keynote address at the 4th Lustrum of the founding of the Management School in Groningen, NL, under the theme, “Social Justice in a Free Market Economy.” Here is what Widepedia says about Roepke.

      “For Röpke, rights and moral habits (Sitte) were key elements which the Central Bank and State (opposed to the Market-Economy) needed to subtly help organise. With a “conforming” social, economic, and financial policy, the task of which is to protect the weak “beyond the market,” to equalize interests, set rules of the game, and limit market power, Röpke strove for an economic order of “economic humanism,” something which he also referred to as the “Third Way.”
      Röpke stood for a society and social policy in which human rights are given the highest importance. He believed that individualism must be balanced by a well-thought-out principle of sociality and humanity. Significantly, Röpke’s economic thought is highly congruent with Catholic social teaching. As he grew older, Röpke increasingly appreciated the overall, general benefits of a society that embraces spirituality, particularly in contrast to societies where spirituality is marginalized or demonized.[2]”

      What about the third way, which is so different from your description of capitalism, and which includes the moral dimension, that your description of capitalism denies.

      I’m not an admirer of capitalism, nor am I a socialist, socialism having failed every moral test or test of efficiency, and collapsed in the late 20th century, but I do think the third way is a valid alternative to neoliberal, investor capitalism, a la anglosaxonia.

      • September 4, 2017 at 6:17 am

        Robert, you are of course correct. I’ve always thought it interesting that Roepke is claimed by conservatives and liberals. Conservatives like that he was the principal champion of a humane economy: that is, an economic system suited to human nature and human society, as opposed to systems bent upon mass production regardless of counterproductive personal and social consequences. He was also an opponent of socialist and other “command” economies, while at the same time a bold and perceptive critic of an inhumane “capitalism.” Liberals liked him for the same reasons. What he did for Germany after WWII cannot be over emphasized. The “German miracle” turned Germany around after the war, even in the face of the occupation forces/rules and a destroyed infrastructure. Lowering taxes, while rebuilding industrial plant, and taking advantage of Germany’s highly skilled workforce turned Germany around, even before Allied troops left. By the mid-1960’s Germany was a world class economic performer.

        America after the War was a different place. Profit was still king but few even noticed, and even fewer cared. The US was awash in money and good jobs. As the only major industrialized nation left standing the US manufactured and sold to the entire world. It would be 20 years before Germany, Japan, the UK, and the other nations involved in the war would show signs of significant recovery. In his 2009 State of the Union address, President Obama likened his stimulus plan to popular government initiatives in post-World War II America: “In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle class in history…. Government didn’t supplant private enterprise; it catalyzed private enterprise.” Paul Krugman has also extolled the role of government in World War II and the post–World War II recovery, claiming that “World War II was, above all, a burst of deficit-financed government spending…[that] created an economic boom… [that] laid the foundation for long-run prosperity.” Prosperity that lasted till the 1970’s. The debate: did this prosperity die a natural death or did neoliberal economists and politician kill it. I lean toward the latter.

        A similar question can be asked about Germany. Germany is no longer the miracle society needing help and support from such things as the Marshall Plan. It is one of strongest and most productive societies in the world. And it is also at times a bully and austerity focused in its relations with the EU, particularly the weaker members. Germany has grown up but not necessarily more humane or more kind. It sometimes doesn’t play well with others.

      • robert locke
        September 4, 2017 at 8:18 am

        “Germany has grown up but not necessarily more humane or more kind. It sometimes doesn’t play well with others”

        You are right, Schaeuble’s role as enforcer of austerity in the Greek crisis, show once again that Germany (as in the Prussian crisis over liberalism in the 1860s) reached a turning point in history and didn’t turn, i.e., Germany failed to humanize its leadership of Europe. We live in a demoralized Europe as consequence.

        Another turning point came with the invasion of UK=US finance capitalism into European banking circles, which brought about the 2008 finance crisis. German commercial banks did not profit from joining the Anglo-American global financial process, think only of what happened to Dresdner and Deutsche Bank.

        The German government is at a crossroad; it can continue to participate in the finance capitalist system headquartered in London and New York, or it can use its power and influence to dismantle the worst aspects of finance capitalism. Otherwise Roepke’s third way will be a Sackgasse.

      • September 4, 2017 at 9:40 am

        Robert, I agree. Germany is at a turning point in its history. As we see now in the US, it doesn’t take much to push a society off course and into collapse or conflict. In less than a year the US moved from hope and optimism to despair and fear. And it seems likely to get worse.

        I will be visiting family in Germany for Christmas. I plan to stay for a month or so to ask some questions of friends in the German government. Maybe it’s not as bad as you and I believe. Or, maybe it’s worse.

      • robert locke
        September 4, 2017 at 5:47 pm

        Let me know where you’ll be. I live in Goerlitz, perhaps we could have a glass of wine together in some café.

  5. September 6, 2017 at 3:40 am

    Comments by Egmont Kakarot-Handtke seemed interesting. At least, he is right when he claims that “economics has to undergo a paradigm shift” and economic science should be focused on “the functioning of the economic system as a whole.” His claim that “Economics is NOT about Human Nature but the economic system” is right. So I visited and read some of his papers uploaded with the trademark AXEC and I was disappointed.

    Here are some reasons:

    (1) His axiomatic system is a set of statistical concepts by which to describe what happened in the past. There is no observation or arguments on laws of economics, i.e. on how economic system works.

    (2) His starting point in construction his economics is pure consumption economy. He is wrong to start from consumption economy, because it only leads to pure exchange economy. Modern economy (say since the industrial revolution) is fundamentally structured by production economy. There was a kind of phase transition. One cannot arrive to understand the essential characters of modern capitalism or actual market economy.

    (3) He is based on a wrong dichotomy of micro and macro and seeks macrofoundations. He is not aware that there are cyclic causal relations between the whole structure and processes and people’s behaviors as a result of evolution in this macro structure and processes. In a word, we should investigate the micro-macro loop in the economy.

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