comments on rwer issue no 75

real-world economics review issue no. 75  – 27/06/16
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  1. Mott Greene
    June 30, 2016 at 6:15 pm

    In Re: Rethinking Piketty: critique of the critiques
    (a work in progress)
    Suzanne Helburn [University of Colorado at Denver, USA]
    (1)
    In the section where you outline Piketty’s argument I suggest that you not use the ratio K/Y as part of your description of his argument as Piketty does not use that notation, but simply s/g. You may wish to use K/Y yourself but at least you should inform your readers, a number of whom will probably will not have finished Piketty, that you are using your own notation and not his. However familiar K\Y may be to economists, there is no K/Y anywhere in the book.

    This is especially important when you are claiming to quote Piketty directly. You have him quoted as saying, on page 166
    Specifically, Piketty states “In the long run the β or K/Y is related in a simple and transparent way to the savings rate s and to the growth rate g according to the following formula β = s/g”.

    What Piketty says on 166 in the HUP text I am looking at is

    “In the long run the capital/income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g according to the following formula:

    β = s/g”.

    He doesn’t say K/Y and he does not italicize,as you have done, the words “simple and transparent.” He also says ( a minor point, but verbatim is verbatim) not “and to the growth rate” but “and the growth rate.”

    (2)

    Every prospective commentator on and reviewer of Piketty should have to sign a declaration that he or she has read and understood your comment below. How did most everyone miss this the first time around, especially the harshly critical and dismissive reviews?

    Fundamentally, it is important to recognize that Piketty’s accomplishment is empirical. He has amassed the data necessary to make his argument, buttressed by useful descriptive detail. He makes no theoretical claims. Given all the criticism levelled by mainstream economists on this point, it is useful to note that in the 700 pages of the book, only two-and-a-half pages in chapter 6 are devoted to “growth theory”

    Eloquently put!

  2. July 1, 2016 at 10:39 pm

    The other half plus the hitherto missing true foundations of macroeconomics
    Comment on Richard Koo on ‘The other half of macroeconomics and the three stages of economic development’

    Richard Koo’s paper about macroeconomic development is descriptively accurate and historically rich in detail. It is far above the low level of familiar orthodox and heterodox economics. What is lacking, though, is a sound theoretical foundation. This cannot be otherwise because economics as a whole lacks sound foundations. There is no longer anything to dispute, BOTH microeconomics and macroeconomics is a scientific failure.

    Koo puts it thus: “Macroeconomics is still a very young science compared to such disciplines as physics and chemistry. It started when Keynes began taking about the concept of aggregate demand in the 1930s, only 85 years ago. As a very young science, it has achieved only limited coverage of the broad range of economic phenomena and remains prone to fads and influences.”

    Reality is far worse, indeed. Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized Keynes’s foundational blunder in 85 years (2011b; 2014).

    Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (1973, p. 63)

    This two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

    Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular ALL I=S/IS-LM models (2011a; 2013b).

    Koo starts his analysis as follows: “One person’s expenditure is another person’s income. It is this unalterable linkage between the expenditures and incomes of millions of thinking households and businesses that makes the study of the economy both interesting and unique.”

    Note that Koo’s first sentence is identical with Keynes’s. For every economist this proposition is pure common sense ― a mere accounting identity. As a matter of fact, it is provably false and this explodes the whole of macro. Economists do not grasp the elementary mathematics of accounting (2012a) and this goes a long way to explain why economics has never risen above the proto-scientific level.

    To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations. In other words, the faulty axiomatic foundations of standard economics have to be replaced.

    In the following a sketch* of the formally and empirically correct price, employment, and profit theory is given. The most elementary version of the objective structural employment equation reads (2012b):

    From this equation follows:
    (i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
    (ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
    (iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

    The complete and testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

    Item (i) and (ii) cover Keynes’s and Koo’s arguments about aggregate demand. What the Keynesian multiplier lacks is the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

    For the relationship between real wage, productivity, profit and real shares see (2015, Sec. 10)

    The correct profit equation reads: Qm = Yd+I-Sm (2014, p. 8, eq. (18)). Legend Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure. The interaction of I and Sm underlies Koo’s description of economic expansion and balance sheet recession (2013a). What is entirely missing in Koo’s description is the interaction of Qm and Yd.

    The profit equation gets a bit longer when import/export and government is included.

    Note that OVERALL profit and by consequence the income distribution has NOTHING to do with productivity or low wages or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Not to realize this is the fatal insufficiency of economists’ feeble-minded ruminations about the relationship between (average) wage rate, price, productivity, and employment.

    Keynes’s approach is macrofounded but incomplete because he had no deeper understanding of the profit, the credit and the price mechanism. Koo’s approach is a clear improvement with regard to the credit mechanism but shares the fundamental conceptual error which is embodied in this simple proposition: Income = value of output. It is as commonsensical and scientifically false as: the sun goes up.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2011a). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL http://ssrn.com/abstract=1911796
    Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438
    Kakarot-Handtke, E. (2012a). The Common Error of Common Sense: An Essential
    Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
    1–23. URL http://ssrn.com/abstract=2124415
    Kakarot-Handtke, E. (2012b). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
    http://ssrn.com/abstract=2130421.
    Kakarot-Handtke, E. (2013a). Redemption and Depression. SSRN Working Paper
    Series, 2343561: 1–28. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343561
    Kakarot-Handtke, E. (2013b). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL http://ssrn.com/abstract=2220651
    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792
    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. London, Basingstoke: Macmillan.
    Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and
    Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34.
    URL http://mpra.ub.uni-muenchen.de/20557/

    * Students are referred to the working papers for all details and the consistent formal
    underpinning of all assertions
    http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665

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