Underlying the economic model is a deeper rooted contradiction

by Ralph T. Niemeyer

In 2011 ECONFIN decided to have the Euro-zone taxpayers continue to “rescue” Greece, although the majority of citizens across Europe understand that it is not the state but the banks that will be rescued, although they brought down the real economy by their casino-like gambling of Credit Default Swaps (CDS).

But, closer scrutiny reveals that it is not only the speculation in the financial markets that can be made responsible for the collapse, but a deeper-rooted contradiction within our present economic model. An economic model in which industries produce only for profit and not for actual demand is bound to collapse sooner or later. Our present economic model is not only being brought down by ruthless speculators, incompetent bank managers, merciless private equity sharks and hedge fund – Jedi Riders but foremost by fake mathematics.

Mainstream economists, in a drive to help political leaders over decades to justify exploitation of citizens while allowing profit maximization dreams for owners and shareholders come true, manipulated mathematics in a fundamental question on which our present economic model rests in it’s entirety.

The Neo-Classical Model, to a large degree developed by Milton Friedman and his Chicago School of Economics, is mathematically incoherent.

In order to be able to record destruction as ‘growth’ the neo-classical model set’s the axiom ∂F(x)/∂x = 0. If it was ∂F(x)/∂x = 1 this would mathematically mean that the function isn’t a continuum. But, in the neo classical economy one wants to uphold the theory that the relations investment-wage, capital & labour, production and productivity, growth and consumption are continuing functions and for this reason set the axiom ∂F(x)/∂x = 0.

This allows the economic model to substitute factors like ‘capital’ and ‘labour’ by whatever figures and assume that it is divisible. The neo-classical model is, in its entirety, based on this assumption, making it possible for this model – in theory – to show even then growth rates if consumption declines because of shrinking wages leading to retracting production cycles while the profit rate increases amid declining production output. Applying this model means that in theory even destruction would be measured as growth. But, the theorists of the neo classical model can’t trick mathematics. The function ∂F(x)/∂x per se can not be a continuous one, only if one set it “0” which defies any logic as non-continuous functions can not be differentiated.

The manipulated econometrics used by EU Commission, all member states and being taught at most universities also makes the accumulation of wealth outside the production cycle and outside of the control of central banks appear irrelevant.

According to the neo-classical ideology all the bubbles created by the financial market’s pyramids wouldn’t exist.

It has become obvious in the current crisis that a deregulated and liberalised global financial system had enjoyed the privilege of creating credit based funds almost without limitation. Under these circumstances central banks had almost no influence on the capital accumulation as well as the irrational movement and use of such liquidity.

The mathematically most elegant Neo-Classical Model giving us the illusion of a balance has been developed by the economists Kenneth Arrow and Gérard Debreu. Mathematically it is impossible to prove it wrong but a closer scrutiny reveals that its underlying assumptions without which its conclusions could not be upheld.

It is, for instance, assumed that in the Arrow-Debreu model every market participant knows exactly about the market conditions and is even able to predict the probability of future developments.

The employee would know that by a 30% probability he could expect a pay increase in two years time while the likelihood that he be fired in the next year would be 70%. In this model a person would also know by which probability one would be married in the next ten years and how likely it would be that one died in the next 15 years.

In this wonderful model everyone has sufficient access to credit in order to bridge bad times or to invest and build up an own business. Even insurances against any adversities of life are possible within the Arrow-Debreu – Model.

Even more unreal are the assumptions of the neo-classical model when it comes to the behaviour of corporations. One assumes, of course, a perfect competition in which no company has the slightest influence on prices. This is only possible because it is assumed that regarding the production costs the scalar revenue would either decline or remain constant but in no case increase.

Declining scalar revenue means that the bigger a company is becoming and the higher its production volume, the more expensive every additionally produced unit would be. The revenue of increasing size of the company therefore is negative. If that was true there would be no danger of an overheating economy, there wouldn’t be any mergers and fusions, take-overs and by this not the danger that economic monsters could pose an overwhelming economic power.

But, that this is not true has become self-evident over the past decades of mega-mergers and fusions.

Of course a big company will grow faster than any smaller company as it can re-finance itself cheaper, buy resources and energy at a better price and can sell at a higher price because it can, due to it’s market dominance, influence the sale’s prices.

In any case, increasing scalar revenues contain the danger of creating an oligopoly. Perfect competition in the true meaning of the Neo-Classical Model is a factual impossibility.

But, big companies aren’t only more efficient because they can be more productive but also because they can handle an increasing demand and also gain political influence.  If 3 or 4, or let’s say even 20, companies determine the development of an entire industry, then the investment decisions of those companies become relevant for a region or even an entire state. No democratically elected representative can resist that power. That’s why politicians rescue banks.

When in the 1990s the European internal market was liberalised the strict cartel controlling mechanisms got watered down. The blind Laissez-Faire attitude towards major corporations that by European-wide mergers created mega-conglomerates had been justified by EU Commission and member state governments citing a bigger market that could still provide for competition.

But, we have seen that market dominance does not only develop when there is no competition any longer, but already when just a somewhat limited amount of major corporations secured their share of the cake.

Price fixing is at hand. This is evident in the EU for its most important economic areas such as food, capital goods, car industry, energy and water.

The political problem that arises is that other than the markets the EU member states have not become bigger but are now confronted with major corporations that handle by far bigger budgets than what any elected government, be it conservative, social-democratic or liberal-green, ever controls.

The biggest mistake committed at the founding of the European Community and later the EU has been that the economic power of major corporations got cemented in a way that let the European institutions advance to a lobby-machinery governing against the declared will of the vast majority of European citizens.

The same applies to the WTO, G8 and IMF sponsored so called “Globalisation” which sole purpose is to manifest a world order that provides for unhindered investment and capital accumulation opportunities on a world wide scale regardless of what would be in the interest of citizens.

An economic model that produces only for profit but not for actual demand in the end, we witness today, becomes anti-economical no matter how much it’s protagonists try to manipulate it’s scientific base.