June 22, 2018

Right troll left troll pack your bag and get out of economics

Comment on Sandwichman’s ‘War is Peace, Freedom is Slavery, Ignorance is Strength’

Blog-Reference

When one Sandwichman calls one Anonymous on an economics blog a racist and right-wing troll then it is pretty obvious that two morons are abusing economics as a cover for political agenda pushing.

Most people have lost sight of the fact that there is a political realm and a scientific realm. Both run on different principles and therefore have to be kept strictly apart. The reason is simple: science cannot improve politics but politics always and everywhere corrupts science. Economics is a case in point.

There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.#1 And this means, in turn, that economic policy guidance has NO sound scientific foundations since Adam Smith/Karl Marx.

Economists are failed/fake scientists: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum) Fact is that economists do not have the true theory. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the foundational economic concept profit wrong.

Scientific incompetence and political fraud are two sides of the same coin. When folks, who are supposed to know how the monetary economy works but failed to this day to figure it out, climb on a soapbox and start talking about democracy, liberty, freedom, the road to serfdom, the invisible hand, sovereignty, capitalism, communism, fascism, populism, the state as monster/savior, the open society, the deep state, and the alleged lessons of history, then the 200+ years old fraud of Political Economy is reenacted.#2

In order that economics finally becomes a science, all political clowns have to be thrown out. Right-wing or left-wing counts for nothing. In the political Circus Maximus anybody has the right of free speech, in the scientific realm only those who are determined and able to contribute to the growth of knowledge.#3

Egmont Kakarot-Handtke


#1 Economics: 200+ years of scientific incompetence and fraud
#2 For details of the big picture see cross-references Political Economics
#3 Shut up! Do first your macroeconomic homework!

Related 'Nietzsche, entropy, full employment, and NO class war'

***
REPLY to Sandwichman on Jun 23

The core issue of economics is, of course, employment theory. Keynesians claim to this day that Keynes has solved the unemployment problem in principle in his General Theory of Employment, Interest and Money. This is a plain self-delusion, employment theory is still at the proto-scientific level. One reliable indicator of the desperate state is that the Lump-of-Labor ‘theory’ is still around.

The situation will NOT be improved by documenting in great detail how the ‘theory’ has been used and abused by politicians and economists alike over the last 200+ years. Economists should know that science has never been advanced by sifting through political BS.

Fact is, though, that economics is a science without scientists.#1 Economists have not produced one small piece of science but one giant heap of propaganda material. In order to see this, one has only to scan economic texts for keywords like democracy, liberty, freedom, slavery, serfdom, exploitation, happiness, free/perfect markets, the invisible hand, sovereignty, capitalism, communism, fascism, populism, the open society, the faceless bureaucracy, inspiring/corrupt managers, historical cliches from the decline of Rome to Weimar, and finally personal cliches from Nero to Hitler and Stalin. The title of Sandwichman’s post is an example of brain-dead rhetoric: ‘Goebbels or Gompers?: A Closer Look at Stephen Miller’s Immigration Manifesto.’

Without reading more than the first three words, one can know that the whole piece is about anything but economics.#2

It is pretty obvious that any scientific ambition economics may once have had is now gone. Economics has degenerated to storytelling/journalism/sitcom and the only hope left is that it cannot get worse and that EconoSpeak has finally arrived at the bottom of the proto-scientific shithole.#3


#1 For details of the big picture see cross-references Failed/Fake Scientists
#2 Right troll left troll pack your bag and get out of economics
#3 Economics has arrived at the bottom of the proto-scientific shithole

***
REPLY to Anonymous on Jun 23

From the title ‘Why Economists Dislike a Lump of Labor’ alone everybody with an IQ above room temperature can safely conclude that Sandwichman is lost in the proto-scientific woods. Science is about true/false and NOT about like/dislike.

Only people who have been conditioned at Facebook with Skinner’s like/dislike reflex button have some weird interest in what retarded economists feel about the 200+ years old Lump-of-Labor corpse.

What do you think about burying the whole issue at the Flat-Earth-Cemetery?

June 21, 2018

Shut up! Do first your macroeconomic homework!

Comment on Lars Syll on ‘The microfoundations crusade’

Blog-Reference and Blog-Reference

Lars Syll summarizes: “But one thing I do know, is that the kind of microfoundationalist macroeconomics that New Classical economists in the vein of Lucas and Sargent and the so-called New Keynesian economists in the vein of Mankiw et consortes are pursuing, are not methodologically coherent … And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductivity are the hallmark of science tout court.”

What the representative economist has to realize is:

• Microfoundations are dead for 140+ years. Because of this, microfoundatlist macro has never been anything else than a stillborn approach.

• All microfounded approaches invariably crash against the methodological wall of the Fallacy of Composition. Methodologically, there is no such thing as microfounded macro.

• Being content with superficial criticism, Heterodoxy never realized what the lethal defect of Orthodoxy was and never developed an alternative. In methodological terms, Heterodoxy never executed the overdue paradigm shift from microfoundations to macrofoundations.

• Keynes came very close to the paradigm shift but then messed it up. After-Keynesians, with the exception of Allais, failed to this day to spot the blunder in Keynes’ macrofoundations.

Walrasian microfoundations and Keynesian macrofoundations are proto-scientific garbage. Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false. Methodologically it holds for the inescapable paradigm shift: If it isn’t macro-axiomatized, it isn’t economics. *

Egmont Kakarot-Handtke


Macroeconomics ― dead since Keynes
How Keynes got macro wrong and Allais got it right
The demise of phony experts: macroeconomics is provably false
True macrofoundations: the reset of economics
How to restart economics
First Lecture in New Economic Thinking
The new macroeconomic paradigm
From false microfoundations to true macrofoundations
Macroeconomics: self-delusion and empty promises
Macro for retarded economists
Macro for dummies
Finalizing the Keynesian Revolution
Keynesians ― terminally stupid or worse?
How to finally hammer down the nails in the coffin of Monty Python economics
If it isn’t macro-axiomatized, it isn’t economics

Related 'Economics: a science without scientists' and 'The fundamental problem of economics: scientific incompetence aka stupidity' and 'Getting out of the economics swamp'. For details of the big picture see cross-references Scientific Incompetence and cross-references Failed/Fake Scientists and cross-references Axiomatization.

*

June 20, 2018

Nietzsche, entropy, full employment, and NO class war

Comment on David Ruccio on ‘Utopia and work’

Blog-Reference

David Ruccio resumes: “The goal of mainstream economists is to get everybody to work. As a result, they celebrate capitalism for creating full employment — and worry that capitalism will falter if not enough people are working.” However, philosophers have long been aware that full employment is not such a good idea: “According to Friedrich Nietzsche …, the dignity of labor was invented as one of the ‘needy products of slavedom hiding itself from itself.’ That’s because, in Nietzsche’s view (following the Greeks), labor is only a ‘painful means’ for existence and existence (as against art) has no value in itself. Therefore, ‘labour is a disgrace’.”

Let us, first of all, take folk psychology out of the issue. Labor must be seen against the background of entropy. Entropy brings humans eventually down to zero. The intake of goods, energy, etcetera slows this process down. The production of goods, though, requires labor input.

Imagine the following initial state. Every living person gets a plot of land in the form of a hexagon. This land delivers all that the person needs. We can put as many hexagons together as we like. Hexagonland is large and symmetrical. There is no scarcity of land or resources. Each occupant works Li=9 hours per day, has 1 hour leisure, and needs 14 hours for regeneration. The necessary and sufficient output is Oi per day. There is no boss, no exploitation, no slavedom, no government. Whether the Hexagonians think that labor is a disgrace is a matter of indifference. If they stop working, they produce no output, entropy takes over and they drop dead in a little while. This is the original material human condition. Labor is a means to counteract entropy. Without external limitations or disturbances, it can go on for an indefinite time.

Now, we switch to the monetary economy. The elementary production-consumption economy is given with this set of macroeconomic axioms: (A0) The objectively given and most elementary systemic configuration 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.

Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given as P=W/R (1), i.e. the market clearing price is always equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.

From (1) follows the real wage as W/P=R (2). The output of the i-th worker is Oi=RLi. For a start, it is assumed that individual labor time Li and output Oi are exactly identical to the situation in Hexagonland. Up to this point, the material situation of the people of Hexagonland has not changed. What has changed is that they work in a firm, get an income, and spend it for consumption goods.

The graphical representation of the elementary production-consumption economy is shown on Wikimedia.#1


Monetary profit of the business sector is defined as Qm≡C−Yw and monetary saving of the household sector is defined as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing C=Yw total monetary profit is zero.

So, profit of the business sector is zero, the workers get the whole output O, the real wage is equal to the productivity.

Now, the organization of the production process is improved through the division of labor and the productivity increases. With unchanged individual and total labor time, total output O increases. The market clearing price falls according to (1) and the real wage increases according to (2). The profit of the business sector is still zero because of C=Yw.

From the observer standpoint, the economy has two limiting paths open, (i) individual labor time Li is kept unchanged and output Oi increases, or (ii), output Oi is kept constant and labor time Li is reduced. If productivity is increasing over time, individual labor time Li goes asymptotically to zero.

Let us call this the Diogenes Solution. Curiously, Nietzsche, when he speaks of  ‘the’ Greeks in the preface to The Greek State never mentions Diogenes. In order not to erect another False-Hero-Memorial, though, it should be mentioned that Diogenes was also a practical economist who was banished from Sinope “when he took to debasement of currency” (Wikipedia). Money creation is NOT meant with the Diogenes Solution but fixing the output Oi at some cultural minimum = maximum.

It holds for both limiting paths and all combinations in-between that the real wage is equal to the productivity, the workers get the whole output, and macroeconomic profit is zero. So, as productivity increases, the Legitimate Sovereign can choose between more material wealth or more leisure or a combination of the two. For the business sector, all combinations are indifferent because profit is zero in all cases as long as the household sector’s budget is balanced, i.e. C=Yw. Macroeconomic profit depends neither on labor time nor on productivity. This is a bit surprising for economists and philosophers who are still stuck in the old world of Walrasian, Keynesian, Marxian, Austrian economics, exploitation, and class war.#2

Egmont Kakarot-Handtke


#1 Wikimedia, The elementary production-consumption economy
#2 Ricardo and the invention of class war

Related 'Capitalism, poverty, exploitation, and cross-over exploitation' and 'Employment theory as an example of proto-scientific soapbubbling' and 'The set screws of overall and individual employment' and 'True macrofoundations: the reset of economics.

***
REPLY to Sandwichman on Jun 21

The Lump-of-Labor Fallacy is NOT solvable by comparing/confronting the statements of politicians on the issue of full employment as you do in your post War is Peace, Freedom is Slavery, Ignorance is Strength.

For the scientifically/philosophically correct answer see the Diogenes Solution in Nietzsche, Entropy, Full Employment, and NO Class War

June 19, 2018

The Fisher Effect ― another piece of nincompoop-economics

Comment on David Glasner on ‘Keynes and the Fisher Equation’

Blog-Reference

Roughly speaking, the Fisher Equation is about the relationship between nominal and real interest rates under inflation and the Fisher Effect is about the effects of changes in expected inflation on the nominal interest rates.#1

In the following, it will be demonstrated that the Fisher Effect is due to a design flaw of the monetary economy. Neither Fisher nor Keynes has realized this because they never understood how the economic system works.#2

As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic 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.

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). This is the most elementary form of the macroeconomic Law of Supply and Demand.

The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#3


The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.

Monetary profit for the economy as a whole 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 surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

When government is added, the Profit Law reads Qm=(G−T)−Sm. Legend: G government expenditures, T taxes.

In the initial period G, T, Sm are all zero. Hence macroeconomic profit Qm, too, is zero.

In period 1, there is a government sector deficit but it is exactly equal to the household sector saving. Hence Qm is again zero. The government’s debt consists of overdrafts at the central bank Ω. The household sector’s savings consist of deposits at the central bank Φ. Both sides of the central bank’s balance sheet are equal.

Now, the interest rate on deposits is zero and the interest rate on government debt is r. The rate r is set such that it covers exactly the central bank’s wage bill, i.e. rΩ=WL* (2).#4, #5

Under these simplified conditions, one has for the price of the consumption good P=W/R and for the rate of interest r=(W/Ω)L* (3).

In period 2, the wage rate W is doubled. All real variables remain unchanged. According to (1) the price P doubles. According to (2) either (a) the nominal rate of interest r doubles and the nominal debt Ω remains constant, or (b), the nominal rate of interest remains constant and the nominal debt doubles.

Needless to emphasize that (2b) is the correct solution. The institutional setting, though, is such that the nominal value of the debt does NOT move in lockstep with inflation.

In the correct institutional setting for the monetary economy, the nominal rate of interest does NOT move with inflation but nominal debt does. So, there is NO such thing as a Fisher Effect, the nominal rate r remains constant. And because of this, inflation expectations have NO effect on the nominal interest rate.

In a well-behaved inflation, the nominal interest rate r remains constant, the real interest rate r'=r/P falls and the nominal debt increases Ω'=ΩP such that nominal interest payments rΩ' increase and real interest payments r'Ω' remain constant.

Egmont Kakarot-Handtke


#1 Wikipedia, Fisher Equation
#2 Macroeconomics ― dead since Keynes
#3 Wikimedia, Idealized transaction pattern
#4 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#5 The Emergence of Profit and Interest in the Monetary Circuit

June 18, 2018

Wrapping up the MMT narrative

Comment on Tom Hickey on ‘The Wage[s]-Lump Doctrine ― still dogma after all these years’

Blog-Reference

Tom Hickey puts the MMT narrative straight: “… it’s contradicted by Warren Mosler’s account of how he discovered what he called ‘soft currency economics’ through an operationally-based understand of government finance, from which he made a pile of $. Subsequently, Warren met Randy Wray and then Bill Mitchell, who jointly developed the economics that came to be called MMT. Warren funded it.”

This information helps to wrap up this thread.*

• MMT is the most recent incarnation of Political Economy. Political Economy abuses science since Adam Smith/Karl Marx for the purpose of agenda pushing.

• Political Economy started as open propaganda, became more sophisticated over time, and is now a mixture of propaganda and science with varying proportions of the component parts. In most cases, the science ingredient does not satisfy the criteria of material and formal consistency. So what remains in the end of political economics, is a piece of communication with zero scientific content.

• The scientific component of MMT is provably false. More precisely: MMT’s foundational macroeconomic balances equation, i.e. (X−M)+(G−T)+(I−S)=0, is false. The true equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0.#1

• The true equation says, inter alia, Public Deficit = Private Profit.

• The economic policy guidance of MMT boils down to money-creation/deficit spending. Deficit spending has multiple effects, the main and immediate effect is that it increases macroeconomic profit.

• MMT is presented to the general public as a socially beneficial program that uses the fiat money system for the Common Good. MMT’s argumentative flagship is the Job Guarantee. MMTers always talk about the employment effect of deficit spending but never about the profit effect.

• As matter of fact, MMT amounts to a capturing of the state/central bank for continuous deficit spending which in turn amounts to a continuous self-financing of the one-percenters.

• Members of the Oligarchy like Warren Mosler fund the propagation of the MMT self-financing scheme on all levels of communication from academia to the social media.

• With regard to economics, which still claims to be a science, this has become common practice.#2

• The real problem with MMT, though, consists in the employment of the well-meaning and unsuspecting philosopher Tom Hickey and other proponents of the Good Society for pushing an a-social agenda.#3

Egmont Kakarot-Handtke


#1 MMT: The one deadly error/fraud of Warren Mosler
#2 Meet the Economist Behind the One Percent’s Stealth Takeover of America
#3 MMT is ALWAYS a bad deal for the 99-percenters

* Preceding posts Employment theory as an example of proto-scientific soapbubbling

June 13, 2018

Nick Rowe’s soapbubbling about money

Comment on Nick Rowe on ‘The Parable of the Fruit Trees’

Blog-Reference

“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.

What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long defunct barter parable proves that he has no idea how the economy works.

As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic 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.

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). This is the most elementary form of the macroeconomic Law of Supply and Demand.

The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#1

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”

The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.

As long as the central bank finances the wage bill Yw=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.

Egmont Kakarot-Handtke


#1 Wikimedia, Idealized transaction pattern

Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.

***
REPLY to Nick Rowe on Jun 14

Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”

The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.

The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow and so on. Money is neither a stock, nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera. As a matter of principle, money cannot be scarce, only the physical data carrier can become scarce.

Money starts as a medium of transaction as shown in the previous post and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e. do not fully spend their period income, that is, if consumption expenditures C are less than wage income Yw. In this case, the household sector’s deposits at the central bank increase and money morphs from a pure transaction medium to a store of value.#1

Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barters apples for bananas.

In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Yw. This has some obvious consequences for the business sector.

Monetary profit for the economy as a whole 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 surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

The simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.

Now, give Nick Rowe a banana, and send him back into the barter woods.


#1 Money and time
***

REPLY to Nick Rowe and other commentators on Jun 15

In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1

It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household- and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.

To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Yw=WL1+WL2 and total employment is L=L1+L2.

In the initial period, the respective prices are equal to unit wage costs, i.e. P1=W/R1 and P2=W/R2. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e. C=Yw, so there is neither saving nor dissaving.

The distribution of total consumption expenditures C=C1+C2 between the two products determines the production of the respective quantities and the respective labor inputs L1 and L2. It holds C=C1+C2=W(L1+L2)=WL=Yw.

So, if the household sector wants more of product 1 it spends more on it and less on product 2, such that C1 goes up and C2 goes down and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and less in firm 2, such that L1 goes up and L2 goes down and total employment L and total income Yw remain unchanged.

The relative price, i.e. the exchange relation between the two products remains unchanged, i.e. P1/P2=R2/R1.

So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Yw is now greater zero. In this case, the business sector makes a loss and the economy goes into recession.


#1 The irreparable unreality of all ‘real’ models

***
REPLY to Nick Rowe on Jun 16

The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.

In the monetary economy, agent 1 does not produce product 1 and barters directly with agent 2 who produces product 2.

In the monetary economy, agent 1 works in firm 1 which produces product 1 and gets the wage income Yw1 which is paid with a transfer of deposits at the central bank.

Analogous for agent 2.

Agent 1 then spends part of his income on product 2. Analogous for agent 2 who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.

Indirect barter presupposes the existence of money which is used (i) to pay the wage bill, and (ii), to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.

Changes in preferences lead to changes in output and production and the allocation of labor between the two firms. Total spending and total employment and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.

Put simply, if agents want more of product 1 and less of product 2 more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.

Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.

Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money and change in the composition of output are mixed. Analytically, though, they have to be strictly kept apart.

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REPLY to Henry Rech on Jun 16

You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”

Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.

At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced and money is produced (or ‘created out of nothing’) by the central bank/banking system. Economic analysis starts at zero. And this holds also for the theory of money.

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REPLY to Matthew Young on Jun 18

You say: “Simultaneous is a relative when money moves faster than fruit.”

The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.

The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant for the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.

Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to logical error; the misuse of language that produces invalid conclusions.”*

Nick Rowe and Matthew Young have not gotten the point that in the monetary economy barter is indirect and that therefore the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.


* Colin Rogers, Review of Political Economy

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REPLY to Nick Edmonds on Jun 19

You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”

Not at all! The real problem is that economists have after 200+ years still no clue how the price- and profit-mechanism works.

To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g. product, labor) deal with flows.

If part of the output is not consumed in the same period then there remains a stock of durable goods = real assets, e.g. houses. This is how the secondary markets come into existence.

The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop-economics.


#1 Primary and Secondary Markets

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REPLY to Nick Rowe on Jun 20

Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”

There is science, and it is binary true/false with NOTHING in between. Truth is well-defined since 2000+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”

In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication.#1, #2, #3

This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)

From Nick Rowe’s Parable of the Fruit Trees nothing can be learned about how the price- and profit-mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.

Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)

One will not find one single scientist in the swamp.#4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.

Egmont Kakarot-Handtke


#1 It is better to be precisely right than roughly wrong
#2 “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions.” (Blinder)
#3 “’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’.”
#4 Getting out of the economics swamp

June 11, 2018

Richard Murphy: the MMT fraudster dressed up as realist

Comment on Richard Murphy on ‘MMT: economics for an economy focussed on meeting the needs of most people’*

Blog-Reference

Realism is practical idiocy but most people like it. And they dislike ‘theory’. So, Richard Murphy opens his post with: “Modern Monetary Theory does suffer from being called a theory.” Note, first of all, nobody else than MMTers themselves has chosen this designation.

Richard Murphy makes it clear that he is not an unworldly theoretician but a down-to-earth realist and that MMT is as realistic as one can get: “In other words, it’s a description of what happens and not an explanation of what might be.”

Richard Murphy plays the old cliches of theoretician and practitioner against each other. Needless to emphasize that a theory is NOT something lofty, unreal, unworldly, or impractical, just the opposite: “There is nothing so practical as a good theory.” (Kant) A scientific theory is the humanly best mental representation of reality. The whole of civilization is built upon good theories.#1

The problem most people have with science is that is often counter-intuitive. Personal experience tells one that the sun goes around the earth but the Theory of Gravity says it is the other way round.

The issue has been addressed by the great methodologist and economist J. S. Mill: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”

Fact is that in the political arena the bigots of common sense are on their own. The ambition of agenda pushers like Richard Murphy is to win over the majority of the bigots of common sense. To enlighten the world scientifically is NOT his business.

So, what is wrong with MMT? MMT is scientific junk and political fraud.

Richard Murphy argues:
(i) “Let me absolutely clear: what this says is that government spending actually creates the money to enable the apparent payment of tax that appears, in popular imagination, to fund that spend. It also creates the money to buy government bonds ― which are private wealth. In other words we don't have tax and spend. We have spend and tax.”
(ii) “This logic is core to modern monetary theory: it is tax that provides value to a state’s money. It is the government’s promise to accept its own currency in payment of tax that gives its money its worth.”
(iii) “So money has value because the government endows it with that quality. And then, and only then, is the supposed left-wing quality added to this whole issue, because modern monetary theory then notes that when markets do not create full employment … then the government can create its own money to just to indirectly boost economic activity …, but to do it directly by investing itself.”

All three arguments are commonsensically plausible but scientifically false.#2, #3 What MMT boils down to is that economic problems can and should be solved with money-creation/deficit spending. Of course, it is long known that deficit-spending stimulates the economy, what seems to be unknown is that the macroeconomic Profit Law says that Public Deficit = Private Profit. So MMT first and foremost stimulates the one-percenters.#4

However, MMT claims to promote the cause of the ninety-nine-percenters: “The only twist most explicit modern monetary theorists add is that we could use this power of the government to create money out of thin air … for the good of everyone by trying to boost employment, investment, productivity and median wages by direct government activity or investment. If that’s cultish, faddish, or left wing, then so be it, I say.”

Needless to emphasize that Richard Murphy never mentions profit, the Profit Law, or the profit effect of deficit spending. Worse, MMTers regularly make this effect verbally disappear by speaking of benefits for the private sector a.k.a. ninety-nine-percenters while the benefits actually go to the business sector a.k.a. one-percenters. And this is not only bad science but a plain political fraud.

So, what is the real political and scientific reality? MMT policy is an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters. MMT is phony social policy designed by Wall Street and marketed by roll-up-the-sleeves realists like Richard Murphy and heart-winning Progressives like Stephanie Kelton.#5 The marketing is good but the product is real crap.

Egmont Kakarot-Handtke


* Tax Research UK
#1 Why J. S. Mill had no friendly word for the bigots and votaries of common sense
#2 For the full-spectrum refutation of MMT see cross-references MMT
#3 MMT: Richard Murphy’s battle-for-money hoax
#4 Keynes, Lerner, MMT, Trump and exploding profit
#5 MMT and grassroots movements

Related 'What is so great about cargo cult science? or, How economists learned to stop worrying about failure' and 'No trade-off, Kant said' and 'Bagehot’s wisdom and the silliness of modern economists' and 'Economics and the Fallacy of Insufficient Abstraction' and 'Complexity and stupidity' and 'MMT: Richard Murphy’s battle-for-money hoax' and 'Wrapping up the MMT narrative'.

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LINK on Jun 11

Link to the refutation of ‘MMT: economics for an economy focussed on meeting the needs of most people’: Richard Murphy: the MMT fraudster dressed up as realist

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REPLY to Noah Way on Jun 12

You say: “Trashing MMT because of the human condition is absurd. What we need is a system that can survive and enhance the human condition.”

The point at issue is NOT thrashing MMT but to answer the question: What is wrong with MMT?

The answer is:
(i) MMT is proto-scientific garbage, i.e. provably false, i.e. materially/formally inconsistent.
(ii) MMT is a political fraud, i.e. it pretends to promote the cause of the ninety-nine-percenters but de facto promotes the cause of the one-percenters.
(iii) MMTers are scientifically incompetent.
(iv) MMTers constantly violate scientific standards/ethics.

The remaining practical question with regard to MMT is how can folks like Murphy, Kelton, Mitchell, Mosler, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine, Ehnts, peterc, Hickey, Calgacus, Konrad, Anderson, Way, Deficit Owls, The Pileus, duncanpoundcake, consbyname, and many other soapbubblers be convinced to leave economics for good and thus to effectively contribute to the betterment of the human condition.

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REPLY to Noah Way on Jun 12

As the saying goes: “You got to know the system if you want to change it.”

MMTers do NOT know how the economic system, i.e. the price- and profit-mechanism, works.

Here is the challenge for all soapbubblers: this is the MMT balances equation (X−M)+(G−T)+(I−S)=0, and this is the AXEC balances equation (X−M)+(G−T)+(I−S)−(Q−Yd)=0. Which one is materially and formally consistent?

It is a sure bet that you do not understand what the equations say about the systemic interrelations, that is, how the monetary economy works.#1

What makes you think that you have anything of interest to contribute to the discussion?


#1 Do NOT look up the proof here

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REPLY to Noah Way on Jun 12

Just answer two questions: Is the foundational macroeconomic balances equation (i) (X−M)+(G−T)+(I−S)=0 or (ii) (X−M)+(G−T)+(I−S)−(Q−Yd)=0 true? Can you prove your answer?

Don’t fear disgrace or embarrassment: Keynes, Post-Keynesians, and all your MMT colleagues flunked this test.

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REPLY djrichard on Jun 12

You say: “I'll put the question, how will corporations make profits in the brave future everybody is forecasting, when nobody is employed making a salary because everyone lost their job to automation and/or outsourcing? And after seeing how people respond, I'll respond that the corporate profits will come entirely from deficit spending by the Fed Gov. And that it will be sustainable.”

A sketch of the monetary economy after the demise of communism and capitalism has been given here: The Third Way: Towards the happy zero-tax economy.

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REPLY to Noah Way on Jun 12

You say: “Mathematical equations don’t apply to ideologies.”

True but irrelevant because economics deals with the economic system and systems are subject to objective systemic laws. For example, the Profit Law or the Employment Law.

Ideologies are for the retarded soapbubblers of the so-called social sciences.

Aircraft get off the ground because of the laws of aerodynamics and thermodynamics. Likewise, economies get off the ground because of systemic laws and not because consumers maximize utility by choosing between strawberry and raspberry yogurt or because greedy capitalists maximize profit.

Fact is that neither capitalists, nor economists, nor ideologues, nor MMTers, nor Noah Way know where macroeconomic profit comes from. This is the result of 200+ years of soapbubbling.

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REPLY to Noah Way on Jun 13

You say: “Only an idiot seeks to apply ‘objective systemic laws’ to human behavior.”

Very true again. Because of this, scientists apply objective systemic laws to systems. Imbeciles, on the other hand, come always up with a ‘behavioral’ explanation, e.g. the sun moves across the sky because Helios drives his golden chariot each day from East to West, or Zeus throws the thunderbolt because he is pissed off.

The subject matter of economics is the economic system, i.e. the interaction of economic variables like employment, price, profit, productivity, income, output, and so on. Human Nature/ motives/behavior/action is the subject matter of Psychology, Sociology, Anthropology, History, Political Science, Biology, Social Philosophy, Ethics and so on.#1, #2

Soapbubbling about human behavior is the chief occupation of brain-dead economists who still have not understood that economics is a system science. As a result, these confused confusers can to this day not tell what profit is.

Macroeconomic profit does not come into existence because some humans are greedy but because Qm=−Sm. There is NO chance that you ever understand this simple but fundamental equation, or what the subject matter of economics is, or what science is all about. This makes you a useful coworker of the MMT snake-oil sales team.


#1 Economics is NOT about Human Nature but the economic system
#2 Economics is NOT a social science