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'.

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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
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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

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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

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'.

***

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

June 10, 2018

Employment theory as an example of proto-scientific soapbubbling

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

Blog-Reference and Blog-Reference

“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. This holds in particular for employment theory, and the lump of labor theory is a case in point. The lethal methodological blunder of employment theory consists in the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. What the representative micro-brained economist never understood is that what is true for the molehill is not true for the universe.

Methodological conclusion: the traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The axiomatically correct macroeconomic Law of Employment/Unemployment#1 is reproduced on Wikimedia.#2


From this objective-structural-systemic relationship follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment L or lower unemployment u (the Greek letter ρ stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF=W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains, in addition, the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how aggregate demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follow the rules of effective employment policy. In the unemployment situation (with ρE and I given), the scientifically enlightened Legitimate Sovereign sets the parameters as follows: price increase zero and wage increase greater than productivity increase. This increases employment for a while. Afterward: price increase zero and wage increase equal to productivity increase. This stabilizes the economy at full employment.

Mentally retarded economists do after 200+ years still not know how the price- and profit mechanism works. The one thing that they have brought to perfection in all this time is the trick of blowing bigger and bigger communicative soap bubbles.#4 Not to forget, economists reward themselves with the Nobel Prize for Proto-Scientific Soapbubbling a.k.a. Economic Sciences.

Egmont Kakarot-Handtke


#1 NAIRU, wage-led growth, and Samuelson’s Dyscalculia
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 Wikimedia, Structural-systemic Phillips Curve
#4 Economics: communication without content

For details of the big picture see cross-references Employment.

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REPLY to Sandwichman on Jun 11

The Walrasian Auctioneer is not unemployed but dead. But Sandwichman is still soapbubbling.

I wonder if you ever realize that the employment theory is false for 200+ years and that the only worthwhile issue in economics is how to abandon soapbubbling and to start with serious scientific work.

For a beginning, you could try to empirically refute the axiomatically correct Law of Employment/Unemployment.

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REPLY to Sandwichman, Barkley Rosser on Jun 12

Your dialogue about the Walrasian Auctioneer is a wonderful demonstration of soapbubbling.

The Walrasian Auctioneer is known since his invention as one of the most idiotic constructions in the history of cargo cult science. You are the last persons who remember him.

The empirical refutation of the axiomatically correct Law of Employment/Unemployment means the application of econometrics which in turn means: “the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference.” (Wikipedia)

The Employment Law defines the set screws for policymakers#1 who are institutionalized differently in different national monetary economies and here lumped together under the heading of Legitimate Sovereign.

Stop soapbubbling, try to empirically refute the Employment Law. You are in for a big surprise.


#1 The set screws of overall and individual employment

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REPLY to Sandwichman, Barkley Rosser on Jun 13

The London gold market is micro/partial, the Auctioneer refers to general equilibrium and overall simultaneous market coordination. The Auctioneer has been a construct of breathtaking idiocy from the very first moment and this means a lot in view of the hereditary delirium of the representative economist who did not get out of the silly lump-of-labor fallacy in 200+ years.

Why do Sandwichman and you not simply quit economics and soapbubble amicably about real-world facts like cow flatulence, or the assassination of JFK, or the death of Yeshua bin Yusuf?

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REPLY to Barkley Rosser, Sandwichman  on Jun 13

Stop soapbubbling about the Auctioneer and cow flatulence and simply try to empirically refute the axiomatically correct Employment Law. It is never too late to do serious scientific work.

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REPLY to Barkley Rosser on Jun 13

Of course, soapbubblers cannot test the Employment Law. But since it consists exclusively of measurable variables, every econometrician who has tested the Phillips Curve has already a good part of the data for testing the macroeconomic Employment Law.#1

Looking forward to the grand showdown.


#1 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to ANC Driver, Tom Hickey, Calgacus on Jun 13

The Legitimate Sovereign can realize any employment level by applying the Employment Law. This is NOT AT ALL a question of left-wing/right-wing. The Employment Law defines exactly the set screws for policymakers.#1 It is much like taking an aircraft off the ground.

Needless to emphasize that soapbubbling economists have never taken anything off the ground. Just the opposite.#2


#1 The set screws of overall and individual employment
#2 Mass unemployment: The joint failure of orthodox and heterodox economics

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REPLY to Tom Hickey on Jun 14

You say: “Institutionalization is an issue involving political economy and politics.”

No, not at all. Institutionalization involves two things: the Legitimate Sovereign and Science. The actual problem with regard to economic institutions is that there is neither.

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.

Economics claims to be a science but is NOT. 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 Employment Theory is provably false, Profit Theory is provably false, Monetary Theory is provably false, and so on.

MMT, too, is proto-scientific garbage. And it is too obvious that it has been hijacked by political agenda pushers.#2

Economics, understood as science, is supposed to develop the true theory. The true economic theory tells one how the economic system works. This knowledge is needed to realize the goals that have been set in the political sphere by the Legitimate Sovereign.

Imagine this situation: The Legitimate Sovereign ― in current understanding = We The People ― has extensively discussed whether to fly to the paradise on Christmas Island or to the paradise on Easter Island. The decision has been Christmas Island and in order to make things happen, a group of people has been tasked to build the aircraft. Obviously, these scientists and engineers need a lot of knowledge about materials and physical laws. What these folks need not at all is an opinion whether the Christmas or the Easter Island is the better destination. What these folks need indeed is scientific competence.

What has happened in economics is that economists have since Adam Smith/Karl Marx been permanently involved in the political discussion and have spent neither time, nor talent, nor brains to figure out how the monetary economy works. What we now have is incompetent scientists from Krugman to Varoufakis to Kelton to Mitchell and so on from the right-wing to the left-wing and back who are fully occupied to push some agenda.

The vast majority of economists has entirely lost any scientific instincts, which would tell them to keep science and politics strictly apart, and has joined the crowd of clowns and useful idiots in the political Circus Maximus.#3

MMTers are no exception. The whole discussion about the Job Guarantee is just political soapbubbling that lacks sound scientific foundations. It is only good as a smokescreen to obscure the political agenda of money making for the one-percenters. Economics has degenerated to plain political fraud.

Make science great again! Throw all economists out! Start with MMTers! Take Tom Hickey first!


#1 Economics has arrived at the bottom of the proto-scientific shithole
#2 Richard Murphy: the MMT fraudster dressed up as realist
#3 For details of the big picture see cross-references Political Economics

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REPLY to Tom Hickey on Jun 14

You say: “I am not an economist. My PhD is in philosophy. If I were an economist, I would argue economics with you, but I don’t operate outside my field.”

As a philosopher, you have studied The Republic and what Plato has said about stories “… which are now in use [but] must be discarded.”

“Of what tales are you speaking? he said. …
Those, I said, which are narrated by Homer and Hesiod, and the rest of the poets, who have ever been the great story-tellers of mankind.
But which stories do you mean, he said; and what fault do you find with them?
A fault which is most serious, I said; the fault of telling a lie, and, what is more, a bad lie.”

Philosophers are known since 2000+ years to be committed to truth. They introduced the distinction between doxa=opinion and episteme=knowledge. You say you are a philosopher who operates strictly within his field.

How does it come, then, that you promote on this blog economists who are political story-tellers, incompetent scientists, and who violate scientific standards/ethics on a daily basis?

Here are five political story-tellers/agenda-pushers who pose as scientists and censor and manipulate their blogs/Twitter accounts:
Bill Mitchell,
Stephanie Kelton,
Jason Smith,
Lars Syll,
Richard Murphy.#1

You know quite well that the foundational MMT balances equation is provably false. This is sufficient for the refutation of MMT. Refutation means that MMT has no sound scientific basis. It’s just story-telling and political agenda pushing. That is NOT what scientists are supposed to do.

What kind of philosopher are you? Who awarded you a degree? Trump University? And why do you so evidently operate outside your field?


#1 For details/proofs see cross-references MMT

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REPLY to Tom Hickey on Jun 14

You need not study philosophy, what the absolute novice in every marketing- and PR-department and every half-witted journalist can tell you even in the state of near-coma is the mantra: Whoever Controls The Narrative Controls The World.

After all, already Plato was aware of “the great story-tellers of mankind”. The point is, though, that Plato was not directly enthusiastic about “telling a lie” or “a bad lie” or what we today call fake news or propaganda or disinformation or cargo cult science.#1, #2, #3

Yes: “He [Shackle] could see that this [marginalist economics] was, in fact, a form of pseudo-secular religion… and that struck him, as it strikes others, as absurd.”

Yes, and because it IS absurd marginalist economics will now be thrown out of science together with Keynesianism, Marxianism, Austrianism, Pluralism, MMT, and the fake philosopher Tom Hickey.

Note that economists award themselves with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” which is a deception of the general public. Economics has never been more than story-telling. Economics is the worst embarrassment in the history of modern science. And MMT and Tom Hickey are part of it.


#1 Economics is not a science, not a religion, but proto-scientific rubbish
#2 Economics: communication without content
#3 Economics: stories, narratives, and disinformation

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REPLY to Barkley Rosser on Jun 15

You say: “I just reread your supposed ‘Employment Law’.”

Fine, but obviously you still do not understand how things work. There are TWO uses of the equation.

(i) For testing, one simply feeds the historical data in and looks how the Law fits. Needless to say that inflation has not been zero in the past but if the Law is true it fits perfectly with the historically given rates of inflation/deflation and employment and all the other variables.

(ii) For achieving his employment goal, the policymaker uses the equation as a tool which tells him how to set the independent variables on the right-hand side while the target value of employment is entered at the left-hand side.

Testing the Employment Law is in principle not different from testing the Phillips Curve. The beauty of the test is that the Employment Law (= structural Phillips Curve) is confirmed and the silly behavioral Phillips Curve is refuted.

Testing can be done and will be done ― not by soapbubblers, though, that much has always been clear but by scientists. In the meantime, you can tell me more about your fields of expertise ― cow flatulence and proto-scientific methodology.

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REPLY to Tom Hickey on Jun 15

You say: “What many if not most that think they understand this but have not studied a relevant discipline don’t understand is that ‘the world’ is based on a narrative aka story and myth.”

Everybody understands this and knows that people are born, told some idiotic stories in the kindergarten, are later on guided in their neurotic behavior by it, eventually become philosophers/journalists/bloggers and earn a living by pushing narratives, tell their children the updated idiotic stories, and then go as stupid out of ‘the world’ as they have come in. This is how culture and communication work in Plato’s Cave.

The scientific realm is different. Science is about true/false with truth well-defined as material and formal consistency: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

The political realm and the scientific realm run on fundamentally different principles. And this is why they have to be kept strictly apart. The mixing of politics and science inevitably ruins science as everybody can know from the history of political economics which has produced NOTHING of scientific value in the last 200+ years.#1

Political economics was and is in the best case brain-dead soapbubbling and in the worst case outright fraud.

MMT falls into the latter category: it pushes the narrative of the benefits of MMT policy for the ninety-nine percenters through all media. Scientific fact is that the MMT selling proposition ‘print, spend, and don’t worry about public debt’ with the same necessity as the First Law of Thermodynamics translates into Public Deficit = Private Profit and therefore benefits the one-percenters.

So, MMT is clearly what the philosopher Plato called a “bad lie” and what the philosopher Tom Hickey euphemizes as narrative, covers with folk-psychological soapbubbling, and actively promotes by applying the old Huxley/Orwell recipes of political brain-washing.

#1 The irrelevance of economics
#2 Economists: political trolls since 200+ years

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REPLY to Tom Hickey on Jun 14

You say: “You are now arguing outside your field unless you are credentialed in philosophy, especially logic and epistemology.”

Before pestering the world with your good advice and talking nonsense about credentials, take first a basic methodology course on YouTube.#1 Note, in particular, that science is NOT about credentials but about logical/empirical proof.

You seem to have an extremely short attention span. You present yourself as a philosopher who does not operate outside his field and then blathers about theoretical economics and political economics and political science and sociology and mass psychology.

You say: “In political science and politics, a fundamental problem is that even when the ‘true theory’ is known, it is not automatically adopted but must be passed into policy (law) and that involves politics.”

Wake up, this is NOT the problem, for the simple reason 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 pivotal economic concept profit wrong. Economic policy guidance has NO sound scientific foundations for 200+ years. Nothing to adopt, neither automatically nor otherwise.

Get it, there is NO true theory in economics, economists are NOT scientists but agenda pushers and useful political idiots.

Here is a good advice for you: read what the great methodologist and economists J. S. Mill has said about the separation of science and politics: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

Repeat: NO part of his business. The political decisions are made in the political sphere by the Legitimate Sovereign and they are NOT AT ALL the business of folks who should have figured out in the last 200+ years how the monetary economy works but failed to do so.

As a philosopher, you have NO credentials to dabble in economic policy or to promote MMT. All the more so, as you have obviously NOT realized some basics about what you are promoting:
(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.

You say you are a philosopher who does not operate outside his field. Very good! Get out of economics, we have already an oversupply of soapbubblers or what Joan Robinson called the ‘throng of superfluous economists’.


#1 YouTube, Feynman on Scientific Method

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REPLY to ANC Driver on Jun 16

You recommend Collingwood’s Economics as a Philosophical Science as follows: “Seeing as we are talking of economics, science, and philosophy all in the same cave I thought I’d share probably one of the best ‘short’… pieces I have ever read and which for its comparative size has probably had the greatest impact on me personally in understanding first and foremost, what an economic activity actually is, second, that we take the ability to engage in economic activities for granted, and third, that we cannot mix morals with economics.”

Realize:
  • You are putting economics, science, and philosophy into one hat.
  • This is illegitimate because economics and philosophy are what Feynman called cargo cult science.
  • The fundamental blunder of economics is that it defines itself as social science.
  • 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.
  • As far as economics deals with Human Nature/motives/behavior/action it is Political Economics.
  • Political Economics has achieved nothing of scientific value in the last 200+ years.
  • Political Economists are failed/fake scientists.
  • Political Economics is since Adam Smith/Karl Marx a smokescreen for agenda pushing.
  • Political agenda pushers, no matter how they present themselves, are either stupid or corrupt or both and will therefore never be accepted in the community of scientists.
  • Economics had been hijacked from the very beginning by agenda pushers. This aberration has to be reversed. In methodological terms: economics needs a paradigm shift.
Collingwood writes in the introduction: “The thesis here to be advanced, then, is that there is a special type of action, … that this utilitarian or economic type of action is the fundamental fact with which all economic science is concerned; …”

No, this exactly is the Social Science Fallacy. Economics as a science is NOT concerned with how people behave but how the economic system behaves. There are systemic laws which can be objectively determined, but economists have to this day failed to figure them out. Instead, they were very successful in producing a breathtaking heap of peer-reviewed proto-scientific garbage.

Time to acknowledge that political economists had much support from retarded social philosophers like Collingwood and Tom Hickey. Time also to properly separate science/theoretical economics from politics, soapbox economics, agenda pushing, philosophy and all the other cargo cult sciences.

Politics has to be determined in the political sphere by the Legitimate Sovereign. The political sphere and the scientific sphere have to be separated. After 200+ years of failure, economists are supposed to figure out now how the economic system works. Only then can they credibly claim to be of assistance in the realization of the Legitimate Sovereign’s objective, that is, the Good Society.

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REPLY to Tom Hickey on Jun 16

You say: “Given contemporary conditions, that would seem to involve instituting full employment now, since it is not only possible but simple by following MMT analysis, theory, and policy based on it. In fact, as Calgacus has pointed out, the MMT JG would begin breaking the back of modern capitalism by increasing labor power. … What needs to happen is that the capital/labor share ratio has to be shifted in favor of workers.”

Take notice that there is Xmas economics where everybody writes down a list of his wishes. Your priorities go roughly as follows: full employment, technological innovation, increasing productivity, increasing leisure, a more equitable distribution.

This list makes you a very likable philosopher. Not many people will contradict you but probably add such things as environmental protection and affordable health care.

In order to realize this program, you need to know how the monetary economy works. Your problem is that you don’t. For example, you recommend MMT/JG without realizing that MMT’s money-creation/deficit-spending makes distribution progressively more unequal.#1 You say that you want to better the distributional situation of the ninety-nine-percenters but your recommendations make matters worse.

The economist’s business is NOT to write down a wish list but to realize the goals that have been authorized by the Legitimate Sovereign. This requires scientific knowledge about how the monetary economy works. This knowledge is embodied in the systemic laws of the monetary economy. You cannot achieve full employment (however defined) if you don’t know the Employment Law.#2

To soapbubble about flying above the clouds is futile. It is the folks that have figured out the laws of aerodynamics and thermodynamics who get things off the ground. Analogous in economics.

As Marx said: “Philosophers and politicians have hitherto only popularized various wish lists; the point is to know how to realize them.”


#1 MMT: So-called progressives as trailblazers for Trumponomics
#2 This brings us back to the first post.

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REPLY to Tom Hickey on Jun 17

Tom Hickey summarizes: “I have said that new vision is needed and proposed a framework in terms of one of the enduring questions of Western intellectual history, which I believe can only be dealt with holistically by incorporating non-Western traditions. That question is the one that occupied the ancient Greeks, what does it mean to live a good life as an individual in a good society. That has a long tradition in terms of ethics, action theory and social and political thought.”

Yes, the political/philosophical discussion about the Good Society goes back to the beginning of civilization.

Tom Hickey tells the story how he came after a spiritual quest through Western and non-Western history to see that the society we live in is mentally deranged and institutionally dysfunctional and that MMT offers a solution, at least for the economic causes of the malaise.

“Realistically, that is where we need to start strategically. What MMT proposes is feasible politically.” Tom Hickey’s narrative explains how he became an MMT agenda pusher.

When one takes the political glasses off and puts the scientific glasses on one sees a quite different reality:
• Tom Hickey never did serious science.
• It is the MMT social goals that appeal to him.
• He never realized that the economic theory that underlies MMT policy guidance is provably false.
• He promotes MMT for political reasons and does not really care about its scientific validity.

So, Tom Hickey stands firmly in the tradition of Political Economy which abuses ‘science’ from Adam Smith onward as credibility/authority-enhancer. For agenda pushers, the political narrative comes always first: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

Tom Hickey recounts MMT history: “Warren Mosler has set forth a range of proposals for implementing a policy based on MMT principles. The range is not complete and many other issues need to be addressed that MMT doesn’t as yet. As the MMT have said, there are less than a dozen of us, which is an improvement on the original 3 + 1 twenty years ago ― Warren Mosler, Bill Mitchell and Randy Wray, along with grad student Pavlina Tcherneva.”

This is what MMT looks like for me. The trained economist and hedge fund founder Warren Mosler stumbled one day upon Post-Keynesianism/MMT and found that it contained a lot of sound arguments against mainstream monetary theory and some good social planks for a political platform. Warren Mosler developed the narrative of how the fiat money system can be used to solve most socio-economic problems. As a marketing buff, he realized that Wall Street types have a credibility problem with selling social policy. And this resulted in strengthening the sales team with caring Stephanie Kelton and the spiritually enlightened philosopher Tom Hickey.

I have no problem with agenda pushers promoting their stuff in the political Circus Maximus. And I have no problem with Wall Street’s Warren Mosler running for Virgin Islands' governor. The lethal flaws of MMT are:
• The scientific part of MMT is provably false.
• MMT policy guidance has no sound scientific foundations.
• MMT is a political fraud, not substantially different from Neoclassics, Keynesianism, Marxianism, Austrianism.

The mixing of politics and science always corrupts science. This starts with Smith/Marx and continues over the whole right/left spectrum from Hayek, Keynes, Friedman, Krugman, Keen, Mosler to Tom Hickey.

Let’s get rid of all of them.

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REPLY  to Calgacus on Jun 17

You say: “Not seeing fallacies in some reasoning that MMT is welfare for the rich is not the same as there not being a fallacy, and there is. A really easy way for anyone to quickly see that the reasoning must be fallacious (formally inconsistent) is the historical fact that applied MMT has everywhere led to progressively more equal distributions of wealth and income, not the opposite. … (By applied MMT I mean the New Deal, WWII in the US & UK, the postwar era practically everywhere & for a few countries even afterward. Pretty much the closer to MMT / genuine Keynes ― the better for income/ wealth distribution.)”

Note that there are two issues here (i) the classical macroeconomic issue of the relative magnitudes of profits and wages [To determine the laws which regulate this distribution, is the principal problem in Political Economy (Ricardo)] and (ii), the issue of the distribution of wages among workers and of profits among firms. I have dealt with both issues in working papers#1, #2 and in blog posts.#3, #4

It is pretty obvious that economists from Smith/Ricardo via Keynes to MMT never understood what macroeconomic profit is and by consequence thoroughly messed up Distribution Theory.

I know for sure that you don’t understand what macroeconomic profit is. Therefore it is beyond your means to say anything sensible about distribution.

The axiomatically correct Profit Law for the economy as a whole is given as Qm=Yd+(I−Sm)+(G−T)+(X−M) which reduces to Qm=G−T for Yd, I, Sm, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit G−T of the public sector, in a nutshell: Public Deficit = Private Profit.

Now, MMT is essentially money-creation/deficit spending. Because of this, it is correct to say that MMT progressively worsens the distribution.#5

However, for anyone who can read an equation, it is obvious that the positive effect of a government deficit G−T on macroeconomic profit Qm can at any time be counteracted by negative effects of the other variables, i.e. Yd, I, Sm, X, M.

Whether this has been the case during the “New Deal, WWII in the US & UK, the postwar era practically everywhere” can be established only by testing the complete equation.

There is no way around it, in order to make progress with Distribution Theory, the Profit Law must be tested with the data for the historical time periods you mentioned.

As far as I know, the axiomatically correct Profit Law has never been tested. Your assertion: “Pretty much the closer to MMT / genuine Keynes ― the better for income/ wealth distribution.” is pretty much hanging in midair.#6


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Essentials of Constructive Heterodoxy: Profit
#3 Profit and the decline of labor’s nominal share
#4 Profit and distribution: a primer
#5 Keynes, Lerner, MMT, Trump and exploding profit
#6 Keynesianism as ultimate profit machine

June 8, 2018

MMT: Richard Murphy’s battle-for-money hoax

Comment on Richard Murphy on ‘The battle for money has begun’*

Blog-Reference

The battle Richard Murphy refers to is about the institutional design of a better money order. The discussion, though, suffers from the odd fact that economists have until this day no scientifically valid theory of money. But this has never hampered the enthusiasm of economists. After all, they are in the political business and not really in the science business.

So, Richard Murphy argues: “… in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value.”

This is what all MMTers sermonize from their soapboxes and it is provably false. Fact is that MMTers have no idea how the monetary economy works.

To get economics right, it has to be consistently reconstructed from scratch. 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), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#1


The price 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 to rest. At this juncture, Friedman et al. are buried for good.

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, which is a generalized IOU, 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. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

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 in Figure 2.#2


The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, 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.

The transaction equation reads M=κYw=κPX=κPRL (2) in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.

As long as the central bank finances a growing wage bill Yw=WL with money creation out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/decreases according to (2) but there is NO inflation/deflation.

This is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy by government deficit spending. This has an immediate effect on macroeconomic profit.

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 complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.

Needless to say that Richard Murphy does not mention the profit effect once. Worse, MMTers regularly make this effect disappear.#4 It does not sit well with their image of social Progressives.

To sum up:
  • MMT policy is NOT in the interest of the ninety-nine-percenters.
  • MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
  • The profit effect of MMT money creation/deficit spending reinforces the transformation from democracy to oligarchy.
  • Politically, MMT is a fraud and scientifically it is garbage.#5

Egmont Kakarot-Handtke


* Tax Research UK
#1 Wikimedia, Elementary production-consumption economy
#2 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#3 MMT: Just another political fraud
#4 MMT and the magical profit disappearance
#5 For the full-spectrum refutation of MMT see cross-references MMT

Related 'The Third Way: Towards the happy zero-tax economy' and 'The ultimate ― analytical ― origin of money' and 'How money emerges out of nothing ― the functional account' and 'The creation and value of money and near-monies' and 'Reconstructing the Quantity Theory (I)' and 'It's about institution-building, stupid' and 'Money and time' and 'Basics of monetary theory: the two monies' and 'Richard Murphy: the MMT fraudster dressed up as realist'.

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REPLY to Richard Murphy on Jun 9 and Blog-Reference MNE

You say: “This is so ridiculous I can dismiss it in seconds. There is apparently no government in your model. And no overseas sector.

Obviously, you cannot read.

I clearly stated: “The complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.”#1

It is all there, government deficit/surplus (G−T) and the trade surplus/deficit (X−M).

Because of Public Deficit = Private Profit MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.

Your assertion: “Money is debt. It is only created by government spending and bank lending.” is provably false. Money is in the most elementary case created by the central bank financing the wage bill Yw.

MMT’s money-creation/deficit-spending is profit making for the one-percenters.#2 Politically, MMT is a fraud and scientifically it is garbage.


#1 MMT: Richard Murphy’s battle-for-money hoax
#2 For the full-spectrum refutation of MMT see cross-references MMT

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REPLY to Ralph Musgrave on Jun 9

You say: “Central bank created money (base money) is supposedly a liability of a central bank: it appears on the liability side of the CB’s balance sheet. But if you go along to the Fed with a $100 bill and demand that they pay you the $100 they allegedly owe you, you’ll be told to shove off. So in what sense is base money a debt?”

The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money.

So, how comes money into existence in the elementary production-consumption economy with pure fiat money? Schematically as follows:

(i) The workers work for some time L in the fully integrated mega-firm = business sector.
(ii) The firm owes the workers the amount Yw=WL. The wage rate W is given.
(iii) The firm could hand out IOUs to the workers but instead turns to the central bank.
(iv) The central bank creates money by lengthening its balance sheet, i.e. by entering an overdraft for the firm on the asset side and a deposit of equal amount on the liability side.
(v) The firm transfers the deposits = Yw to the workers. Thus it discharges its liabilities vis-a-vis the workers. The firm has now a liability vis-a-vis the central bank.
(vi) The workers spend their whole income C=Yw and buy the total output X=O. The workers’ deposits are fully transferred back to the firm.
(vii) The firm’s overdrafts and deposits are exactly equal and are canceled against each other. Money is fully destroyed. The central bank’s balance sheet shrinks to zero = initial state.
(viii) The money creation-destruction cycle starts again.

Money is not a thing, money is not a fixed stock, money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera).

Money = deposits at the central bank is accepted (i) by the workers as wage payment, and (ii) by the firm as payment for handing over the consumption good. There is NO state and NO taxes needed to enforce the acceptance. Central bank deposits are defined as legal tender, they discharge all kinds of liabilities/IOUs.

The central bank is tasked to support the autonomous transactions between the firm and the workers. In other words, the central bank creates exactly that amount of money that is needed to pay the wage bill which steadily increases with growing employment and a constant wage rate.

The point is that there is NO such thing as a monetary policy or an inflation target. In the elementary production-consumption economy, the central bank simply supplies the means of transaction = money = deposits. Nothing more, nothing less. The central bank does not interfere with the autonomous transactions between the business and the household sector.

There is NO government deficit-spending needed to bring money into existence and NO taxation in order to enforce acceptance. The MMT money creation story, i.e. government deficits and taxes drive money, is a myth just like the barter and goldsmith stories.#1, #2


#1 The Third Way: Towards the happy zero-tax economy
#2 The objective value of money

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REPLY to Richard Murphy on Jun 9

You say: “You have not shown there is a thing wrong with MMT, which is wholly familiar with and uses (I use in my theoretical work) the type of analysis you are doing.”*

Actually, this is the case:

(i) MMT is built upon this macroeconomic balances equation (X−M)+(G−T)+(I−S)=0 which is shown at any MMT presentation and is to be found all over the econoblogosphere including Wikipedia.#1

(ii) The MMT balances equation (i) is provably false. The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0.#2

(iii) The MMT balances equation is false because MMTers are too stupid to understand the elementary mathematics of macroeconomic accounting and do not know how the monetary economy works.

(iv) Because the foundational equation is false the whole analytical superstructure is false. By consequence, MMT policy proposals have NO sound scientific foundations.

(v) The main defect of the MMT policy of money creation/deficit spending is that it produces a distribution that is generally regarded as socially unacceptable.#3

So, MMT is scientific junk and political fraud.#4 That’s what is wrong with MMT!

Richard Murphy and the rest of the MMT crowd (Kelton, Mitchell, Mosler, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine, Ehnts, Hickey, Pino, and so on ) are snake-oil sellers.#5


* Tax Research UK
#1 Down with idiocy!
#2 Rectification of MMT macro accounting
#3 Keynes, Lerner, MMT, Trump and exploding profit
#4 For the full-spectrum refutation of MMT see cross-references MMT
#5 MMT: academic snake oil for the people

June 6, 2018

The Third Way: Towards the happy zero-tax economy

Comment on Tom Hickey on ‘From Wicksell to Le Bourva and MMT’

Blog-Reference

Communism is down the drain and the ― entirely justified#1 ― widespread feeling is that Capitalism will follow next. Quite naturally, there is a lot of discussion about what the core problem is and how the situation can be fixed. New Economic Thinking is all the rage. MMTers are one of the many politically active groups and they have a strong selling point: (almost) all economic problems can be solved with money-creation/deficit spending. This soapbox economics resonates well at the street level.

No doubt about it, rethinking economic theory is indispensable because Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false and materially/formally inconsistent. Neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations.

However, MMT is not a real breakthrough, it is bad science and bad politics just like all the rest. Bad science because it is materially/formally inconsistent and bad politics because it claims to promote the cause of the ninety-nine-percenters but in fact promotes the cause of the one-percenters.#2, #3

Yet in all their scientific and political corruption MMTers have intuitively grasped a fruitful transformative idea, i.e. to use fiat money for the construction of an economic system that works better than obsolete communism and capitalism.

All that is needed to make things happen is a well-informed Legitimate Sovereign. There is no use to define the Legitimate Sovereign here in greater detail. This is not the task of economics but of Political Science.

The Legitimate Sovereign is in full control of the process of money creation and destruction.#4, #5 The closed economy is, for a start, in the state of full employment with the macroeconomic budgets of the household sector and the government sector all balanced. The Profit Law for this simplified economy translates from the general Qm=Yd+(I−Sm)+(G−T)+(X−M) to the specific Qm=−Sm+(G−T) with Sm=0 and G=T. Legend: Qm monetary profit/loss, Sm monetary saving/dissaving, G government spending, T taxes.

In the first step, the Legitimate Sovereign simply creates some extra money for continuously buying shares on Wall Street and successively taking over the control of all big corporations.

In the second step, the Legitimate Sovereign cuts all taxes and creates the money for government spending G out of nothing. So, T=0 and G remains unchanged.

Now, two things happen:
(i) The disposable income of the household sector, i.e. Yw−T, increases because of T=0. If the households fully spend this extra money, the price goes up a little (NO inflation) and the household sector as a whole gets the SAME total real output O under the conditions of market clearing and unchanged employment.
(ii) The profit of the business sector increases because of Qm1=C1−Yw in comparison to Qm0=C0−Yw=0 with C1 greater C0. The difference between C1 and C0 is the amount G, i.e. the deficit-spending/money-creation of the government sector.

The real situation of the household sector remains unchanged because the price hike exactly counteracts the nominal demand increase. The situation of the business sector as a whole improves, i.e. monetary profit Qm rises from Qm0=0 to Qm1=G. In other words, Public Deficit = Private Profit.

The real situation of the household sector as a whole does NOT change at all. The whole act is called stealth taxation#6 because the price hike reduces the real quantity the wage income receivers can buy with their increased disposable income. What happens is that the former taxes T are replaced by a one-off price hike. In real terms, the household sector is taxed as before but does not realize anything provided the price hike is small and indistinguishable from a random fluctuation.

Because the greatest misfortune in the life of most people is that they feel to be unjustly forced to pay taxes, it can be safely assumed that human happiness increases enormously with the abolition of taxes and the replacement by money-creation/deficit spending.

Being the Legitimate Sovereign means that the money that has been created out of nothing has to be destroyed eventually. Because the Legitimate Sovereign owns all corporations of the business sector, this is an easy task. All that has to be done is to distribute the full amount of monetary profit, i.e. Qm=G, to the shareholder, which happens to be the Legitimate Sovereign. It is by profit distribution = dividend payment how fiat money is again taken out of the circulation and destroyed.

Needless to emphasizes that the Legitimate Sovereign decides how the total amount of government spending G is allocated to social, military, administrative and other purposes.

Remains only one thing to do: to consolidate the existing public debt overhang. Needless to emphasize that it cannot be redeemed. So it has to be converted into perpetual bonds with an interest rate just a little above zero percent or into current deposits with zero interest.

Egmont Kakarot-Handtke


#1 Mathematical Proof of the Breakdown of Capitalism
#2 MMT: The one deadly error/fraud of Warren Mosler
#3 MMT: Money-making for the one-percenters
#4 The ultimate ― analytical ― origin of money
#5 How money emerges out of nothing ― the functional account
#6 MMT, money printing, stealth taxation, and redistribution

Immediately preceding 'Neoclassics and MMT ― much like pest and cholera'.

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REPLY to Tom Hickey on Jun 7

You say: “One reason the so-called US left is not winning is lack of vision and a popular presentation of the vision and plan for actualizing it that is clear, concise and precise enough to avoid the usual objections. … Ultimately, the goal has to be get buy-in by both enough voters to pass the legislation and politicians that understand the plan well enough to present it coherently and convincingly and defend it against objections.”

The subject matter of economics is to figure out how the economy works. Period. Nothing else. Period. The subject matter of economics is NOT to sell MMT to voters and lawmakers.

What the public has, first of all, to clearly recognize is that there are TWO economixes: the real thing and the look-alike. There is theoretical economics and political 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.

Political economics has produced NOTHING of scientific value since Adam Smith/Karl Marx. What the Classicals have to be credited for is naive honesty. They called themselves Political Economists, that is, they presented themselves as agenda pushers. Naive honesty was the historical epoch before the War Ministry renamed itself to Defense Ministry and a military offensive was re-framed as pre-emptive self-defense. It was the epoch before Orwellian doublespeak became the norm.

The fact of the matter is that economics defined itself 140+ years ago as science but it is still political agenda pushing. The clear separation of the political and the scientific sphere never happened.

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational concept of the subject matter ― profit ― wrong. What we actually have is the pluralism of provably false theories.

MMT is just another instantiation of political economics a.k.a. agenda pushing. Note well: it does NOT matter at all whether one pushes a right-wing or a left-wing agenda. From the standpoint of science, it is roughly the same proto-scientific garbage only dressed up for different target groups. The whole right-left discourse is a ridiculous pygmy wrestling show of useful political idiots in the Circus Maximus.

All that comes under the label of economics is scientifically unacceptable. Because of this, economics has nothing to offer in the way of a scientifically well-founded advice: “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 MMT is NOT the true theory but just another political fraud.

The most pressing problem of economics is how to clean the Augean Stable of the gigantic heaps of axiomatically false models, how to get rid of all failed/fake scientists, and how to advance from a 200+ years old cargo cult science to a genuine science.

Make no mistake, Dante’s famous motto above the Gate of Hell "Lasciate ogni speranza, voi ch’entrate" [Abandon all hope, you who enter here], applies to political economics of ALL denominations and also to MMT.

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REPLY to Andrew Anderson on Jun 7

You say “In the Bible, profit is good but profit taking (and usury) isn’t good.”

Your exegesis is not up to date. What the Bible really says is: profit distribution to private persons is bad, profit distribution to the Legitimate Sovereign is good.

The Bible never ever contradicts the axiomatically correct macroeconomic theory. Believers should know this.

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REPLY to ANC Driver on Jul 8

You say: “This is probably the reason why economics will never be treated as a science because it will reveal the truth.”

Economics is not a science because Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, etcetera are mutually contradictory, axiomatically false, and materially/formally inconsistent ― in two words: provably false.#1

As far as economists do not realize this, they are stupid. As far as they realize it and spread their crappy stuff nonetheless, they are corrupt. To this day, economics is a cargo cult science. The “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is a deception of the general public.#2

The policy guidance of economists NEVER had sound scientific foundations.#3 The stupidity and fraud of economists are destructive to society. This is known since Napoleon: “Late in life, …, he claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner)#4

All this is not a question of right-wing or left-wing. Economists in general and MMTer, in particular, will never be accepted as scientists but forever be regarded as stupid and corrupt useful political idiots.#5


#1 Economics: 200+ years of scientific incompetence and fraud
#2 The real problem with the economics Nobel
#3 Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother
#4 Economists and the destructive power of stupidity
#5 For details of the big picture see cross-references PoliticalEconomics