March 23, 2016

Macro of and for the scientifically blind and deaf

Comment on Simon Wren-Lewis on ‘MMT and mainstream macro’

Blog-Reference

The summary argument against MMT from the standpoint of old/post-Keynesian/ mainstream macro is ‘the old is correct and well understood, while the new is substantially wrong.’ (Palley)

The old may be subjectively well understood but it is objectively false nonetheless since Keynes. In order to see where things went wrong one has to return to the very beginnings of macro: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

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

This elementary two-liner is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, all I=S models including the Keynesian multiplier are false (2011; 2014b; 2014a; 2012). Neither the proponents nor the opponents of mainstream macro got this point until this day. Wren-Lewis is only one among the many (for details see this post).

It should be clear that when the foundational economic concept profit is inconsistently defined then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. This applies to both old mainstream macro and new MMT macro. Therefore any policy discussion between the two camps is vacuous.

The three main points of the axiomatically correct approach are:
• All I=S models are are false since Hicks (for the proof see post ‘Toward the true economic axioms’).*
• The correct profit equation for the investment economy reads Qm=Yd+I-Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. Sm establishes the connection to the money/credit market.
• The correct employment equation/Phillips curve is given here. For details see the post ‘Have data, lack theory

Conclusion: The old macro is incorrect but nonetheless accepted by a majority, while the new MMT macro is incorrect but accepted by a minority. Neither approach can be taken seriously because the proponents do not know what macro profit is, but the stuff is good enough for another senseless economic policy debate.

Egmont Kakarot-Handtke


References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

* For details of the big picture see cross-references I=S

***

COMMENT on Simon Wren-Lewis on Mar 28

You ask “Can you suggest a better way of examining intergenerational issues than an OLG model?”
Yes. For the correct approach see the working paper ‘Settling the Theory of Saving

***

COMMENT on axdouglas on Mar 29

Before you wreck your brain about how the state can positively/negatively affect employment you first need the correct employment theory for the economy without state. The fact of the matter is that the neoclassical and the Keynesian employment theories are provable false. Because you do not have the correct employment theory to start with your whole argument is flawed.

To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct employment equation for the economy as whole is given here.

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

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

Item (i) and (ii) is familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

This is the very OPPOSITE of what standard economics claims. The explanation of unemployment is ultimately given by the fact that the price mechanism does NOT work as standard economics hallucinates, i.e. wages down, employment up. The correct employment equation tells you how the market interaction produces unemployment and how full employment can be achieved WITHOUT the state’s variation of taxes/government spending.


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL