September 13, 2016

Clueless about money and profit

Comment on David Glasner on ‘Helicopter Money and the Reflux Problem’


Not only humans but animals, too, know how to use levers of all forms and sizes since time immemorial. And it is certainly possible to write a history of the use of levers from the Stone Age to the Egyptians and beyond. However, this history of the practical use of levers will NEVER arrive a the Law of the Lever as put down by Archimedes.

Obviously, there are different views of the lever: the practical, the historico-genetic, and the scientific. The fact of the matter is that roughly 99 percent of people use the lever without any understanding of the essence/principle/nature of the lever which is ABSTRACT and INDEPENDENT of concrete historical time/space. Only the 1 percent of scientists really understands the lever.

The same holds for economic phenomena like money or debt. We have the commonsensical history of money and the theory of money. Actually, we do NOT have a valid theory of money. What we have is Walrasianism, Keynesianism, Marxianism, and Austrianism and all four approaches are provable false, that is, materially and formally inconsistent. Put in methodological terms, the axiomatic foundations of the four approaches are false and this means that the whole analytical superstructure is false, even if each intermediate logical step is correct. In short, economics is a failed science and this includes, of course, the theory of money.

From this follows: “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). What is needed is a paradigm shift or as Joan Robinson put it: “Scrap the lot and start again.”

It is pretty obvious that the discussion about helicopter money suffers from the fact that each participant has a different model of the economy at the back of his mind. Lacking a common workhorse model the natural result is ongoing confused blather that forever remains inconclusive. Make no mistake, though, inconclusive confusion is were the representative economist is most at home: “I find I’m learning so much from the back and forth on this issue (both from Nick and David plus related posts like this one) ― I hope they never resolve it!”*

This is the very difference between economist and scientist: the economist is happy with never ending inconclusive wish-wash, the scientist is happy with a provable true/false conclusion.

So, let us first of all define common ground. The 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 and is given by these three objective structural axioms: 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 (for details see 2015; 2014; 2011).

The first mistake is to think of money as a given stock. That is historically true but analytically false. The very characteristic of transaction money is that it is permanently created and destroyed.

In order to reduce the monetary phenomena to the essentials it is supposed that all money transactions are carried out by the central bank. The household and business sector’s respective stock of money then takes the form of current deposits or current overdrafts.

By sequencing the initially given period length of one year into sub-periods one gets a simple pattern of wage payments and consumption expenditures.** It is assumed here that the monthly income Yw/12 is paid out at mid-month. In the first half of the month the daily spending of Yw/360 increases the current overdrafts of the households. At mid-month the households change to the positive side and have current deposits of Yw/24 at their disposal. This amount reduces continuously towards the end of the month. This pattern is exactly repeated over the rest of the year. At the end of each sub-period, and therefore also at the end of the year, the household sector’s stock of money is ZERO. Money is present and absent depending on the time frame of observation. The reflux is perfect due to the fact that C=Yw for the given period.

Seen from the central bank the income-expenditure pattern gives rise to an AVERAGE stock of transaction money which is here proportional to the period income Yw.***

In period 2 the wage rate and the price is doubled. Since no cash balances are carried forward from one period to the next, there results no real balance effect provided the doubling takes place exactly at the beginning of period 2. If employment L is doubled income Yw and output O doubles and under the condition of C=Yw and R=const. the market clearing price P remains constant. In the first case there is a correlation between price and average stock of money in the second case not. The quantity of money is NOT causal for the market clearing price as the commonplace quantity theory claims. Under the condition that the central bank is passive, i.e. that it accommodates the autonomous transactions between household and business sector there is a perfect reflux. The stock of money is zero at the beginning and the end of each period.

Things change when the household sector saves or dissaves, i.e. when C is no longer equal to Yw. In this case, there is no perfect reflux and money morphs from a pure transaction medium into a store of value. This uno actu creates a new economic phenomenon, viz. profit/loss for the economy as a whole. The details are an issue for another occasion.

The point that is ENTIRELY OVERLOOKED in the usual treatment of saving/dissaving/money/ credit/reflux is the effect on overall profit. Put bluntly: helicopter money is the best profit machine ever invented. So nobody should be surprised about massive distributional distortions as collateral damage.****

Conclusion: The representative economist is a person who filibusters about the monetary economy without any idea about the two most important phenomena of his subject matter, viz. money and profit.

Egmont Kakarot-Handtke

Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL

* Source: Koning blog
** Wikimedia
*** Wikimedia
**** See post ‘Keynesianism as ultimate profit machine

Related 'Demystifying employment theory and policy' and 'Cranks? What cranks? That’s economics!' and 'Helicopter money — a free lunch for the one-percenters' and 'Deficit spending, helicopter money, and profit' and 'Money, cranks, and morons' and 'Collateral damage'