December 7, 2017

Selling public debt with Ricardo’s tear gland rhetoric

Comment on Simon Wren-Lewis’ ‘Government debt phobias, and possible cures’

Blog-Reference

Arguing against all kinds of land-related taxes, Ricardo took an emphatic social stance: “Such taxes, therefore, fall almost always upon the necessitous person, and must, therefore, be very cruel.” (Principles, p. 154) Needless to emphasize that Ricardo knew quite well that land taxes are normally not a concern of poor people but appear very cruel to rich people.

As a rule, economists put the poor widow in the foreground and in the emotional limelight when they lack sound arguments. Simon Wren-Lewis is no exception, he abuses the underpaid nurses in order to argue against reducing the public debt. When nurses or babies or pandas appear in an economic/political argument the odds are that the general public is taken for a ride.

The problem with the debt discussion is that it is macroeconomics and macro is scientific garbage since Keynes. The apex of scientific incompetence is microfounded macro. Keynesian macro, on the other hand, and Post Keynesianism and MMT as the latest reincarnation has been based on provably false balances equations.#1 Roughly speaking, macroeconomic profit theory is false and because of this, the whole analytical superstructure is false, and because of this, economic policy guidance lacks sound scientific foundations.

The point everyone can agree upon is “It makes perfect sense in many situations for the government to increase its debt.” Yes, but it should be added that public debt is always a bad deal for the ninety-nine-percenters.#2 The discussion about deficit spending and inflation is a red herring. The disastrous effect of a growing public debt is NOT on inflation but on the distribution of income and wealth.

Curiously, the word profit does not appear once in Simon Wren-Lewis’ post. Neither does it appear in the contributions of MMTers ― the most outspoken champions of deficit spending and the propagandists of the debt-does-not-matter meme.#3

From axiomatically consistent macrofoundations follows Public Deficit = Private Profit. With deficit spending, the business sector is always better off. The household sector, on the other hand, always holds the bag. It is taxed in real terms in the period of consumptive government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

Neither orthodox nor heterodox economists have figured out how the price and profit mechanism works. Macroeconomics in general and the profit and employment theory, in particular, is provably false since Keynes.

Economists’ care for the poor widow and the unemployed teenager and the underpaid nurse, and the endorsement of popular social agendas is, as a rule, rhetorical window dressing. In particular, if the proposed policy is deficit spending and permanent increase in the public debt. The macroeconomic Profit Law states Public Deficit = Private Profit. MMT policy, in particular, is a wellness program for the one-percenters which is realized with the help of the sovereign money issuing state and paid for in real terms by the ninety-nine-percenters.#4

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting
#2 MMT, money printing, stealth taxation, and redistribution
#3 MMT: The one deadly error/fraud of Warren Mosler
#4 For details of the big picture see cross-references MMT


Related 'MMT is ALWAYS a bad deal for the 99-percenters' and 'Austerity and the utter scientific ignorance of economists' and 'Austerity and the idiocy of political economists' and 'Austerity and the total disconnect between economic policy and science'

***
COMMENT on Jure Jordan on Dec 9

You say (i) “State prints its own money. Can you go bankrupt if you could print money?”

No, but that is NOT the issue. Distribution is the issue. If the state/central bank creates new money for the business sector to pay the wages for additional workers and the household sector as a whole spends total income on consumption, i.e. Ch=Yw, then the household sector gets the whole output and the price remains constant if average wage rate and productivity are constant, no matter how much the economy and the average stock of transaction money expands.#1

To produce money in order to enable the autonomous transactions between the business and the household sector is the original task of the central bank, that is, it has to see to it that THE ECONOMY never runs out of money.

If the state issues new money and it is added to consumption expenditures, i.e. C=Ch+Cg, there is a one-off price increase which results (i) in the redistribution of output, and (ii), in the monetary profit Qm=Cg. So, the household sector = ninety-nine-percenters is taxed in real terms via the price mechanism and the business sector = one-percenters makes additional profit. The real distribution and the distribution of financial wealth changes.

One can repeat this feat for an indefinite time without inflation. The central bank finances the deficit, and public debt vis-a-vis the central bank grows steadily if it is not consolidated by issuing interest-bearing bonds or other securities. These financial variants do NOT alter the fact that the wage income receivers are period after period TAXED in real terms without realizing it.

The price mechanism is NOT an information system as Hayek hallucinated but the very tool of stealth taxation/redistribution.

(ii) “No country pays off its debt, ever.”

This is a historical fact. But the indefinite rolling over does not make the debt disappear. The problem is simply pushed beyond the time horizon according to the old policy motto ‘After me, the deluge’. The question is what happens if the debt is eventually redeemed. And the answer is that the market economy breaks down.

(iii) “Debt interest is almost never paid by taxes but by new debt.”

True, but this is only ‘After me, the deluge’ with a vengeance. What MMT is in effect saying is, don’t worry, we will pay neither interest nor principal but, when the day of reckoning comes, redefine debt as a gift of the central bank.

The MMT debt-does-not-matter argumentation appeals to the corrupt part of the population. In the political realm, this kind of half-truth/trickery/deception/fraud is standard procedure. Economics, though, claims since 200+ years to be a science. The real problem starts when academics ignore the separation of science and politics and become the loudspeakers of Warren Mosler’s MMT sales team.#2

#1 MMT, money printing, stealth taxation, and redistribution
#2 MMT: Money-making for the one-percenters

December 5, 2017

Settling the Phillips Curve for good

Comment on Josh Hendricks’ ‘The Phillips Curve, Again’

Blog-Reference

Josh Hendricks summarizes: “the Phillips Curve is something that people desperately want to believe in, despite the lack of evidence.”

Not so. The Phillips curve has been messed up back in the 1960s by both pro- and anti-Keynesians. Thus it became one of the conspicuous landmarks of the cargo cult science economics. For the axiomatically correct Phillips curve see:
Egmont Kakarot-Handtke

Economists’ rude awakening

Comment on Peter Dorman's ‘The Great Awokening’

Blog-Reference and Blog-Reference

There are TWO economixes: 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.

From Adam Smith/Karl Marx up to the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” economists claim that their economic policy guidance has ― in contrast to those of politicians, cranks, demagogues, preachers, snake-oil sellers, agitators, impostors, etcetera ― scientific foundations.

Fact is that there is NO greater embarrassment in the history of modern science than economics. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the foundational concept of the subject matter ― profit ― wrong. What we actually have is the pluralism of provably false theories.

Both orthodox and heterodox economics is scientifically unacceptable. Because of this, economics has nothing to offer in the way of a 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 economics has by now degenerated to pure political agenda pushing. A short visit of the econoblogosphere suffices to realize that economic content has virtually evaporated:
• Tolerance And Terrorism In Saudi Arabia#2
• John Davidson’s Bad Faith Defense of General Kelly#3
• If we treat plutocracy as democracy, democracy dies#4
• Republican Class Warfare: The Next Generation#5
and so on.

Since the founding fathers, economists violate the principle of the separation of science and politics. Economics is what Feynman famously called a cargo cult science.#6

Economics is currently completing its career from failed science to fake science to political fraud.#7 It is time now to expel economists officially from the sciences. The first step is to abolish the fake economics Nobel.

Egmont Kakarot-Handtke

#1 Why is economics such a scientific embarrassment?
#2 EconoSpeak
#3 Uneasy Money
#4 mainly macro
#5 Economist’s View
#6 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#7 For details see cross-references Political economics


For details of the big picture see cross-references Incompetence and cross-references Failed/Fake scientists and cross-references Debunking the representative economist.

***
REPLY to Six on Dec 6

You say “Numbers can never explain ‘how the actual economy works’. They can just give one numerical description after the fact. You need the wordy part of economics to attempt to do the explaining part.”

On Wikipedia, MMT gives this formula for the interdependence of sectoral balances, G−T=S−I−NX, and a verbal description and then draws some economic policy conclusions.#1

The sectoral balances formula is provably false. Because of this, the “wordy part” of MMT is vacuous blather and the economic policy proposals, e.g. a pony for every American, are just silly sales talk.#2

Followers of MMT, of course, do not understand the balances formula but only the pony story. For political purposes the “wordy part” is sufficient.

Economics claims to be a science, and Mitchell, Tcherneva, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne etcetera claim to do science. They are NOT. MMT is a proto-scientific sitcom and a pseudo-social spoof.#3

#1 Wikipedia, Modern Monetary Theory
#2 For the full-spectrum refutation see cross-references MMT
#3 Austerity: Who takes the little man for a ride?

December 2, 2017

MMT is ALWAYS a bad deal for the 99-percenters

Comment on Noah Smith/Bloomberg View on ‘Bigger Deficits for Bad Tax Cuts Is a Bad Deal’

Blog-Reference and Blog-Reference

Noah Smith summarizes: “Her [Stephanie Kelton’s] reasoning, common in MMT circles, is that government deficits are also private-sector surpluses. That’s simple accounting ― since there are only the government and the private sectors in the world, when the government borrows it’s the private sector that lends. When banks or individuals buy government bonds, they become net lenders, meaning that they’re running a financial surplus with respect to the government.”

That’s NOT simple accounting, that’s false accounting. Fact is that economists get macroeconomic accounting wrong since Keynes.#1 The scientific embarrassment is that accounting is elementary mathematics. Because MMTers are too stupid for elementary math the whole theoretical superstructure falls apart, which, in turn, means practically that MMT policy proposals have NO sound scientific foundation.

Whatever Stephanie Kelton thinks she is doing or claims she is doing for the ninety-nine-percenters is a matter of indifference, what she is actually doing is agenda pushing for the one-percenters.

From correct macroeconomic accounting follows Public Deficit = Private Profit. With MMT policy, the business sector is always better off. The household sector, on the other hand, always holds the bag. It is taxed in real terms in the period of government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

The Pavlovian counter-argument against MMT is that it produces inflation. This is nonsense, more precisely, old Quantity Theory nonsense. MMT policy does not cause inflation but massive distributional distortions.#2

MMTers and Post Keynesians and Functional Financers in their utter scientific incompetence simply have no idea how the monetary economy works. The profit and employment theory is provably false since Keynes.#3

With MMT policy, Warren Mosler and his scientifically incompetent academic supporters have found a way to propagandistically endorse full employment, healthcare, and all other popular social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state.#4

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting
#2 MMT, money printing, stealth taxation, and redistribution
#3 MMT: The one deadly error/fraud of Warren Mosler
#4 MMT and the promotion of Wall Street socialism


Related 'Selling public debt with Ricardo’s tear gland rhetoric'

***
REPLY to Matt Franko on Dec 2

You say: “Well the MMT people will often readily admit that ‘the only limit to high deficit is inflation’ so your point here is a bit off the mark... iow it is not a counter argument but a disagreement on scale effect of the tax cuts... iow Smith thinks the "inflation" threshold will be breached and apparently the MMT elites do not...”

What the MMT people readily admit is old Quantity Theory nonsense. Deficit spending leads to a one-off price hike and NOT to inflation.#1 The disastrous effect of MMT is NOT on inflation but on DISTRIBUTION.#2

The whole inflation argument is a bit off the mark.

#1 MMT was right all along: Gov-Deficits do NOT cause inflation
#2 Austerity and the idiocy of political economists

***
REPLY to MRW on Dec 3

You say: “You’re still peddling this notion that the US federal level macroeconomy is based on your definition of science, terms you insist must be obeyed in order for you to grant the poobahs from your point-of-view the honor of being an economic scientist here.”

The Law of Gravity and 2+2=4 applies always and everywhere. This is the very kick of science that it applies universally. The same holds, of course, for economic laws and the elementary math of accounting.

Warren Mosler argues: “In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”#1

No, correct accounting says Public Deficit = Private Profit. Warren Mosler is either stupid or he deliberately deceives his brain-dead followers. His assertion “Simply put, government deficits ADD to our savings (to the penny).” is false. It is NOT “our” savings but “their” profits.

If you do not understand what science is all about, that’s OK. But that academics and people with an economics diploma like Mitchell, Tcherneva, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne etc. join Warren Mosler’s sales force is strange, to say the least.

#1 MMT: The one deadly error/fraud of Warren Mosler

***
REPLY to MRW on Dec 4

You say: “I don’t agree, Public Deficit = Private Profit. Doesn’t make sense.”

National accounting deals with period flows for the economy as a whole. Your airport example shows that you do not understand what aggregated period flows are. The lack of sense is in your head.

Consistent National Accounting results in the formula Public Deficit = Private Profit. Private profit is total monetary profit for the business sector as a whole. The formula is provable and testable to the penny. For the proof see ‘Rectification of MMT macro accounting’.

For the MMT accounting mistake/error/fraud see ‘MMT and the magical profit disappearance’.

Public deficit spending has always been a profit machine for the one-percenters, see ‘Keynesianism as ultimate profit machine’.

That people who call themselves Progressives argue for deficit spending is either stupidity or fraud or both, see ‘Austerity: Who takes the little man for a ride?’.

MMT policy does NOT cause inflation but the gigantic distortions of the distribution of income and wealth that so-called Progressives criticize so vehemently. A bit schizo, isn’t it?

November 27, 2017

Freedom for fake scientists?

Comment on Barkley Rosser’s ‘A Race To Suppress Academic Freedom?’

Blog-Reference

There are TWO economixes: 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.

It is important to realize that 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.

Orthodox economics is clearly defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

Since the soapbox economists and agenda pushers Adam Smith and Karl Marx, economics is what Feynman called a cargo cult science. In the genuine sciences, peer review is institutionalized as quality control, in economics it has been perverted to an instrument of selection and career promotion of suitable spokespersons and representatives of the prevailing view.

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

This pluralism is not an indicator of academic freedom and creativity but the very proof of scientific degeneration, incompetence, and confusion. Pluralism is a political concept and relates to matters of belief. Science is about knowledge and the sole criterion is true/false with truth clearly defined as material/formal consistency.

Theoretical economics is scientifically unacceptable from Jevons/Walras/Menger onward to DSGE. So, what remains is political economics.#1 And that is exactly what can be observed from Krugman’s liberal soapbox blather to Keen’s leftist agenda pushing. Not to forget Barkley Rosser, the expert for political unrest in Catalonia, Saudi Arabia, and China who, disqualifying for an economist, does still not know what profit is.#2

Economists have never understood the overriding importance of the separation of science and politics and simply ignore that they have NO political mandate. Strictly speaking, there is no place for political economics in academia. Because of this, the question of whether there is more academic freedom in the USA or in China is pointless. In the last 200+ years, economists have never been more than useful political idiots. Time to make economics a science.

Egmont Kakarot-Handtke

#1 For details see cross-references Political economics
#2 You are fired!


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

***
REPLY to Barkley Rosser on Nov 28

You say: “As for me not knowing what profit is, well, I know that you think the most important thing about profit is to distinguish between retained and distributed earnings, which is an utter accounting triviality.”

In the last instance, it is not an accounting triviality but one of elementary mathematics. And the fact of the matter is that economists are too stupid for simple math.#1 You still don’t get it.#2

All this, though, does not matter much because academic economics is, to begin with, NOT about scientific excellence but about political agenda pushing.

Traditionally, there are two methods of governance: carrot and stick. In entrenched/ affluent societies the carrot is preferred (= an offer you cannot refuse), while vulnerable post-regime-change societies rely more on the stick (= a threat you cannot ignore). Neither method has much to do with the Humboldtian ideal of unconditional academic freedom.

#1 National Accounting: scientific incompetence or political fraud?
#2 How the intelligent non-economist can refute every economist hands down

***
REPLY to Barkley Rosser on Nov 29

You say: “Every accountant and the vast majority of economists are fully aware that retained earnings and distributed earnings are not the same thing, yes, this is trivial arithmetic we all know, even the dumbest of us, …”

No, you simply don’t get it.

Macroeconomics is false since Keynes. Here is the corpus delicti from the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because macroeconomic profit is ill-defined
(i) the whole theoretical superstructure of Keynesianism is provably false,#1
(ii) all I=S and IS-LM models are provably false,#2
(iii) Post Keynesianism is provably false,#3
(iv) MMT is provably false,#4
(v) all microfounded approaches are a priori false.

Macroeconomic profit is in the Keynesian case given with Qm=I−Sm. The Profit Law says that the monetary profit of the business sector Qm is equal to the difference between investment expenditures of the business sector I and monetary saving of the household sector Sm (or dissaving −Sm as the case may be).

The correct macroeconomic Profit Law Qm=I−Sm REPLACES the untenable Keynesian I=S.

The scientific incompetence of the representative economist consists in not having realized in 80+ years the foundational error in Keynesian and After-Keynesian macro. No more proof of utter scientific incompetence is needed.

All this elementary stuff comes well before the distinction between profit and distributed profit is introduced as even the dumbest member of orthodox and heterodox academic economics has to admit.

When distributed profit Yd is taken into the picture the Profit Law expands to Qm=Yd+I−Sm. Only Allais got this equation right,#5 the rest of econ academia is still lost in the proto-scientific woods.

Fact is that economists have not gotten the Profit Law right in the last 200+ years. Academic freedom has been perverted into the privilege to produce cargo cultic trash for the political Circus Maximus and to violate the scientific standards of material and formal consistency with impunity.

#1 Keynesians ― terminally stupid or worse?
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Why Post Keynesianism Is Not Yet a Science
#4 Where MMT got macro wrong
#5 How Keynes got macro wrong and Allais got it right


Related 'Macroeconomics without Keynes'

***
ADDENDUM on Nov 30

Behind the facade of academic freedom, peer review has long ago been corrupted to gatekeeping. See James Heckman’s Summary Chart on Twitter.

Source: Twitter, James Heckman

Accordingly, the scientific content of AER and the rest of economic journals has been zero for generations.

***
REPLY to Barkley Rosser on Dec 1

This is the track record of economics:
  • profit theory, false since 200+ years,
  • Walrasian microfoundations (including equilibrium), false since 140+ years,
  • Keynesian macrofoundations (including I=S, IS-LM), false since 80+ years,
  • Walrasianism, Keynesianism, Marxianism, Austrianism = mutually contradictory, axiomatically false, materially/formally inconsistent,#1
  • unresolved pluralism of provably false theories,#2
  • scientific content of economic journals = zero,
  • scientific content of economic textbooks = zero,#3
  • economics is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”,#4
  • what is entirely missing among economists is scientific competence,#5
  • economics never rose above the proto-scientific level.#6
#1 Fact of life: your econ prof is scientifically incompetent
#2 “There are always many different opinions and conventions concerning any one problem or subject-matter …. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper)
#3 The father of modern economics and his imbecile kids
#4 Yes, economics is a bogus science
#5 For details of the big picture see cross-references Science and cross-references Failed/Fake scientists
#6 The real problem with the economics Nobel

***
REPLY to Barkley Rosser on Dec 2

With regard to economics, academic freedom has been clearly defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

In economics, peer review ensures that only papers that conform to methodological individualism ≈ Walrasianism ≈ Neoclassics ≈ Orthodoxy are accepted. It is plain that the AER as flagship journal has executed these methodological guidelines faithfully for generations and the rest has followed suit. Unfortunately, methodological individualism is proto-scientific junk since 140+ years.

What more proof does anybody need that, with regard to economics, academic freedom has been perverted to a license for morons to crowd out scientists.

Your comparison of academic freedom in the USA and China is simply absurd and a deflection of the plain fact that economics is a cargo cult science and that the representative orthodox/heterodox economist is either stupid or corrupt or both.

MMT, money printing, stealth taxation, and redistribution

Own post, no external Blog-Reference

The MMT message is: “The only limit to how much a currency issuing government can spend is inflation. Not the debt. Not the deficit. Inflation.” (see Twitter and the blogosphere)

This joyful political message is based on MMT economic theory which, as a matter of fact, is provably false. Needless to emphasize that the general public cannot see that MMT economics is scientific garbage, a feature that it shares with Walrasianism, Keynesianism, Marxianism, and Austrianism. But lack of sound scientific foundations has never been a disadvantage in discussions about economic policy.#1

Because economics is a failed science it has to be reconstructed from scratch. As the new analytical starting point, the pure 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.#2


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

From (1) follows W/P=R, i.e. the real wage is equal to the productivity. So, for a start, labor gets the whole product.

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 (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing total monetary profit is zero.

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. 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.#3


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 in the case of budget balancing and market clearing and this yields the commonplace correlation between 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.

Let us now introduce government deficit spending. Total expenditures consist now of household sector spending Ch, with Ch=Yw, and government sector spending Cg. The money for government spending is created out of nothing by the central bank.

The market clearing price is according to the macroeconomic Law of Supply and Demand P1=(Ch+Cg)/X0=P0+Cg/X0, that is, there is a hike of the market clearing price which depends on the amount of additional nominal government demand Cg. Employment, productivity, and output are kept constant, i.e. O1=O0=X1=X0. The one-shot price increase has NOTHING to do with inflation. The price increase effects the redistribution of output between the household and the government sector in the period under consideration.

The real share of output of the household sector, which was initially 100 percent, is now lower, i.e. Oh1=Xh1=Ch1/P1<Oh0=Ch0/P0 with Ch1=Ch0. In real terms, the household sector is taxed. The real tax is given with Oh0−Oh1 and it is proportional to government spending Cg and, in turn, to money creation. The government simply uses the price mechanism for real taxation. The households cannot see that they are taxed.

The profit of the business sector was zero in the initial period and is now positive, i.e. Qm=Cg, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit. This configuration can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of cash rising continuously. As MMT claims, there is no operational limit to government deficit spending/money creation.

With MMT policy, the business sector is clearly better off. The household sector, on the other hand, holds the bag. It is taxed in real terms in the period of government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

MMT policy is an economic shell game with massive and virtually unlimited redistributive effects to the detriment of the ninety-nine-percenters.#4

Egmont Kakarot-Handtke

#1 For details see cross-references Political economics
#2 Wikimedia, Pure production-consumption economy
#3 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#4 For the full-spectrum refutation of MMT see cross-references


Related 'MMT is ALWAYS a bad deal for the 99-percenters'

November 26, 2017

Dear philosophers, economics is a system science

Comment on Lars Syll’s ‘La discipline économique et le mirage de la ‘vraie science’’

Blog-Reference

Frédéric Lordon maintains: “Car l’économie a été soumise comme aucune autre science sociale au démon de la tentation galiléenne: n’est-elle pas par excellence science social du quantitatif et science des rapports sociaux nombrés?”

Frédéric Lordon’s mistake is to unthinkingly subsume economics under the so-called social sciences. The subject matter of economics, though, is the structure and behavior of the economic system. To explain individual/social behavior is the task of Psychology, Sociology, Political Science, History, Biology/Evolution, Philosophy, etcetera.#1

With Political Economy, economics started on the wrong foot. Since Adam Smith/Karl Marx, economists NEVER understood what science is all about. Until this day, economics is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is entirely missing among both orthodox and heterodox economists is scientific competence.#2 After more than 200 years economists have not even figured out what profit is, that is, they do not understand the pivotal phenomenon of their subject matter.#3 By consequence, neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations.

The scientific incompetence of economists consists in the fact that it is beyond their means to realize that NO way leads from the second-guessing of Human Nature/motives/behavior/ action to the understanding of how the economic system works.#3 Analogously, NO way leads from the second-guessing of the motives, emotions, and ruminations of passengers/ crew to the understanding of how big metallic objects can fly. In other words, from psychology NO way leads to the Laws of Aerodynamics.

The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science: “The fundamental problem, therefore, of the social science, is to find the laws according to which any state of society produces the state which succeeds it and takes it place.” (J. S. Mill)

The social sciences cannot, for deeper methodological reasons, rise above the level of storytelling. And this is exactly what Walrasianism, Keynesianism, Marxianism, and Austrianism is. Neither approach satisfies the non-negotiable criteria of science, i.e., material and formal consistency.

In order to become a science, economics has to perform the paradigm shift, that is, it has to move from false Walrasian microfoundations and false Keynesian macrofoundations to true systemic macrofoundations. Thereby, retarded epistemologists like Syll and Lordon are more a handicap than a help.

Egmont Kakarot-Handtke

#1 Economics is NOT a social science
#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#3 Brief history of soapbox economics

November 21, 2017

Brief history of soapbox economics

Comment on Peter Radford’s ‘Doomed to repeat?’

Blog-Reference

Peter Radford remembers the good times: “There was a time when it [economics] attempted to explore reality, when it included lumpy and vague concepts, when it allowed for collective action, and when it related to experience: how different from today’s pseudoscientific axiomatically self-determining oddity.”

Peter Radford’s prototype of an economist is Adam Smith, “We’ve been chasing his tail, and his tale, ever since.” Joseph Schumpeter characterized Adam Smith accurately as the founder of soapbox economics: “… in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.”

And then the high times of plain common sense, storytelling, and straightforward agenda pushing ended: “Where do the wheels start to come off? The early writers, those we call the ‘classical theorists’ talked about economics very differently from the way we do today. We lost a lot when the change occurred. Frankly, I blame the ‘marginalists’ but that’s just me.”

Not exactly. Keynes has to be credited for realizing that the economics of Jevons/Walras/ Menger/Marshall was false at its core and that nothing less than a paradigm shift was needed: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”

After Keynes, every economist who still does not see the necessity of a paradigm shift is a moron. One loudspeaker of this prevailing majority is Krugman who debunks himself with: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Fact is that maximization-and-equilibrium economics has already been dead in the cradle 140+ years ago.

Keynes, though, messed up the shift from microfoundations to macrofoundations. His lethal blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This two-liner is conceptually and logically defective because Keynes never came to grips with profit. (Tómasson et al.) Because profit is ill-defined, the whole analytical superstructure of Keynesianism is false.#1

As a genuine soapbox economist, Keynes never rose above the proto-scientific level: “In the early thirties he [Keynes] confessed to Roy Harrod that he was ‘returning to an age-long tradition of common sense’.” (Coates)

Because Marx#2, the Post Keynesians#3, and the Austrians, too, never got the foundational concept profit right, the present state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, materially/formally inconsistent, and all four approaches are mutually contradictory.

The history of economic non-thought boils down to a case study of scientific incompetence and soapbox blather. What we have today is the indefensible pluralism of provably false theories.#4 Economists still lack the true theory#5. But: “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)

With a little educated common sense and much personal opinion, both orthodox and heterodox economists were never more than useful political idiots and clowns in the Circus Maximus.#6

Egmont Kakarot-Handtke

#1 Keynes’s Missing Axioms
#2 Profit for Marxists
#3 Why Post Keynesianism Is Not Yet a Science
#4 Heterodoxy, too, is scientific junk
#5 Yes, economics is a bogus science
#6 Economists: scientists or political clowns?


Related 'Why J. S. Mill had no friendly word for the bigots and votaries of common sense' and 'The bigots of common sense' and 'Misled by ordinary intuition and common sense' and 'How the intelligent non-economist can refute every economist hands down'.

November 20, 2017

Some fatal flaws of MMT

Comment on Simon Wren-Lewis on ‘Some thoughts about the Job Guarantee’

Blog-Reference and Blog-Reference

Simon Wren-Lewis summarizes: “But I am also fed up with policy makers implementing bad policies just because they sound good to those policy makers, so I want to subject any policy I intuitively like to rigorous analysis.”

Rigorous analysis of MMT shows the following
• MMT is based on Keynesian macro which is provably false since 80+ years,#1
• MMT profit theory is false,#2
• MMT employment theory is false.#3

False theory leads to false policy guidance.#4 MMT policy guidance has no sound scientific foundations. MMT policy proposals are social on the surface but in essence a wellness program for the one-percenters.#5, #6

Egmont Kakarot-Handtke

#1 How Keynes got macro wrong and Allais got it right
#2 Rectification of MMT macro accounting
#3 Full employment through the price mechanism
#4 MMT: The one deadly error/fraud of Warren Mosler
#5 MMT and the promotion of Wall Street socialism
#6 For details of the big picture see cross-references MMT


Related 'Everything you know about MMT is wrong' and 'MMT: The one deadly error/fraud of Warren Mosler' and 'MMT, money printing, stealth taxation, and redistribution'.

***
COMMENT on David Timoney on Nov 23

There are TWO issues here: the microeconomic = operational details of a Job Guarantee and the macroeconomic effects of MMT policy in general.

So, given one has revisited employment theory#1 and decided the operational nitty-gritty, the remaining question is how to finance the program: taxes or deficit spending with central bank money?

Rigorous analysis shows that budget deficits of the government sector end up one-to-one as profit in the cash box of the business sector. It holds Public Deficit = Private Profit.#2

So, in the final analysis, a tax-financed JG program is advantageous for the household sector = ninety-nine percenters and a central bank financed program is advantageous for the business sector = one-percenters.

Why MMT obscures the profit effect of their policy#3 and why the representative economist so eagerly gets lost in the wood of operational details of fake social programs is at anybody’s guess.

#1 Full employment through the price mechanism
#2 The profit effect of a Job Guarantee
#3 MMT and the magical profit disappearance

November 19, 2017

Dilettantes at the end of the coal-pit

Comment on Jo Mitchell’s ‘Dilettantes shouldn’t get excited’

Blog-Reference and Blog-Reference on Nov 20 and Blog-Reference on Nov 21

As Hume said, “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

With DSGE, Walrasian economics has, after 140+ years, reached the end of the coal-pit. Lacking sound scientific judgment, though, Christiano/Eichenbaum/Trabandt maintain: “People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren’t serious about policy analysis…”

Science is NOT about like/dislike but about true/false. Fact is that DSGE is provably false. Because of this, all policy proposals that have ever been derived from DSGE models lack sound scientific foundations.

Science is about the true theory. The characteristic of science is the insistence on 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)

Economics pretends to be a science but is what Feynman called a cargo cult science “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Economists lack genuine scientific instinct/ambition: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter, 1946)

Theory construction starts since 2000+ years with clearly stated premises#1: “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter)#2

Not only DSGE has failed at constructing the Simple Ur-Model. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept profit wrong.

At the end of the coal-pit, the lethal methodological blunder of DSGE is quite obvious: microfoundations are false since Jevons/Walras/Menger. And Keynes’ attempt to move from microfoundations to macrofoundations failed.#3

The methodologically correct action in the given situation is the paradigm shift. False Walrasian microfoundations and false Keynesian macrofoundations have to be replaced by true macrofoundations.

Economics is a failed/fake science. At the end of the coal-pit, it is now quite obvious that scientific dilettantism leads the representative orthodox/heterodox economist astray since 200+ years.

Egmont Kakarot-Handtke

#1 “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
#2 Microfoundations are given with this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#3 How Keynes got macro wrong and Allais got it right


Related 'Yes, economics is a bogus science' and 'From false microfoundations to true macrofoundations' and 'Heterodoxy and Pluralism, too, is proto-scientific junk' and 'First Lecture in New Economic Thinking' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Scientific Incompetence and cross-references Failed/Fake scientists.

The Simple Ur-Model is given with the Economics God Equation


NOTE on Lars Syll’s ‘DSGE models are missing the point’ on Nov 23

“Macroeconomics needs models which work to guide the interventions of government policy.” (Silsonwy)

“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)

Neither Orthodoxy nor Heterodoxy has the true theory. See Dilettantes at the end of the coal-pit.

November 18, 2017

Why Heterodoxy is no real alternative to mainstream economics

Comment on Lars Syll on ‘Why Krugman and Stiglitz are no real alternatives to mainstream economics’

Blog-Reference and Blog-Reference

Mainstream economics is a failed/fake science, that much is obvious. Only a moron can take DSGE seriously. The problem is that there are still so many of them around. Why this is so is a deep sociological question. Even deeper is the question why Heterodoxy never developed a real alternative to mainstream economics.

Lars Syll noticed the obvious, that is, alleged new economic thinking has never been more than putting lipstick on the dead Walrasian pig: “Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream neoclassical economists. Just like Milton Friedman, Robert Lucas or Greg Mankiw.” This, however, is not a sensational new insight. After all, Krugman tells anybody on any occasion that “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Anyone who expects that an orthodox economist honors the scientific protocol and retires quietly after he has been refuted has not studied the history of economic thought. Economists violate scientific standards since 200+ years: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)

Not only Orthodoxy violates scientific standards and blathers on as if nothing had happened but Heterodoxy, too. What we actually have is the pluralism of false theories. 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. Neither Orthodoxy nor Heterodoxy satisfies well-established and well-known scientific standards. Neither Orthodoxy nor Heterodoxy has achieved anything of scientific value.#1

Take Adam Smith and Issac Newton as reference points. How much knowledge did science produce and how much did the cargo cult science economics produce in roughly 200 years? Economists live either in the maximization-and-equilibrium world or in the Keynesian world or in the pluralistic world of anything goes. All three worlds are hallucinatory.

Lars Syll buries Orthodoxy for good: “No matter how many thousands of technical working papers or models mainstream economists come up with, as long as they are just ‘wildly inconsistent’ axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and possible explanations of real economies.”

True, but to repeat this in thousands of posts on Heterodox blogs does not help much either: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

This is the enigma of economics: why does Heterodoxy “not take us one single inch closer to giving us relevant and usable means to further our understanding and possible explanations of real economies?”#2 Fact is that Heterodoxy is not part of the solution but part of the problem.

In order to get out of the proto-scientific mess, economics needs a paradigm shift.#3 Nothing less will do. Both Orthodoxy AND Heterodoxy is proto-scientific rubbish — or worse.

Egmont Kakarot-Handtke

#1 Yes, economics is a bogus science
#2 For details of the big picture see cross-references Failure of Heterodoxy
#3 From false microfoundations to true macrofoundations


Related 'Not big news: political economics is a failure' and 'Economics is NOT a science of behavior' and 'Where modern macroeconomics went wrong' and 'Heterodox schizo'.

November 16, 2017

Yes, economics is a bogus science

Comment on John Ioannidis/Los Angeles Times on ‘Economics isn’t a bogus science ― we just don’t use it correctly’

Blog-Reference and Blog-Reference on Nov 17

John Ioannidis argues: “But these crises and scandals do not mean that the SCIENCE of economics is inherently unreliable. Most of them occurred because we ignored what we knew. Perhaps most obviously, we deputized ― and continue to deputize ― the wrong people as authorities. … But the opinions of wealthy tycoons are often dissociated from SCIENTIFIC evidence, out of touch with reality and all too plainly wrong. … Similarly, politicians rarely use economic SCIENCE to make decisions and set new laws. Indeed, it is scary how little SCIENCE informs political choices on a global scale. Those who decide the world’s economic fate typically have a weak SCIENTIFIC background or none at all.”

John Ioannidis desperately tries to convince the audience that economics is a SCIENCE. Economists have attempted this from Adam Smith/Karl Marx onward up to the “Bank of Sweden Prize in Economic SCIENCES in Memory of Alfred Nobel”.

Fact is that economics is a failed/fake science or what Feynman called a cargo cult science.

Strictly speaking, there is no such thing as economics. There are TWO economixes: 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.

For non-economists, the most important thing to realize is that 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.

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got the foundational concept of the subject matter ― profit ― wrong.#1, #2

The fact that economists do not know what profit is makes economics a proto-science comparable to medieval physics before the foundational concept of energy was properly defined and understood. Methodologically it holds since 2000+ years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

So, when the premises (foundational concepts, axioms, primitive propositions, postulates, principles, hardcore assumptions, etc) are false the whole analytical superstructure is false and NO SCIENTIFIC knowledge of a thing is produced.

Because economics is a failed/fake science it has to be reconstructed from scratch. In methodological terms, economics needs a paradigm shift, that is, Walrasian microfoundations and Keynesian macrofoundations have to be scrapped and fully replaced by consistent (= certain, true, and primary) macrofoundations.

John Ioannidis does not understand this because he is a bogus scientist.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008) For details of the big picture see cross-references Profit


Related 'Keynes, Euclid, and economic methodology' and 'Economics: 200+ years of scientific incompetence and fraud' and 'Heterodoxy, too, is scientific junk' and 'The real problem with the economics Nobel' and 'Economics: a science without scientists' and 'There is NO such thing as an economic expert' and 'Schizonomics' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Failed/Fake scientists and cross-references Scientific incompetence.

November 15, 2017

Full employment through the price mechanism

Comment on Bill Mitchell on ‘Automation and full employment ― back to the 1960s’

Blog-Reference and Blog-Reference

Bill Mitchell argues “A currency issuing government has the ability to address change in a timely way so as to minimize the effects of disruptive innovation by maintaining full employment and keeping the economy on track. It’s a matter of maintaining demand so resources that technological innovation and increased productivity make available are not idled owing to lack of demand.”

This is not false but only the first half of the correct employment theory. Bill Mitchell argues within the familiar Keynesian macro framework. He has not realized that Keynes’ employment theory is provably false.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded#2) Employment Law is shown on Wikimedia.#3


From this equation follows:
(i) An increase of the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(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 equation contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρF  as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.

With regard to automation then follows (under the initial condition of I given and ρE=1 and P constant) that the average wage rate has to rise in lockstep with productivity in order to keep ρF constant and employment at the given level.

There are TWO set screws for controlling employment, i.e. ρE and ρF. Bill Mitchell completely ignores the macroeconomic price mechanism which is formally embodied in ρF.

False theory leads to false policy guidance. With their defective employment theory, economists ― including Post Keynesians and MMTer ― bear the intellectual responsibility for the social devastation of mass unemployment.#4

Egmont Kakarot-Handtke

#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 The macrofoundations approach starts with three systemic 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. For a start it holds X=O.
#3 Wikimedia, Employment Law
#4 For details of the big picture see cross-references Employment

***
REPLY to Kaivey on Nov 15

Stop hallucinating and learn to read!

The title of my post is ‘Full employment through the price mechanism’. It is shown that ― for systemic reasons ― the average wage rate must rise faster than the productivity in order to move towards full employment and that the average wage rate must rise with the same rate as productivity in order to maintain full employment and price stability.

I made it quite explicit that “This is the OPPOSITE of what microfounded economics teaches.” Your Pavlovian waffle about the advocates of the free market system is entirely beside the point.#1

You say “MMT is a way of tweaking the machine to run at a more optimum level taken into account people’s needs, psychology, desires, and wants, and the greater good of the collective society.”

Dream on. MMT is proto-scientific garbage. The employment theory is provably false since Keynes.#2 The political claim that MMT fights for the little man (Kelton: a pony for every American) is rancid soap opera stuff.#3

For the ‘greater good of the collective society’ MMTer have to be expelled from the scientific community.

#1 The market economy is inherently unstable and economists never grasped it
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 MMT: Money-making for the one-percenters

***
REPLY to ANC Driver on Nov 17

There are two issues here: employment and profit.

Profit, in turn, comes in two forms: monetary profit Qm and distributed profit Yd. This gives one the Profit Law for the elementary production-consumption economy as Qm=Yd−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving. Note that there is a positive feedback loop between profit and distributed profit. This, by the way, sinks the idea of economic equilibrium.

For the investment economy including government and excluding foreign trade, macroeconomic profit is given by Qm=Yd+(I−Sm)+(G−T). This compares to the original MMT balances equation (S−I)+(T−G)=0 or 0=(I-S)+(G-T).#1 The equations clearly tell everybody that MMT deals with a zero profit economy ― no profit, no distributed profit. Nobody has ever seen a zero profit economy. So the whole of Modern Monetary Theory is vacuous blather.

This means, of course, that MMT employment theory, too, is vacuous blather. The Employment Law for the closed economy is shown on Wikimedia.#2, #3

The Employment Law tells everyone that the average wage rate must rise faster than productivity in order to achieve full employment. This is a testable proposition because the Employment Law consists of measurable variables (see ADDENDUM below).

It is only a question of time until MMT is empirically refuted.

#1 Wikipedia, Modern Monetary Theory
#2 Wikimedia, Employment Law, including profit distribution
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

***
ADDENDUM on Nov 23 'Australia Wage Growth and Underutilization Rate'

Source: Tweet Philip Soos
See the Employment Law above for the inverse relationship between wage rate and unemployment.

November 12, 2017

MMT: The one deadly error/fraud of Warren Mosler

Comment on Warren Mosler on ‘Seven Deadly Innocent Frauds of Economic Policy

Blog-Reference

Warren Mosler asserts: “Deadly Innocent Fraud No.1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no ‘solvency risk.’“

Operationally true, of course. With regard to the economy holds, the Legitimate Sovereign can do anything. The two questions, what is legitimate and who is the sovereign has to be discussed and decided in the political realm. What Legitimate Sovereignty means in concrete detail is NOT an issue for economics ― understood as science. It should be clear, though, that from the fact that the government is not operationally constrained to kill the whole population does not logically follow that this is legitimate. Legitimacy entails operational self-constraint. From the fact that government spending is not operationally constrained does not logically follow that it is legitimate. From the fact that the government is not constrained in creating any amount of money does not logically follow that this is ‘good’ economic policy. The detailed discussion about operational feasibility distracts from the core of the matter.

The core of economics is the question of how the monetary economy works and how deficit spending affects employment, income, profit, the creation/destruction of money, absolute and relative prices, growth, nominal and real distribution over the whole cycle from the origination of private and public debt to its full redemption.

Warren Mosler is right on all operational details but he does not get the big picture. He is, like the economists he criticizes, an incompetent scientist and inexcusably bad at macroeconomics.#1 The common defect of all schools of economics is macroeconomic profit theory.#2 Warren Mosler’s MMT movement is no exception.

“Deadly Innocent Fraud No.2: With government deficits, we are leaving our debt burden to our children. Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.”

True, except for the fact that MMTer confuse (or play a shell game with) the words we, us, and our.#3 Debt or no debt makes a huge difference for the DISTRIBUTION of real output (and accumulated real wealth) between the ninety-nine percenters and the one-percenters ― “we” and “our” in ‘We owe the debt to ourselves’ refer to DIFFERENT people.#4

“Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”

Unfortunately, MMTers got National Accounting wrong.#5 Fact is that government deficits add NOT to OUR savings but to profit. It holds Public Deficit = Private Profit. Not to realize this (or to shell game it away) is the one deadly error (fraud) of MMT.#6

“Deadly Innocent Fraud No.6: We need savings to provide the funds for investment. Fact: Investment adds to savings.” Or “I like to say it this way: ‘Savings is the accounting record of investment.’”

This is rubbish since Keynes. The axiomatically correct relationships are Qm=−Sm in the case of the pure production-consumption economy, Qm=I−Sm in the case of the investment economy, Qm=(I−Sm)+Yd+(G−T)+(X−M) in the general case. Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.

Saving is NEVER equal to investment. Therefore, all I=S and IS-LM models are provably false and this includes Post Keynesianism and MMT.#7

With MMT policy, Warren Mosler has found a way to endorse full employment, healthcare, and other social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state.#8

Egmont Kakarot-Handtke

#1 For the point-by-point refutation see cross-references MMT
#2 The profit theory is false since Adam Smith
#3 On the saying “We owe the debt to ourselves”
#4 MMT and the promotion of Wall Street socialism
#5 Rectification of MMT macro accounting
#6 MMT and the magical profit disappearance
#7 For details of the big picture see cross-references Refutation of I=S
#8 MMT: Redistribution as wellness program

***
REPLY to Kaivey on Nov 13

You say: “Our government is run by the oligarchy and we need a more democratic government accountable to the people.”

This, obviously, is a political analysis/conclusion. And, clearly, it has to be dealt with in the political realm. Economists, though, seem never to have fully realized that there is, for very good reasons, a strict separation of politics and science.

Since the founding fathers, economists violate the principle of the separation of science and politics which has been clearly stated by J. S. Mill: “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.”

The compelling reason for the separation of politics and science is that the two realms are guided by different and incompatible principles. The one question in science is about the truth of a theory, i.e. its material and formal consistency: “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)

The designation MMT = Modern Monetary Theory indicates the allegiance to science. The problem is that MMT is nothing but crappy proto-science. This status MMT shares with the rest of economics. Economics is what Feynman famously called a cargo cult science and neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations since the soapbox economists Adam Smith and Karl Marx.

At present, neither Krugman nor Wren-Lewis nor Keen#1 nor Varoufakis nor Mosler nor the rest of political loudspeakers, fake scientists, amateur journalists, bloggers, and blatherers can back up their political agenda pushing with a scientifically acceptable economic theory.#2 In order to become a science, economics has to get rid of ALL these folks.

#1 Debunking Squared and Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn and Keenonomics, aggregate demand/change of debt, and some misleading critique
#2 For details of the big picture see cross-references Political Economics

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REPLY to Calgacus on Nov 14

You say: “New Deal style deficit spending can be and almost always is the option that causes the smallest future additional distributive burden of the 99% towards the 1% - one which is mostly negligible.” and “An important way station in realizing this is understanding the flaw in the idea that surpluses are needed to pay for deficits in some way. In particular the idea that this follows from money being a creditary relationship.”

(i) Public deficit spending increases public debt. The concept of debt includes repayment in period t, otherwise, it is a gift. Now, the repayment can be postponed indefinitely. So, as a LIMITING case t goes to infinity, t → ∞. MMT simply pushes repayment beyond the time horizon where it is conveniently forgotten.

(ii) The limiting case, though, does NOT make the debt disappear. Debt gives rise to interest. And a debt with infinite duration gives rise to an infinite interest burden for the household sector which takes the form of a tax burden.

(iii) Interest payments redistribute income from we = all taxpayers = creditors + non-creditors to creditors.

(iv) In the LIMITING case, the interest rate is zero if the debt is held in the form of overdrafts/deposits at the central bank (with deposits = money). In this limiting case, no redistribution of income takes place.

(v) The two limiting cases taken together make public debt resemble a gift: no repayment, no interest burden.

(vi) What is missing in this picture is that Public Deficit = Private Profit. Profit, though, is not indefinitely held as zero interest deposit at the central bank. Let us assume here that profit is distributed as dividend and that this dividend income is fully spent. The additional consumption expenditures lead to a price hike and a redistribution of period output between wage income receivers (a.k.a. ninety-nine-percenters) and the receivers of dividends (a.k.a. one-percenters). Needless to emphasize that non-distributed profits can alternatively be used to buy all kinds of assets, e.g. other firms.

In sum: Public deficit spending has real distributional effects. Whether these are ‘huge’ or ‘small’ depends on the duration of the debt, the rate of interest, and on profit distribution or how non-distributed profit is used. Compared to taxation, public deficit spending is, in any case, a BAD deal for the ninety-nine-percenters.#1 Apart from the distributional issue, it holds in any case that public deficit spending increases the economic power of the business sector.

MMTers and Post Keynesians and Functional Financers in their utter scientific incompetence simply have no idea how the monetary economy works.#2 The profit and employment theory is provably false since Keynes.#3 The only positive feature of Keynesianism/MMT is that microfounded Orthodoxy is an even greater heap of proto-scientific garbage.

#1 On the saying “We owe the debt to ourselves”
#2 Why Post Keynesianism Is Not Yet a Science
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to Calgacus on Nov 15

The balances equations MMT is based upon are provably false.#1 By consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.

The core of the argument is: the macroeconomic foundations of MMT are false since Keynes. Because of this, all MMT policy recommendations lack sound scientific foundations. And this, in turn, means that MMT is not economics but brainless agenda pushing. On closer inspection, it turns out that MMT claims to push the agenda of the ninety-nine-percenters but in fact — intentionally or unintentionally does not matter — it pushes the agenda of the one-percenters.

So, MMT is refuted as an approach.#2 The lack of consistent axiomatic foundations is, of course, compatible with the fact that SOME claims of MMT are accidentally or commonsensically or trivially true. This does not help much. The flat earth theory contained also statements that were trivially true but this has not saved it from being flushed down the drain.

You say “But what you are doing is like trying to refute or prove a statement of classical Euclidean plane geometry with calculus or differential geometry.” It is pretty obvious that this pseudo-methodological blather is beside the point and an insufficient answer to the PROOF of MMT’s material/formal inconsistency.

So, let us first of all, put the balances equations right. At first, we have only the business- and the household sector.#3 The two sectoral balances are given as follows:
Qm≡C−Yw  profit Qm is household sector’s spending C minus wages Yw,
Sm≡Yw−C   saving Sm is wage income Yw minus consumption expenditures C,
---------------
Qm+Sm=0 or Qm=−Sm.

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. For a start, the household sector’s budget is balanced, i.e. C=Yw, hence macroeconomic profit is zero.

Transaction money is needed by the business sector to pay the workers who receive the wage income Yw per period. Transaction money is produced (i) either in the form of an IOU by the business sector, or (ii), by the central bank in the form of overdrafts/deposits with deposits = money. The average stock of transaction money is given as M=kYw, with k determined by the payment 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 either the business sector as an IOU or by the central bank in the form of deposits and overdrafts which are always equal. The idealized transaction pattern is shown on Wikimedia.#4


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.

The transaction equation M=kYw=kPX=kPRL tells one that under the condition of budget balancing C=Yw and market clearing X=O the average stock of transaction money doubles if employment L doubles. The economy NEVER runs out of money. Transaction money is a generalized short-term IOU that bears no interest.

Now, the government sector GS is added. The three sectoral balances are given as follows:
Qm≡C+G−Yw  profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡Yw−T−C   saving Sm is wage income Yw minus taxes T and expenditures C,
Bm≡T−G         budget surplus Bm is taxes T minus government expenditures G,
-------------------
Qm+Sm+Bm=0 or Qm=−Sm−Bm.

The business sector’s monetary profit Qm is equal to the household sector’s dissaving plus the government sector’s budget deficit. For a start, taxes T are set to zero. Deficit spending −G is equal to cumulative money creation by the central bank. The household sector’s budget is balanced, i.e. C=Yw, i.e Sm=0. In this case, the business sector’s profit is equal to the government’s deficit, i.e. Qm =−G. It holds Public Deficit = Private Profit.

The combined transaction pattern of the household- and the government sector is shown on Wikimedia.#5



The transaction pattern of the business sector is the exact mirror image. So, while the government sector ends up with overdrafts, the business sector ends up with deposits of equal magnitude.

Two things happen, (i) there is a price hike because aggregate nominal demand is now C+G, and (ii), output O is redistributed between the household and the government sector. There is REAL taxation without nominal taxation because T=0. Nominal taxation is simply shifted into the indefinite future.

The government’s deficit spending causes an increase in the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank which bear zero interest.

In the second step, the public debt is consolidated by the issuance of long-term government bonds or other types of securities. Government securities are offered with a certain maturity and interest rate. In the present case, the business sector is in possession of deposits and decides which amount to buy. It is here assumed for simplicity that the whole government debt is consolidated. After the switch from non-interest-bearing deposits to interest-bearing bonds, the newly created money vanishes again from the central bank’s balance sheet.

So, over the whole cycle, the household sector is taxed in real terms, suffers a reduction of net income for the duration of consolidated government debt via interest payments = taxes, while the business sector makes a profit which is equal to the budget deficit and enjoys interest income for the duration of the consolidated debt.

Compared to immediate taxation T=G, the household sector is worse off with government deficit spending and the business sector is better off. These are the distributional effects of MMT policy. Other effects have been dealt with elsewhere (for employment policy see #6).

Bottom line: MMT is proto-scientific garbage, politically biased in favor of the one-percenters, and sold as beneficial for the ninety-nine percenters.

#1 Rectification of MMT macro accounting
#2 For the point-by-point refutation see cross-references MMT
#3 The production-consumption economy is defined by the macro axiom set: (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. For a start X=O.
#4 Wikimedia, Transaction pattern C=Yw
#5 Wikimedia, Transaction pattern C+G greater than Yw
#6 Full employment through the price mechanism

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REPLY to Calgacus on Nov 16

I said “The balances equations MMT is based upon are provably false. By consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.”

You answered: “That is getting things completely backwards. MMTers do not say that ‘MMT is based upon’ some balance equations.”

Fact is that the balances equations constitute the very core of MMT’s self-presentation. #1, #2, #3, #4, #5, #6 Fact is also that the MMT balances equations are mathematically/ provably false.#7

Because of this, ALL MMT policy recommendations lack sound scientific foundations. The economics of Kansas City, Bard, the Virgin Islands, Australia etc is qualitatively below the level of Trump University.

MMT is refuted on all counts and whether Calgacus, Mitchell, Tcherneva, Mosler, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne and the rest of scientifically incompetent MMTers understand/accept this is a matter of indifference.

#1 Presentation, Pavlina Tcherneva, Sectoral Balances Spain

Source: Google Images

#2 Wikipedia, Modern Monetary Theory
#3 Wikipedia, Sectoral Balances
#4 Billy blog, Flow-of-funds and sectoral balances
#5 For the point-by-point refutation of Peter Cooper’s posts see cross-references MMT
#6 Warren Mosler “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”
#7 MMT and the magical profit disappearance

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LINK to Twitter Real Progressives "Sectoral analysis provides a key..." Nov 21

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COMMENT on Brad Voracek's 'USA 2017 Q1 Sectoral Balances Update' on Nov 21

Source: The Minskys, Brad Voracek

The sectoral balances are provably false. Profit = sectoral balance of the business sector is missing. See MMT and the magical profit disappearance, see also MMT: The one deadly error/fraud of Warren Mosler.

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COMMENT on Deficit Owls on Nov 28

Source: Twitter Deficit Owls

The sectoral balances are provably false. Profit = sectoral balance of the business sector is missing. See MMT and the magical profit disappearance, see also MMT: The one deadly error/fraud of Warren Mosler.

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LINK to Warren Mosler 'MMT to Washington: There Is No Long-term Deficit Problem!', Huffpost, Dec 1

Source: Huffpost, Warren Mosler