AXEC: New Foundations of Economics: Rectification of MMT macro accounting

September 3, 2017

Rectification of MMT macro accounting

Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’

Blog-Reference

MMTers and other incompetent economists apply this sectoral balances equation (S−I)+(T−G)=0 which says that the non-government sector’s surplus, i.e. S−I greater zero, is equal to the government sector’s budget deficit G−T, respectively, that the non-government sector’s deficit, i.e. I−S greater zero, is equal to the government sector’s budget surplus T−G. This sectoral balances equation is used to demonstrate that a government deficit is advantageous for the non-government sector.

The MMT sectoral balances equation violates the rules of accounting.#1 What should be self-evident is that macroeconomic profit is entirely missing.

In the following, the correct relationships are derived by successively increasing the complexity. The pure production-consumption economy is the most elementary economic configuration and therefore the point to start from.

(i) Elementary production-consumption economy,#2 two sectors, balances

Qm≡C−Yw profit/loss Qm is the household sector’s spending C minus wages Yw,
Sm≡Yw−C saving/dissaving Sm is wage income Yw minus expenditures C,
--------------------------
Qm≡−Sm.

It always holds for the balances Qm≡−Sm or Qm+Sm=0, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

(ii) Production-consumption economy with government sector GS, three sectors, balances

Qm≡C+G−Yw profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡(Yw−T)−C saving Sm is net income (Yw–T) minus expenditures C,
Bm≡T−G budget surplus/deficit Bm is taxes T minus government expenditures G,
------------------------------------
Qm≡−Sm+(G−T).

The business sector’s profit is equal to the household sector’s dissaving and the government sector’s budget deficit. Or, given the household sector’s saving/dissaving the business sector’s profit is equal to the government sector’s deficit. In a neat formula, Public Deficit = Private Profit.

(iii) Investment economy, two sectors with business sector differentiated, balances

Qmc≡C−Ywc profit of consumption good industry is spending C minus wages Ywc,
Qmi≡I−Ywi profit of investment good industry is investment minus wages Ywi,
Sm≡(Ywc+Ywi)−C saving/dissaving Sm is wage income minus expenditures C,
Äc≡−I change of the asset side of the consumption sector’s balance sheet
------------------------
Qmc+Qmi+Sm+Äc=0
Qm≡Qmc+Qmi
Qm≡I−Sm.

The business sector’s profit/loss is equal to the difference between business sector’s investment expenditures and household sector’s saving/dissaving.

(iv) Investment economy with government sector, three sectors with business sector differentiated, balances

Qmc≡C+G−Ywc profit of CGI is HS and GS spending C+G minus wages Ywc,
Qmi≡I−Ywi profit of IGI is investment expenditures minus wages Ywi,
Sm≡(Ywc+Ywi−T)−C saving Sm is net wage income minus expenditures C,
Bm≡T−G budget surplus Bm is taxes T minus government expenditures G,
Äc≡−I change of the asset side of the consumption sector’s balance sheet,
-----------------------------
Qmc+Qmi+Sm+Bm+Äc=0
Qm≡Qmc+Qmi
Qm≡(I−Sm)+(G−T).

Given the difference between the business sector’s investment expenditures and the household sector’s saving/dissaving (I−Sm) the monetary profit of the business sector Qm is equal to the government sector’s deficit (G−T).

The original MMT balances equation (S−I)+(T−G)=0 rewritten as 0=(I−S)+(G−T) compares to the correct equation Qm≡(I−Sm)+(G−T). Formally, the original MMT balances equation covers a zero-profit economy. Overall monetary profit has NOT been zero in the last 200+ years and will NOT be zero in the future. What is MMT talking about?

When macroeconomic profit is factored into the balances equations according to the elementary mathematics that underlies double-entry accounting then it becomes obvious that public and private deficit spending determines the overall profit of the business sector. More specifically, public deficits are always advantageous to the business sector.#3 Whether they have also a positive employment effect depends on the absence or presence of synchronous price increases.#4

Because the MMT sectoral balances equations are false the whole analytical superstructure vaporizes and therefore MMT policy guidance has no sound scientific core. MMT is brain-dead soapbox economics, just like Walrasianism, Keynesianism, Marxianism, and Austrianism.

Egmont Kakarot-Handtke

#1 A tale of three accountants
#2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C–Yw, monetary saving Sm≡Yw–C). For details see ‘How to restart economics’
#3 Keynesianism as ultimate profit machine and Who or what exactly did Keynes save?
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Immediately preceding 'MMT: NO sound scientific foundations'

Related 'Keynesians ― terminally stupid or worse?' and 'MMT and the magical profit disappearance' and 'MMT, fake science' and 'MMT ― the economics moron as problem solver' and 'MMT: The one deadly error/fraud of Warren Mosler'. For details of the big picture see cross-references MMT.

***

LINK at Bill Mitchell – billy blog on Sep 3

The MMT sectoral balances equations violate the rules of accounting. See ‘Rectification of MMT macro accounting’

***

COMMENT on Short & Simple 20 on Sep 5

As Popper said, science proceeds by conjecture and refutation.

This does not happen in economics. Morgenstern reminded his fellow economists back in 1941: “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.”

Economics is a failed science because it does get neither conjecture nor refutation right. This applies obviously to Peter Cooper.
• To begin with, he does not realize that the MMT balances equations are false since Keynes.
• When given the explicit mathematical refutation* he does understand it but presents the same analytical garbage in graphical form “as if nothing had happened”.

For the record: Not only Walrasians, Keynesians, Marxians, Austrians violate scientific standards on a daily basis but MMTers, too.

* Rectification of MMT macro accounting

***

ADDENDUM on Oct 2

The Wikipedia entry ‘Modern Monetary Theory’ states:

“Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity:

G−T=S−I−NX

where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.

The conclusion that MMT draws from this is that it is only possible for the non-government sector to accumulate a surplus if the government runs budget deficits. The non-government sector can be further split into foreign users of the currency and domestic users.”

Let us ignore foreign trade here, i.e. NX=0, and regroup the MMT equation, then one gets
0= (G−T)+(I−S). This compares to Qm=(G−T)+(I−Sm) above which is simplified to
Q≡(G−T)+(I−S).

The MMT balance equation applies only to a zero-profit economy, i.e. Q=0. This follows in detail from the rectification above. The point to notice is that Q is the balance of the business sector.

Because the fundamental balances equation in the Wikipedia entry is false most of the content is worthless or even misleading.

***

Compilation: Wikimedia AXEC143d Profit Law (with increasing complexity) and Balances Equation

Knowledge only — no opinion

Science does not explain everything, but non-science explains nothing.

Neither orthodox nor heterodox economics satisfies the scientific criteria of material and formal consistency.

Economists cannot explain how the economy works. The Profit Theory is false since Adam Smith. There is much opinion and little knowledge.

Opinion is the realm of political economics, knowledge is the realm of theoretical economics.

Political economics is scientifically worthless.

Theoretical economics is built upon clearly stated premises, i.e., upon a set of axioms.

Orthodoxy got the axiomatic foundations wrong and Heterodoxy has none at all.

Economics is a failed science. Economists are incompetent scientists.

Profit

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they all fail to capture the essence of the market economy.

Because of this, economists have nothing to offer in the way of a scientifically founded economic policy guidance.

The hybrid science

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-component must always be in the foreground. This fallacy compares to geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand.

There are systemic laws but no behavioral laws. Systemic laws have the same methodological status as physical laws.

Neither Orthodoxy nor Heterodoxy can tell what the systemic laws of the actual monetary economy are.

Whether the outcome of the human/system-interaction is good or bad is a politcal question that lies outside of theoretical economics. Theoretical economics explains how the actual economy works - no less, no more.

Narrative vs.Theory

Psychological, sociological or behavioral assumptionism cannot yield anything other than a gossip model of the world. Second-guessing the agents is not economic analysis.

Science deals exclusively with propositions that can in principle be decided by objective means. The rest is opinion, faith, phantasy, motive speculation, allegation, hallucination, myth, paranoia, ink-blot association, psychology, philosophy, in one word: storytelling.

Storytelling is the original mode of communication in the social realm — except science.

Political economics is storytelling and, by default, the natural habitat of confused confusers. Walrasianism, Keynesianism, Marxianism, Austrianism are social narratives and not scientifically valid representations of reality.

"The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions." (Fisher)

In marked contrast, theoretical economics lives up to the standards of material and formal consistency. A scientific theory is the best mental representation of reality that is humanly possible.

Theory starts with a set of objective and consistent axioms.

Paradigm Shift

"The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy." (Feynman)

"As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction." (Nell)

"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)

"Is it not a fact, which stares at us from the histories of all sciences, that it is much more difficult for the human mind to forge the most elementary conceptual schemes than it is to elaborate the most complicated superstructure when those elements are well in hand?" (Schumpeter)

"The task of producing knowledge against the grain requires imagination." (Mirowski)

"A new idea is extremely difficult to think of. It takes a fantastic imagination." (Feynman)

"The scientific imagination dreams of explanations and laws." (Peirce)

"It is brilliance of imagination which makes the glory of science." (Evans)

"... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations." (Clower)

Selftest and to watch for

You apply one of these items

• supply-demand-equilibrium,

• general equilibrium,

• marginal utility,

• well-behaved production functions,

• total income = value of output,

• total income = wages + profits,

• I=S,

• wage rate down - employment up,

• behavioral axioms?

Then you are out of science because of unnoticed material or formal inconsistency.

Every economist who uses the concept of equilibrium is scientifically incompetent because she/he failed to notice that equilibrium is an economic nonentity.

Practically this means: as soon as the word equilibrium appears in an economic text it can be thrown into the waste basket. The same holds for all other nonentities.

The vast majority of economists deals mainly with nonentities. This is why Walrasianism, Keynesianism, Marxianism, Austrianism is scientifically worthless.

Since Adam Smith, economic policy guidance has no sound scientific foundations.

To be replaced (1)

The core premises of Orthodoxy are uncertain and false and this fully explains the failure of the research program.

“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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)

The inescapable Paradigm Shift consists of the move from this obsolete hard core to the superior set of structural axioms.

To be replaced (2)

The fundamental equations of macroeconomics have been formulated by Keynes in two lines.

"Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment."

This elementary syllogism is demonstrably false. The demonstration consists in the proof that Keynes could not solve the Profit Puzzle. Neither did Post-Neo-New-Keynesians.

In the most general terms, the economics Paradigm Shift consists in switching from the behavior-centric bottom-up approach to the structure-centric top-down approach. This is comparable to the Copernican turn from geo-centrism to helio-centrism.

Consensus

Economics is a science without scientists. Because they are ignorant of the elementary difference between profit and income, the present generation of economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.

Every orthodox or heterodox economist can convince himself/herself that their profit theory is defective.

Every non-economist can — by applying elementary logic — convince himself that conventional profit theories are false. See 'How the intelligent non-economist can refute every economist hands down'.

Because the profit theory is false the whole of conventional economic theory has to be rejected.

"What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse." (McCauley)

No scientist will ever accept Walrasianism, Keynesianism, Marxianism, or Austrianism. These approaches are logically and/or empirically refuted. This is the actual methodological state-of-art. Walrasians, Keynesians, Marxians, or Austrians are still at the proto-scientific stage. These approaches cannot be improved, only abandoned.

Economists are a public nuisance because they have an opinion on everything but knowledge of nothing.

About me

“Bottom line is that your profit law is just a definition you made up nobody else agrees with, nobody. You are all alone with your precious tautology.” Barkley Rosser

“In any event, your entire theory is based on you doing macro accounting in wacky fashion that nobody agrees with.” Brian Romanchuk

"Your stuff is at least original: it's quite cool after a couple of decades at this to see a fresh Economics. But real promises are not advanced: they were around for millennia until the Greeks obscured them with Metaphysics." Chris Cook

"No mate, they're you-blockers. You have all the personality traits of a crank, and the rest of them have tired of you. You could be 100% right, and you'd still die as your only follower." Steve Keen

"What you are doing fills is all with joy, your constructive critique is most welcome!"

Achim Truger,

German Council of Economic Experts,

in a failed attempt to be ironic

"200+ years of thought and yet you are the only one who gets it—or even understands your argument. Thank god we have you, pseudonymous Twitter user. Otherwise no one would know."

William Luther

Assistant Professor of Economics

in a failed attempt to be funny

"Egmonts profit law is the perfect equation that demonstrates this in action. Put the equation into a spreadsheet and then add government spending and watch how it flows into profits. Enter in some debt (-Sm) and watch too how that flows into profits. It can't go anywhere else."

Dean

About the rest of economics

Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, Pluralism are mutually contradictory, axiomatically false, materially/ formally inconsistent. Economics is a failed science.

“There are three classes of people: those who see. Those who see when they are shown. Those who do not see.” Leonardo da Vinci

In economics, the overwhelming majority belongs to Class III. This explains why economics is after 200+ years still at the proto-scientific level.

The obvious task for every economist is to advance from cargo cult science and political agenda-pushing to science. This is absolutely beyond the means of Class III people.

For 200+ years now, economists are not scientists but agenda pushers, useful idiots, clowns in the political Circus Maximus.

Nopopop

This blog does not add to any popular/un- popular opinion.

This blog does not hand out advice about how to avoid taxes, to get rich on the stock market, to be successful in business, to increase the wealth of nations, to run an economy, to maximize welfare, to prevent national/global bankruptcy, to improve the institutional setup of society, to get out of national/global depression, nor about how to save humankind or any subgroup thereof.

This blog is about the true theory of the actual monetary economy.

"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)

Focus

Science is of primary interest and importance. Scientists are of secondary interest.

With regard to science, most people lose focus easily because of a natural preference for anecdotes and gossip over facts or subjectivity over objectivity.

Hence, Schumpeter once considered it necessary to remind his habitually disoriented fellow economists: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Science is about true/false and nothing else.

Disclaimer

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Texts: Parts of arbitrary length of any of the author's texts is and will be used again by the author in papers, books, websites, blogs, and other media without explicit reference. The right to make corrections or minor textual improvements on reutilization is reserved. Therefore, it is always a good idea to double-check for the latest version.

Caution: Do not expect a corroboration of your political view. Neither a refutation. Political economics has been scientifically worthless since Adam Smith. Politics has to be separated from economics because it is categorically different from science. The best science can do and has always done is to prove beyond reasonable doubt that you have been objectively wrong or ignorant until now. Science goes beyond the naive common sense of today and becomes the sophisticated common sense of tomorrow.

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Outlook

To recall, while political economics is storytelling, theoretical economics adheres to scientific standards.

The first task of theoretical economics is to get the axiomatic foundations right. This is what J. S. Mill called the opus magnum. Neither Orthodoxy nor Heterodoxy came up with a reasonable solution to this day. This explains the secular stagnation of economics.

There is no serious alternative to structural axiomatic economics. This is not a matter of opinion but of proof. The sole criteria are material and formal consistency.

All of economics has to be reconstructed from the ground up.

Major economic policy implication

The price mechanism does not work as standard economics hypothesizes. The axiom-based Employment Law states that overall employment increases if the average wage rate increases relative to average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflation without rising debt and without artificial capacity growth. To increase the average price relative to the average wage rate and productivity increases unemployment.

Right policy depends on true theory.

“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)

Lacking the true theory, economists promote for more than 200 years opinion instead of knowledge.