Comment on Robert Murphy on ‘The Upside-Down World of MMT’*
Blog-Reference and Blog-Reference
For his refutation of MMT, Robert Murphy takes the MMT balances equation as the analytical starting point.
“That is the three balances have to sum to zero. The sectoral balances derived are:
• The private domestic balance (I−S)
• The Budget Deficit (G−T)
• The Current Account balance (X−M).
A simplification is to add (I−S)+(X−M) and call it the non-government sector. Then you get the basic result that the government balance equals exactly $-for-$ … the non-government balance (the sum of the private domestic and external balances). This is also a basic rule derived from the national accounts and has to apply at all times.”
“So … we derive this equation: G−T=S−I. That is, the amount of government spending minus total tax revenue, is necessarily equal to private saving minus private investment. The MMTers might succinctly express this relationship in words: Government Budget Deficit = Net Private Saving.”
After this first demonstration of his scientific incompetence, Robert Murphy goes on: “This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. Let’s look again at the equation causing so much confusion: G−T=S−I. As a free-market economist, I don’t need to run from this tautology. I can use it to underscore the familiar ‘crowding out’ critique of government deficit spending.”
No, the fact of the matter is that the so-called “macro-accounting tautologies” are provably false because economists are too stupid for the elementary mathematics that underlies macroeconomic accounting.#1
To make a long story short, the correct macroeconomic relations are given as follows:#2
(1) Q≡−S in the elementary production-consumption economy,
(2) Q≡I−S in the elementary investment economy,
(3) Q≡Yd+I−S in the investment economy with profit distribution,
(4) Q≡Yd+(I−S)+(G−T)+(X−M) in the general case with government in an open economy.
Legend: Q profit, S saving, I investment, Yd distributed profit, G government expenditure, T taxes, X/M foreign trade.
The simplification of (4) yields Q=(I−S)+(G−T) (i) and this compares to Robert Murphy’s (G−T)=(S−I) resp. 0=(I−S)+(G−T) (ii).
The upshot is that (ii) implies that macroeconomic profit Q is zero. And this is plain analytical idiocy because a zero-profit economy does NOT exist. All this proves that Robert Murphy does not understand how the market economy works. The word profit does not appear once in his post. Austrianism is the failed attempt of explaining the market economy without ever mentioning the foundational economic concept profit which is objectively given with the precision of two decimal places.
Robert Murphy’s “Government Budget Deficit = Net Private Saving” has to be corrected to “Public Deficit = Private Profit”. And this correct formula tells everyone that MMT is a political fraud.#3
Robert Murphy, of course, does not realize anything. Austrians, in general, are not very smart. Because of this, Austrianism has never been anything else than vacuous proto-scientific blather.
Egmont Kakarot-Handtke
* Mises Institute
#1 Wikipedia and the promotion of economists’ idiotism
#2 Rectification of MMT macro accounting
#3 Stephanie Kelton’s legendary Plain-Sight-Ink-Trick
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REPLY to Bob Roddis on Jan 27
“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)
Austrians are a political sect. Hayek’s Road to Serfdom is a political pamphlet with zero scientific content. What comes in the cloak of economic theory is thinly veiled agenda-pushing.
The foundational tenet ― markets never fail if left alone ― has no empirical content. It is only good for blaming any crisis on some random interventionist. The very characteristic of Austrians is circular reasoning. Circular reasoning is irrefutable and Austrians advertise this as strength ignoring the well-known methodological fact that a theory that is non-refutable is not scientific.
The foundational tenet of Austrianism has been refuted. The market system is inherently unstable because the relationship of wage rate and employment constitutes a positive feedback loop. When the foundational premise is false all the rest is scientifically worthless.
Robert Murphy’s discussion of the MMT sectoral balances equation proves that he does not understand elementary algebra and never realizes that the equation represents a zero-profit economy.
Austrians are simply too stupid for science. From von Mises onward to Hayek to Robert Murphy to Bob Roddis they are active as useful idiots in the political Circus Maximus.
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REPLY to Bob Roddis on Jan 27You ask rhetorically: “Investment causes savings. Right. What do have to invest if you haven’t saved it?”
The relation between saving and investment is not well understood for 200+ years. This is disqualifying for the whole profession of academic economists.
Above, Robert Murphy tries to “explain the importance of saving and investment in a barter economy” and concludes “This is an admittedly simple story, but it gets across the basic concepts of income, consumption, saving, investment, and economic growth.”
No, not at all. Real models have always been garbage. A barter economy is a NONENTITY. The subject matter of economics is, as Keynes put it, the “monetary theory of production”. Starting with the right foot, however, Keynes messed up macroeconomics and ended up with I=S.
I=S is provably false. Keynesianism is refuted.#1
The correct relationship is given in the most elementary case as Q≡I−S, Legend: Q business sector’s monetary profit, I business sector’s investment expenditures, S household sector’s monetary saving. All variables are measurable with the precision of two decimal places.
The equation tells one that the household sector’s saving and the business sector’s investment are independent and that their difference determines profit/loss of the business sector as a whole.
In a fiat money system, saving S ends up as deposits at the central bank (if private banks are taken out of the picture for a moment). Investment I is financed by the central bank through credit creation and ends up as long-term debt on the asset side of the central bank’s balance sheet. Profit Q ends up as deposits on the liability side. Needless to emphasize that the central bank’s balance is balanced. However, the term structure of both sides is not congruent. The liability side of the central bank, i.e. the household’s and business sector’s deposits, constitutes money.
The households can, in a second step, either keep their deposits or buy the business sector’s stocks/bonds on issuance. This destroys money and shortens the central bank’s balance sheet.
Both, the Austrian idea that saving is the precondition of investment and the Keynesian idea that investment creates saving via the income multiplier is nonsense. In a fiat money system, saving S and investment I are independent. There is no causality, no equality, no equilibrium. This is what Q=I−S tells those who can read a simple macroeconomic equation.
#1 Cross-references Refutation of I=S
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REPLY to Bob Roddis on Jan 27
Robert Murphy writes: “To explain the importance of saving and investment in a barter economy, I walk through a simple numerical example where Crusoe can gather ten coconuts per day with his bare hands.”
I respond: “A barter economy is a NONENTITY.”
You respond: “Actually, David Graeber, of all people, helped to improve and clarify the basic story because there was never a barter economy.”
So, we agree that Robert Murphy’s story about saving and investment is as silly as can be.
The real economy is NOT the ‘real’ barter economy but the monetary economy.#1 The economy constitutes itself through the interaction of real and nominal variables.
This interaction is defined with this set of macroeconomic axioms: (A0) 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, the price is given by P=W/R. This is the macroeconomic Law of Supply and Demand.
Profit for the economy as a whole is defined as Q≡C−Yw and saving as S≡Yw−C. It always holds Q≡−S, i.e. the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving. Under the initial condition of budget balancing, profit is zero.
So, the counterpart of household sector’s saving is business sector’s loss AND NOT INVESTMENT! Get it Austrians, we are living in a monetary economy and saving is NOT some non-consumed coconuts but money in the bank.
Austrianism is dead since about 1900. Now, rest in peace Bob Roddis and the Mises Institute.
#1 The irreparable unreality of all ‘real’ models
Related 'Settling the Theory of Saving' and 'Squaring the Investment Cycle'.
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REPLY to Bob Roddis on Jan 29There is political agenda pushing and there is science. Economics as science tries to figure out how the monetary economy works. Austrian economics is proto-scientific garbage and a smokescreen for agenda pushing which comes under the euphemistic heading of Libertarianism.
Clearly, Austrians violate the principle of separation of politics and science since von Mises.
Your discussion of defensive or aggressive violence has no economic content. Worse, it misses the point. Compared to open violence, continuous low-intensity aggression/violence is currently the greater problem.
The upshot is, that this type of almost imperceptible violence is built right into the price system. And this brings us back to the heart of economics.
Contrary to Hayek, the major function of the price mechanism is NOT information processing and signaling but imperceptible redistribution. What is advertised as optimal functioning of an anonymous and apparently non-violent market system is, in fact, an impenetrable mechanism of continuous low-intensity redistribution.#1
To paint the market system as a superior information processor instead of a merciless slow-motion executor is one of the greatest deceptions of Austrianism.
#1 Pareto-efficiency, Hayek’s marvel, and the invisible executor
