AXEC: New Foundations of Economics: The sectoral balances obfuscation: stupidity or corruption?

Comment on Andrea Terzi on ‘Euro area sectors’ balances’

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In order to determine the sectoral balances, one first needs a description of the elementary production-consumption economy. This economy is constructed from scratch with the following 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) Y_w=WL wage income Y_w 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 the graphical representation of the analytical starting point see Wikimedia AXEC31.#1

In this elementary economy, three configurations are, under the conditions of market-clearing X=O, logically possible:
(i) consumption expenditures are equal to wage income C=Y_w, i.e. the budget is balanced,
(ii) C is less than Y_w,
(iii) C is greater than Y_w.

In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. In case (ii) monetary saving S_m is positive and the business sector makes a loss, i.e. Q_m is negative. In case (iii) monetary saving S_m is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It holds Q_m+S_m=0 (1), i.e. the balance of the business sector Q_m and the balance of the household sector Sm add up to zero. This is the Fundamental Law of Macroeconomic Accounting.

The causal form of (1) reads Q_m=−S_m (2), i.e. if the household sector saves S_m>0 the business sector makes a loss Q_m<0 of an equal amount, and if the household sector dissaves S_m<0 the business sector makes a profit Q_m>0 of an equal amount. This is the Fundamental Law of Balance Mechanics. In order to stress the causality, (2) is rewritten as Q_m⇐−S_m.

When the complexity is increased the macroeconomic Profit Law reads Q_m≡Y_d+I−S_m+(G−T)+(X−M) (3) or in causal form Q_m⇐Y_d+I−S_m+(G−T)+(X−M) (4) which says that monetary profit depends on (i) distributed profit Yd, (ii) investment expenditures I, (iii) household sector saving S_m, (iv) government surplus/deficit (G−T), (v) Rest of the World surplus/deficit (X−M).#2 While the items (iii) to (v) are identical to Andrea Terzi’s balances chart, the items (i) and (ii) are thrown together with the balance of the business sector, i.e. profit Q_m. This is formally inadmissible because it obscures the causality and makes the foundational magnitude of economics ― profit ― disappear.#3 MMTers apply the sectoral balances equation (I−S_m)+(G−T)+(X−M)=0 (5) which shows neither profit nor distributed profit.#4 Strictly speaking, equation (5) says that profit and distributed profit are always zero which, of course, is brain-dead nonsense.

In reality, profit and distributed profit are different from zero and most of the time greater than zero. This is what most people see as the defining characteristic of Capitalism. The macroeconomic Profit Law (4) consists of variables that are measurable with the precision of two decimal places and is readily testable.

Why, then, is profit missing in the MMT balances equation and in Andrea Terzi’s chart? It could be stupidity but actually, it is fraud.#5

Equation (4) boils down to Q_m⇐G−T (6) which says that the public deficit causes the profit of the business sector. MMTers, who present themselves as Progressives, can obviously not tell WeThePeople that their policy of deficit-spending/money-creation benefits the Oligarchy. So they talk instead of the blessings of a Job Guarantee and a Green New Deal.#6

Economics is NOT a science and has NEVER been. Economists in general, and MMTers, in particular, are too stupid for the elementary algebra that underlies macroeconomics. MMTers are neither scientists nor Friends-of-the-People but agenda-pushers for the Oligarchy.

Egmont Kakarot-Handtke

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