How some MMTers got inflation wrong

Comment on Nick Johnson on ‘Modern Monetary Theory and inflation ― Anwar Shaikh’s critique’

Blog-Reference and Blog-Reference

Nick Johnson compares Anwar Shaikh’s approach with the MMT approach. Scientifically, this is a futile exercise, just as comparing Superman with Spiderman because both are NONENTITIES.

MMT is an offshoot of Post-Keynesianism. Anwar Shaikh works largely within the Classical/ Marxian tradition. However, the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got profit wrong. With the pluralism of provably false theories both orthodox and heterodox economics sits squarely at the proto-scientific level.

Clearly, when the foundational concept profit is not properly understood the rest of the analytical superstructure falls apart and the whole is scientifically worthless. What the representative economist has to understand is that nothing less than a Paradigm Shift is required, that is, a move from obsolete Walrasian microfoundations and false Keynesian/ Marxian macrofoundations to entirely new macrofoundations.#1

In order to go back to the basics, the elementary production-consumption economy is for a start defined by three macro axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w), and two definitions (profit/loss Q_m≡C−Y_w, saving/dissaving S_m≡Y_w−C).#2

It always holds Qm≡−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. This law refutes familiar profit theories. Note in particular that profit for the economy as a whole has nothing to do with capital or productivity or greed or power.

Money is needed by the business sector to pay the workers who receive the wage income Y_w per period. The workers spend C per period. Given the two conditions, the market-clearing price is derived for a start as P=C/X=W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. From this follows the average stock of transaction money as M=κY_w, with κ determined by the payment pattern. In other words, the quantity 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 formula reads in the general case M=κ sup(1, ρ_E) PX= κ (sup(1, ρ_E) RL) P, with the ratio ρ_E defined as C/Y_w, and this yields the commonplace correlation between the quantity of money M and price P for a given employment/output level, except for the fact that M is the DEPENDENT variable.

The market-clearing price is given with the macroeconomic Law of Supply and Demand:#3

An expenditure ratio ρ_E greater than 1 indicates credit expansion = dissaving, a ratio ρ_E less than 1 indicates credit contraction = saving. In the initial period ρ_E = 1, i.e. the household sector’s budget is balanced. The ratio ρ_E establishes the link between the product market and the money/capital market.

Now we have deficit spending, i.e. ρ_E greater 1, which yields a price hike. If deficit-spending is repeated period after period, the price remains on the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase.

The price formula makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the Phillips curve.

MMT claims that inflation/deflation can be managed via fiscal and monetary policy. This policy advice has no sound theoretical foundation.#4

The current deflationary trend is caused by the fact that (worldwide) wages lag behind productivity growth. To turn this trend around it does not matter much what happens on the money/bond/stock markets, what matters is that governments/central banks engineer a coordinated worldwide increase of the average wage rate.

Policy guidance of both MMT and Anwar Shaikh is ineffective/misleading because for both approaches the macrofoundations and the concept of profit are ill-defined and methodologically forever unacceptable.

Egmont Kakarot-Handtke


#1 First Lecture in New Economic Thinking
#2 For the detailed description see How the intelligent non-economist can refute every economist hands down.
#3 Wikimedia AXEC101 Price formula = Law of Supply and Demand
#4 For the full-spectrum refutation of MMT see cross-references MMT

Related 'Putting economic policy on scientific foundations' and 'Why Post Keynesianism Is Not Yet a Science' and 'The Profit Theory is False Since Adam Smith' and 'Gov-Deficits do NOT cause inflation'.

What is MMT? (I)

Comment on Nick Johnson on ‘Michael Hudson on Modern Monetary Theory’

Blog-Reference and Blog-Reference

The soundbites of MMT go roughly as follows:

• Money is a legal creation, not a commodity like gold or silver. It is a special form of an IOU. A currency-issuing government’s IOU is the currency.
• Creating money costs the central bank virtually nothing (likewise for banks creating their own electronic credit).
• It is ‘the state’ that defines a unit of account (e.g. dollar)
• Ultimately, ‘the state’ ensures the acceptance of money by imposing taxes that can only be paid in that unit of account.
• It is ‘the state’ that spends or lends the currency into existence. This is sometimes summarized as ‘taxes drive money’.

These arguments are either half-true or false.

(i) An IOU economy can ― as a matter of principle ― be established by the business sector. This includes the definition of the unit of account.

(ii) A money economy is different from an IOU economy in that the general acceptance of the means of transaction is established and enforced by law. This is the crucial point where ‘the state’ participates in the creation of the monetary order.

(iii) Only a central bank is needed for the ongoing creation and destruction of money which takes the elementary form of deposits/overdrafts on the central bank’s balance sheet. Money comes into the economy through the autonomous transactions between the business and the household sector. It is ‘the economy’ that determines the quantity of money.

(iv) As a matter of principle, ‘the economy’ never runs out of money because the central bank can create it out of nothing. The crucial point is whether new money comes into the economy as (a) additional wage income, or (b), additional nominal demand. Option (a) is the neutral way, and option (b) affects the overall profit of the business sector and as consequence the income distribution.

(v) ‘Taxes drive money’ is just a silly slogan because it does NOT matter whether taxes T come first and government expenditures G come later or vice versa. As long as G = T in a given period, there are only short-run fluctuations in the quantity of money during that period. It is only deficits, i.e. G greater than T, or surpluses, i.e. G less than T, that drive money.

(vi) There is NO difference at all between the household sector and the government sector: it is deficits/surpluses = dissaving/saving = CHANGE OF DEBT that drives money.

(vii) By defining the institution Central Bank ‘the State’ can determine that the financing of the government deficit is unlimited and interest-free. This has NOTHING to do with the origin or the nature of money.

(viii) Credit and money are produced like any other product. Roughly speaking, the ‘price’ (average interest rate on the asset side minus average interest rate on the liability side) times the average amount of the central bank’s balance sheet must cover the costs (wages, depreciation of hard- and software, and so on) of producing transaction money and credit. It is a myth that the production of money or loans costs virtually nothing. The interest rate difference must be positive otherwise the banking system (central bank plus commercial banks) cannot break even.

(ix) The assertion: “The government’s budget deficit is (by definition) the private sector’s surplus” is false. The government’s budget deficit is the household sector’s surplus (= saving) or the business sector’s surplus (= profit) or a combination of the two. In the case of a balanced budget of the household sector, the government’s budget deficit is equal to the business sector’s profit.

(x) The MMT narrative has no scientific content whatsoever.#1 Ultimately, MMT is a free-lunch program for the one-percenters.

Egmont Kakarot-Handtke


#1 For the full-spectrum refutation of MMT see cross-references MMT

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REPLY to Calgacus on Jul 3

The question is, What is MMT? And the answer is, it is proto-scientific garbage.

To recall. Scientific knowledge is embodied in true theory. The true theory is the humanly best mental representation of reality. Truth is well-defined by material and formal 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)

MMT does NOT satisfy the criteria of material/formal consistency. In fact, most of it is brain-dead political blather. People like this storytelling stuff but it is garbage nonetheless.

You try to refute me with this argument: “Seriously wrong. Factually and logically wrong. A money economy is a type of ‘IOU’ (credit) economy. Money is credit and nothing but credit. Always and everywhere.” Yes, so what? This is exactly what I said about the logical origin of money: “In the next step, the firm pays the monthly wages with a standardized IOU and declares that this conveniently denominated title will be unconditionally accepted at the firm’s store. The employees accept that the IOUs discharge their wage claim against the firm.”#1

How money was introduced historically is a question for historians NOT for economists. The question for economists is to explain how the monetary economy works. The theory of money is a building block of the overarching ‘monetary theory of production’ (Keynes). MMT has NO theory of how the monetary economy works, i.e. MMTers have no idea how the price- and profit mechanism works.

You say: “The MMT meaning of that slogan is that taxation drives the demand for money. So deficits, money-creation could not drive (the demand for) money in this meaning.” The demand for money originates from the necessity of the business sector to pay the workers in an accepted means of transaction and from the necessity of the household sector to have an accepted means of transaction to buy stuff.#2 The general acceptance is established by law and not by the necessity to pay taxes.

You say: “Fully developed mathematical theories tend to have no scientific content ― it is all form, all in the definitions, all trivialities.” Obviously, you do not understand the role of mathematics in science: “But it was a second and more important quality that struck readers of the Principia. At the head of Book I stand the famous Axioms, or the Laws of motion: ... For readers of that day, it was this deductive, mathematical aspect that was the great achievement.” (Truesdell). Only a moron can say that Newton’s theory had no scientific content and that his axioms were trivialities. It is the Walrasian axioms (maximization-and-equilibrium) and MMT storytelling that has no scientific content.

MMT is dead as a scientific theory#3. It has no truth-value, only some political use-value among mentally retarded Young Turks.


#1 The ultimate ― analytical ― origin of money
#2 Exchange in the Monetary Economy
#3 For the full-spectrum refutation of MMT see cross-references MMT