Exploding the Household Fallacy

Comment on Charles Adams on ‘The household fallacy’*

Blog-Reference and Blog-Reference (Link) and Blog-Reference Nov 15

Charles Adams, a physics professor at the University of Durham, explains the Household Fallacy: “When the goverment spends, that spending is someones income and that someone pays some tax so the government immediately gets some of their money back. And then that someone spends most of their money which becomes other peoples income. And these other people also pay tax, so the government gets another fraction back. And these other people also spend which becomes the income of even more people who also give a fraction back to the goverment. And so on. If everyone spends then the government gets all its money back. Whereas when you or I spend we do not get anything back. That is a big difference. The only way the goverment can be in deficit is if the people decide to save. The goverment debt is simply the peoples savings. If at any point the people go out and spend their savings, then the goverment debt will be cleared.”

The first thing to notice is that in this story, only the government sector and “people”, i.e., the household sector, appear, but not the business sector. And, curiously, the word profit does not appear once. An economic story without profit is fishy, to begin with. However, having a bad smell in the nose and precisely locating its source are quite different things. So, one has to advance from storytelling to proper economic analysis.

For a start, one 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 sector 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 as the dependent variable is given by P=W/R. This is the macroeconomic Law of Supply and Demand. For the graphical representation of the analytical starting point, see AXEC31. #1

In this elementary economy, the Central Bank finances the wage bill by creating fiat money out of nothing. The average stock of transaction money is given as M=κYw, with κ determined by the payment pattern. #2

So, the business sector spends money into the economy in the form of wage income, Yw, and gets it back in the form of consumption expenditures C. The stock of fiat money is zero at the beginning of the period under consideration and zero at the end. Money is created and destroyed by the autonomous transactions between the business and the household sector. There is NO government, NO taxes, and NO deficit spending.

It is pretty obvious that this elementary production-consumption economy can run for all eternity at any level of employment. Problems arise if the households do not spend exactly their income, i.e., do not balance their budget.

Dropping the condition C=Yw yields two balances: Saving/dissaving of the household sector S≡Yw−C and profit/loss of the business sector Q≡C−Yw. It always holds Q≡−S, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving, and vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

Now, if the households save, the business sector makes a loss, and if this continues for a while, the economy breaks down. If the households dissave, i.e., run a deficit, the business sector makes a profit. The business sector’s deposits at the Central Bank (= money) grow in perfect lockstep with the household sector’s overdrafts (= debt). The deficit spending of the households is financed by the Central Bank, and it ends when the Central Bank puts the brake on further debt growth. In this case, C falls back to Yw, and profit falls back to zero.

Conclusion: Capitalism depends on profit, and profit depends on deficit spending, so Capitalism depends, in the most elementary case, on the growing debt of the household sector. It is NOT enough that “people” always fully spend their wage income; they have to spend more. So ultimately, Capitalism depends on a credit-creating banking system. However, here is the problem: either the households are not willing to go into debt, or the banking system is not willing to give them much credit for an extended time span.

This is where the state comes to the rescue. With the state as an additional sector, the Profit Law reads Q≡−S+(G−T). So, if the private households balance their budget, i.e., S=0, and the public households balance their budget, i.e., G−T=0, the balance of the business sector (= profit) is zero. If the government sector taxes only a part of its expenditures back, i.e., T<G, then the business sector makes a profit, i.e., Q=G−T. The minimum condition for the survival of state-sponsored Capitalism is G−T>S.

Now, the crucial difference between private households and public households is that the growth of household sector debt is limited, while the growth of public sector debt is virtually unlimited. Up to an ex-ante unknown amount, state debt is considered riskless because of the taxing power of the state.

So, the Household Fallacy does NOT come down to the economic miracle that “If everyone spends then the government gets all its money back.” No, the government runs a deficit, i.e., G−T>0, while the households spend what they get as wage income, i.e., C=Yw. The government does NOT get its spending back, and this is why the public debt permanently increases ($22 trillion and counting). #3

The Household Fallacy consists of the idea that the public sector is, in the same way, debt-restricted as the individual household. MMT is absolutely right in pointing out that this is NOT the case. However, MMT is absolutely wrong in maintaining that government deficit-spending/money-creation is a good economic policy. As a general rule, it is NOT. MMT policy creates the distribution of income and wealth that is now generally regarded as a grave danger to social stability. Economically, MMT policy amounts to the limitless issuance of counterfeit currency for the benefit of the Oligarchy.

The physics professor again gets economics badly wrong. #4 There is something rotten in UK academia.

Egmont Kakarot-Handtke


* Progressive Pulse
#1 Graphic AXEC31
#2 For details, see Criminals and the monetary order
#3 Keynes, Lerner, MMT, Trump, Biden. and exploding profit
#4 MMT and the single most stupid physicist

Related 'The sectoral balances obfuscation: stupidity or corruption?' and 'The right and the wrong way to bring money into the economy' and 'Dear idiots, it is deficit spending that creates the distribution people complain about' and 'Dear idiots, government deficits do NOT fund private savings' and 'How counterfeiters save America with an extra profit and make WeThePeople pay for it' and 'MMT undermines democracy' and 'The MMT-Yawner: Government is not a household' and 'Swabian housewife vs Wall Street loan shark' and 'Why economists always seem to lose the fight against inequality' and 'Links on Austerity' and 'A beginner’s guide to MMT' and 'From the debt economy to the gift economy: how America is brainwashed to love budget deficits'.

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#PointOfProof
Nov 14

Link missing
#EconBlocker

Dear idiots, Marx got profit and exploitation wrong

Comment on Peter May on ‘A communist manifesto for money?’

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Peter May recaps: “Marx is saying that money ― a monetary production economy ― is the basis for capitalism since capitalists use money to produce goods for sale for more money ― investment is for return, that is, profit. The profit comes from the wage being less than the market price of commodities produced by wage labor. The end-in-view is not to provide a rationale for abolishing money but rather for terminating the extraction of economic rent in the form of ‘surplus value,’ profit accruing from unpaid labor time.”

Marx’s definition of profit is ultimately based on the Labour Theory of Value, which does not relate to the economy as a whole. #1 But Marx also applied macroeconomic reasoning: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

This, indeed, is the crux of Profit Theory. To come to the point, Marx got the answer wrong. #2 Here is the short proof. #3

(i) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.

(ii) The elementary production-consumption economy is defined by three macroeconomic axioms: (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.

(iii) The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e., X=O.

(iv) The monetary profit of the business sector is defined as Q≡C−Yw,

(v) The monetary saving of the household sector is defined as S≡Yw−C.

(vi) Ergo Q≡−S.

The balances add up to zero. The counterpart of household sector saving S is business sector loss −Q. The counterpart of household sector dissaving (−S) is business sector profit Q.

For a start, the household sector’s budget is balanced, i.e., C=Yw. From this follows that macroeconomic profit is zero. The market-clearing price is given by P=W/R, and from this follows W/P=R, i.e., the real wage is equal to the productivity. The workers get the whole product.

Now, the owner of the single macroeconomics firm can do what he wants, i.e., lengthen the labor time or cut wages; nothing happens to profit and the real wage. #4 In Marx’s impeccable logic: “From nothing comes nothing. The capitalist class cannot draw more out of circulation than they throw into it.” They throw Yw in and get C out, and because of C=Yw macroeconomic profit is zero.

The business sector can only get more out of the circulation if the household sector throws more in, that is, if the household sector deficit-spends/dissaves. This is what the most elementary version of the Profit Law says, i.e., Q≡−S. The logical minimum condition of deficit spending is a banking system that creates money and lends it to households.

So, profit for the economy as a whole does NOT come from exploitation but, in the most elementary case, from the growth of the household sector’s debt. And this, in turn, means that Capitalism does not end with a revolution of the exploited workers, but as soon as the growth of private and public debt ends. #5

Egmont Kakarot-Handtke


#1 Basics of Value Theory
#2 Profit for Marxists
#3 Profit Theory in less than 5 minutes
#4 Capitalism, poverty, exploitation, and cross-over exploitation
#5 MMTers make capitalism work

Related 'Karl Marx, fake scientist' and 'MMT and Marxism ― blather as immunizing stratagem' and 'Marx’s bicentennial ― nothing to discuss, nothing to celebrate' and 'Here is the long overdue scientific death certificate for Marx and Marxists' and 'Marx and the curious coexistence of provably false economic theories' and 'Confounding sociology and economics' and 'Marxism is one of four instances of proto-scientific garbage' and 'Links on Karl Marx' and 'Ricardo, too, got profit theory wrong'.

For more about cross-over exploitation, see AXECquery.

MMT and the single most stupid physicist

Comment on Charles Adams on ‘The single most important piece of economics that everyone should know.’

Blog-Reference and Blog-Reference and Blog-Reference on Sep 8

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.” and “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In words, the public sector's deficit is the private sector's surplus or vice versa, or as Stephanie Kelton puts it succinctly in this video, the government's red ink is our black ink.”

The physicist Charles Adams is obviously just as stupid or corrupt or both as MMT's Stephanie Kelton. #1, #2 In fact, he is even worse because he has not realized that the MMT accounting identity/sectoral balances equation has already been refuted. #3, #4

To make matters short, here is the gist of the proof:

• The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.

• The elementary production-consumption economy is given with three axioms, two conditions, and two definitions, i.e., monetary profit/loss Qm≡Ec−Yw, monetary saving/dissaving Sm≡Yw−Ec. Legend: Ec consumption expenditures, Yw wage income.

• It always holds Qm≡−Sm, in other words, the business sector’s monetary profit/loss Qm equals the household sector’s monetary dissaving/saving −Sm.

• For the more complex economy, the axiomatically correct balances equation reads (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0, which reduces to Qm=G−T, that is, Public Deficit = Private Profit. #5, #6

• In marked contrast, the false MMT balances equation reads (X−M)+(G−T)+(I−S)=0, which reduces to S=G−T.

It is a curious fact that in Charles Adams’ The single most important piece of economics that everyone should know’ the word profit does not appear once despite the fact that profit is the single most important variable in economics. #7

This tells one that Charles Adams has NO idea of what he is talking about.

Egmont Kakarot-Handtke


#1 Down with idiocy!
#2 The Kelton-Fraud
#3 Wikipedia and the promotion of economists’ idiotism (II)
#4 For the full-spectrum refutation of MMT, see cross-references MMT
#5 MMT: How mathematical incompetence helps the Kelton-Fraud
#6 DSGE and profit―forget it! MMT and profit―forget it!
#7 MMT and the magical profit disappearance

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REPLY to Ed Zimmer on Sep 9

You say: “E.K-H’s so-called axioms don’t even hold up to elementary common sense.”

In the meantime, even the most retarded folks should have realized that common sense never has been and never will be a valid argument in a scientific debate.

About the relationship between common sense and science, all has been said by the great methodologist J. S. Mill 150+ years ago: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcilable with the theory they held and with a totally different one. It seems strange that such an instance as this, ..., should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” #1, #2, #3


#1 Why J. S. Mill had no friendly word for the bigots and votaries of common sense
#2 The bigots of common sense
#3 Misled by ordinary intuition and common sense

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REPLY to Matt Franko on Sep  9

Charles Adams states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity.”

You say: “Anyone can regurgitate an accounting identity.”

I say: “The axiomatically correct accounting identity reads in the most elementary case Qm+Sm=0 and the MMT identity is provably false.” #1, #2

Can you now write down your accounting identity? This is the precondition for determining which one is true.

After all, we are dealing with ‘The single most important piece of economics that everyone should know.’


#1 Wikipedia and the promotion of economists’ idiotism (I)
#2 Wikipedia and the promotion of economists’ idiotism (II)

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REPLY to Ed Zimmer, Tom Hickey on Sep 10

The axiomatically correct accounting identity reads in the most elementary case Qm≡−Sm, in words, macroeconomic profit/loss is the complement of dissaving/saving, or, as Charles Adams put it in general terms, “the sum of all sectors is zero”. The number of sectors is two, to begin with. This is the irreducible minimalist configuration. Analytically, this is the correct starting point.

The 3-bar symbol indicates a definition. A definition introduces a new variable that is composed of the axiomatically given variables, which are connected by mathematical operators. This technicality has been explained elsewhere and is of no importance in the present context.

The decisive point is that monetary profit for the business sector as a whole Qm depends alone on the dissaving of the household sector as a whole −Sm and NOT on productivity, the wage rate, exploitation, monopoly, market power, union strength, greed, profit maximization, etcetera which, in turn, means that the familiar microeconomic explanations of profit are false for 200+ years. And this, in turn, means that Distribution Theory is false. And this, in turn, means that economics is proto-scientific garbage from the founding fathers onward to MMT. #1

For the complex economy with more than two sectors follows the axiomatically correct balances equation (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0 #2, which is obviously different from the false MMT balances equation (X−M)+(G−T)+(I−S)=0. #3

The bottom line is that MMTers got the macroeconomic accounting identity wrong. This is a mathematical fact. #4 It tells the world that economists in general and MMTers, in particular, are too stupid for the elementary mathematics that underlies macroeconomic accounting. #5 It is a grave state of affairs when the elementary equation Qm+Sm=0 is beyond the understanding of academics.


#1 Ricardo, too, got profit theory wrong
#2 Go! ― test the Profit and Employment Law
#3 Rectification of MMT macro accounting
#4 Wikipedia and the promotion of economists’ idiotism (II)
#5 For details of the big picture, see cross-references Accounting

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REPLY to Tom Hickey, Matt Franko on Sep 10

Charles Adams deals with ‘The single most important piece of economics that everyone should know.’

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.”

Up to this point, all is fine in general terms.

In concrete terms, it holds for the two-sector economy (business, household) Qm≡−Sm (i).

For the three-sector economy (business, household, government) holds Qm+Sm−(G−T)=0 or Qm+Sm=(G−T) (ii), i.e. business sector’s profit Qm plus the household sector’s saving Sm is equal to the government sector’s deficit (G−T). #1

Up to this point, all is fine in accounting terms. But now comes the MMT blunder/fraud. Charles Adams says: “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In other words, the public sector's deficit is the private sector's surplus or as vice versa, or as Stephanie Kelton puts it succinctly in this video, the government's red ink is our black ink.”

The sleight of hand consists of the tacit introduction of an additional/redundant definition S≡Qm+Sm, i.e. private sector surplus S is the sum of the business sector’s profit Qm and the household sector’s saving Sm.

So, eq. (ii) Qm+Sm=(G−T) becomes S=(G−T) (iii), i.e., “our” black ink S is the government’s red ink (G−T). The MMT fraud consists of lumping “their” profit Qm and “our” saving Sm together to “our” black ink.#2 H okuspokus Simsalabim, profit is gone and then is heard no more when MMTers climb on a soapbox or advise Bernie Sanders and straightforwardly push their Wall Street/City of London agenda of deficit spending (G−T)>0, which results in “their” profit Qm for any given amount of “our” saving Sm, i.e., Public Deficit = Private Profit.

Outside academic economics, to let profit disappear is called accounting fraud, and accountants are sent to jail for it. This is ‘The single most important piece of economics that everyone should know.’


#1 Rectification of MMT macro accounting
#2 The Kelton-Fraud

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REPLY to Ed Zimmer on Sep 10

You say: “E.K-H’s basic error is believing an ‘identity’ (3-bar symbol) is different from an ‘equality’ (2-bar symbol), which is simply not the case for numerical variables …”

The elementary production-consumption economy is given by three macroeconomic axioms (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) Ec=PX consumption expenditure Ec is equal to price P times quantity bought/sold X.

The axiom set consists of 4 real variables L, R, O, X, and 4 nominal variables Yw, W, Ec, P.

From these variables, only a subset reappears in macroeconomic accounting, viz., the nominal flows Ec and Yw.

Now, two new variables are introduced. Monetary profit of the business sector Qm is defined as Qm≡Ec−Yw (i) and monetary saving of the household sector Sm as Sm≡Yw−Ec (ii).

The 3-bar symbol ≡ means in the given context “is defined as”. #1

It obviously holds Qm+Sm=0 when (i) and (ii) are inserted. In the words of Charles Adams, “Something that is true is that the sum of all sectors is zero.” #2

This statement follows logically from the axioms (A1) to (A3) and the definitions (i) and (ii).


#1 Wikipedia List of mathematical symbols
#2 In the comment section, Adams refers explicitly back to Stützel, see also Keenonomics, aggregate demand/change of debt, and some misleading critique.

For more about the balance mechanics of Stützel, see AXECquery.