From false microfoundations to true macrofoundations (I)

Comment on Lars Syll on ‘Big — and not so big — ideas in macroeconomics’

Blog-Reference and Blog-Reference

John Quiggin summarizes his book review: “In Athreya’s world, and that of a large part of the academic macroeconomics profession, macroeconomics does indeed begin with Walras, and the first modern development in the field was the formalization of Walras’ model by the economic theorist Arrow, Debreu and MacKenzie in the 1950s.” and concludes ”Athreya’s version of macro excludes everything in which I am interested.”

Obviously, John Quiggin is a proto-scientific moron of the sort that overpopulates economics. Science takes the form of a theory that has to satisfy the criteria of material and formal consistency. So the only question with regard to orthodox macroeconomics is Is it true or false? and NOT whether it is after John Quiggin’s fancy.

It holds: “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)

Neither orthodox nor heterodox economists have the true theory. Fact is:

• Economics is a failed science. It consists actually of political and theoretical economics. Political economics is scientifically worthless, and theoretical economics is materially and formally inconsistent.#1
• The subject matter of economics is the economic system as a whole. Psychology, Sociology, Behaviorism, Political Science, Geopolitics, History, Anthropology, Biology/Darwinism, Institutionalism, Law, Ethics, and Philosophy are NOT economics. The valid results of these independent disciplines are taken into economics by way of multidisciplinary cooperation if needed.
• Economics is NOT about Human Nature/motives/behavior/action. No way leads from second-guessing individual/social behavior to the understanding of how the economic system works. The microfoundations approach had been doomed to failure from the very beginning.
• Partial analysis is of extremely limited value and invariably runs into the Fallacy of Composition.
• The indispensable paradigm shift consists in replacing microfoundations with macrofoundations.
• Keynes messed up the paradigm shift because his macrofoundations lack the correct definition of macroeconomic profit.#2
• This is the core of the correct macrofoundations: (A0) The objectively given and most elementary systemic configuration of the (world-) 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.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic, that is, Occam’s Razor has been applied and the set cannot be reduced further, only expanded. The set contains no nonentities like constrained maximization or equilibrium and no normative assertions.

Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke


#1 Microfoundations are given with these verbalized axioms: “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) Every economic model that applies just one of these axioms is false.
#2 How Keynes got macro wrong and Allais got it right

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Wikimedia AXEC121i

Dani Rodrik, fake scientist

Comment on Dani Rodrik/Boston Review on ‘Rescuing Economics from Neoliberalism’

Blog-Reference and Blog-Reference Jan 5 adapted to context

Every layperson who is confronted with the statement: Mr. A has been murdered and you are the murderer, understands immediately the concept of scientific truth. Truth is (i) a binary concept, i.e. there is only true/false with NOTHING in between, and (ii), truth is objective, that is provable in principle, and (iii), that it is worth every effort to find out the truth even if we cannot be absolutely sure that we will be successful. As Popper put it: “Although nowadays we have given up the idea of absolutely certain knowledge, we have not by any means given up the idea of the search for truth.”

Admitting that there is no absolute certain knowledge is perfectly compatible with the assertion that the Law of the Lever represents certain knowledge. In fact, science is defined as the body of certain knowledge. Scientific truth has two inseparable methodological components: material and formal consistency. This, of, course, holds also for economics: “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)

Economists do not have the true theory. Economics is not a science but what Feynman called a cargo cult science. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got profit ― the foundational concept of the subject matter ― wrong. With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

So, since Adam Smith/Karl Marx, economic policy guidance NEVER has had sound scientific foundations. Economics is one of the most embarrassing scientific failures of all time and the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is either an absurd self-delusion or a deliberate deception of the general public.

While genuine scientists have no problem with the idea of certain knowledge, fake scientists desperately try to keep things in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes). Vagueness, vacuous wish-wash, and inconclusiveness are components of the survival strategy of incompetent scientists because “… you cannot prove a vague theory wrong.” (Feynman)

Accordingly, Dani Rodrik’s supreme methodological rule is “Good economists know that the correct answer to any question in economics is: it depends.” Genuine scientists know that this is NO answer at all but the evasive blather of fake scientists. Popper called this an immunizing stratagem and condemned it as a violation of the foundational principle of science.

Dani Rodrik, of course, maintains that evasion has some merits: “As even its harshest critics concede, neoliberalism is hard to pin down.” Yes, this exactly is the difference between the political agenda pusher and the scientist. The former subscribe methodologically to anything-goes the latter to provable material/formal consistency. Anything-goes is not only “hard to pin down” it is impossible to pin down and this makes it so dear to cargo cult scientists.

Dani Rodrik has not realized that economics is scientifically as dead as the flat earth theory. He defends the indefensible and tries to save economics by a spectacular operation, that is, by amputating the excrescence of neoliberalism from the healthy body of economic science: “A proper understanding of the economics that lies behind neoliberalism would allow us to identify ― and to reject ― ideology when it masquerades as economic science.”

This leads directly to the core question: “Are there universal truths in economics?”

Here is Dani Rodrik’s list of the universal principles that underlay economics: “efficiency, incentives, property rights, sound money, fiscal prudence.” These principles “… presume a capitalist economy ― one in which investment decisions are made by private individuals and firms ― but not much beyond that. They admit ― indeed they require ― a surprising variety of institutional arrangements.” This, in a nutshell, is what Dani Rodrik offers as the scientific truth economists have worked out in the last 200+ years.

Where economists fail, Dani Rodrik concedes, is at practical application: “Perhaps maps offer the best analogy. Just like economic models, maps are highly stylized representations of reality. … Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand.”

The fact is that the representative economist in his utter scientific incompetence has not realized to this day that his maps = models are utter scientific garbage beginning with supply-demand-equilibrium and ending with DSGE respectively Post Keynesianism. More specifically

• economics is axiomatically false, that is, Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent,
• because the axioms are false the whole analytical superstructure is false,#1
• economists do to this day not know what profit is,#2
• economists do not understand how the economic system, i.e. the price and profit mechanism, works,
• economists fail to realize that the market economy is NOT self-adjusting but inherently unstable,#3
• economists fail to realize that because their economic policy prescriptions lack sound scientific foundations they regularly worsen the situation.#4

Economists are NOT scientists who are clumsy at practical application but political agenda pushers who are absolutely incompetent at science. Dani Rodrik is just another representative in the 200+ years old history of cargo cult science who fails to grasp that economics does not need another brain-dead model but a Paradigm Shift.#5

Egmont Kakarot-Handtke


#1 10 steps to leave cargo cult economics behind for good
#2 The profit theory is false since Adam Smith
#3 The market economy is inherently unstable and economists never grasped it
#4 How economists murdered the economy and got away with it
#5 For details of the big picture see cross-references Failed/Fake scientists

Related 'New Economic Thinking, or, let’s put lipstick on the dead pig' and 'Failed economics: The losers’ long list of lame excuses' and 'Heterodoxy and Pluralism, too, are proto-scientific garbage' and 'How economists habitually mess it up' and 'The existence of economic laws and the nonexistence of behavioral laws' and 'The father of modern economics and his imbecile kids' and 'How to make economics a science' and 'Again and again: economists are incompetent scientists'.

The profit theory is false since Adam Smith

Comment on David Ruccio on ‘Global rentier capitalism’

Blog-Reference

David Ruccio summarizes: “Mainstream economics lies in tatters. Certainly, the crash of 2007-08 and the Second Great Depression called into question mainstream macroeconomics, which has failed to provide a convincing explanation of either the causes or consequences of the most severe crisis of capitalism since the Great Depression of the 1930s. But mainstream microeconomics, too, increasingly appears to be a fantasy…”

This is true. In fact, the situation is much worse. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got profit wrong. From the fact that Orthodoxy is false does not follow that Heterodoxy is true.

Smith treated profit as the income of the factor capital. This was the original blunder.#1 It was followed by Ricardo’s theory of rent#2, and Marx’s theory of profit#3, and Keynes’ messed-up macro.#4 As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

Because economics is a failed science it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.

As the new analytical starting point, the elementary production-consumption economy is defined with this 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.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w in each period, the macroeconomic price is given by P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#1

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing total monetary profit is zero.

Overall profit depends alone on deficit spending, that is, on the change of private or public debt. It does NOT depend on labor time, or productivity, or monopoly power, or greedy landlords, or rent-seeking bankers. There is no such thing as normal and excessive profit.  Macroeconomic profit depends alone on objective systemic factors. More specifically:

• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Macroeconomic profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup-setting, nor on risk-taking.
• In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of the household sector’s debt.
• Monopoly power is irrelevant for macroeconomic profit and affects only the DISTRIBUTION of total profit AMONG firms.
• There is no relation at all between profit, capital, marginal or average productivity.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#6
• Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
• It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. Microfounded profit theory is one big Fallacy of Composition.#7
• There is NO such thing as good old value-creating capitalism and bad new rentier capitalism. The macroeconomic Profit Law is the same from the beginning of time until the end.

High time that retarded orthodox and heterodox economists get their heads around the foundational fact of economics.

Egmont Kakarot-Handtke


#1 Working Paper The Profit Theory is False Since Adam Smith
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 Profit for Marxists
#4 How Keynes got macro wrong and Allais got it right
#5 Wikimedia AXEC31
#6 Profit and the decline of labor’s nominal share
#7 For details of the big picture see cross-references Profit

Related 'How the intelligent non-economist can refute every economist hands down' and 'The unintended consequences of deficit spending' and 'Rethinking macro' and 'Ricardo and the invention of class war' and 'Capitalism, poverty, exploitation, and cross-over exploitation' and 'If we only had classes' and 'Profit'

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Wikimedia AXEC109i

MMT and the promotion of Wall Street's idea of social policy

Comment on Peter Cooper on ‘If it’s Doable, it’s Affordable’*

Blog-Reference

Peter Cooper summarizes the core of MMT: “Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments: If something can be done, it is ‘affordable’. If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it.” So, why “… we do not just spend our way out of the current mess. And while we are it ― give the NHS more money, shelter the homeless and feed the poor of the world.”

Time to do some serious economics. Because economics is a failed science it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.

As the new analytical starting point, the elementary production-consumption economy is defined with this 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.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w in each period, the macroeconomic price is given by P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. For the graphical representation see Figure 1.#1

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing total monetary profit is zero.

What is needed for a start is two things (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Y_w per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Y_w.

Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Y_w, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#2

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κY_w, with κ determined by the transaction pattern. In other words, the average stock 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 equation reads M=κY_w=κPX=κPRL in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given level of employment and productivity, except for the fact that M is the DEPENDENT variable. In other words, money is endogenous.

Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side. This deposit is then transferred to the household sector as wage payment and returns in the form of consumption expenditures.

Now it is assumed that employment in the initial period is L but full employment is 2L. Is full employment feasible? Yes, as a matter of principle. Given the productivity R and the wage rate W the variables O, X, Y_w, C, M double under the condition of market-clearing and budget-balancing with P=W/R=constant. This basic scenario serves as a reference.

Scenario (i) It is now assumed that full employment is established by improving healthcare services. The state taxes the initial wage income Y_w, so disposable income is now Y_w−T. The newly employed workers in the healthcare service receive the income Y_g, such that total disposable wage income in period 1 is Y_w1=Y_w−T+Y_g=Y_w and Y_g=T, i.e. the government budget is balanced. Under the condition of the household sector’s budget-balancing, total consumption expenditures remain constant, i.e. C₁=Y_w1=C. As a result, the total output of the economy consists now of the unchanged quantity of the consumption good, i.e. O₁=O, and in addition, of healthcare services H₁ which are not sold but distributed according to some medical criteria. What we now have is full employment and reasonable healthcare and all budgets balanced. The profit of the business sector is zero.

Scenario (ii) Now it is assumed that the income in the healthcare sector is not provided via taxation but via the central bank. So total disposable wage income in period 1 is now Y_w1=Y_w+Y_g. Accordingly, consumption expenditures are higher, i.e. C₁=Y_w1, and this results in an increase of the market-clearing price, i.e. P₁>P. The profit of the business sector is now Q_m1=C₁−Y_w=Y_g.

For the household sector, the real situation, i.e. labor input 2L and output O₁ and H₁, is IDENTICAL in both scenarios. The relevant difference is that the profit of the business sector is higher in scenario (ii) due to the creation of central bank money.#3

With MMT policy, Wall Street has found a way to endorse full employment, healthcare, or other social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state. It holds Public Deficit = Private Profit. MMT is a social bluff package.

Egmont Kakarot-Handtke


* Refers to Youssef El-Gingihy/The Independent Actually the magic money tree does exist, according to modern monetary theory.

#1 Wikimedia AXEC31 Elementary production-consumption economy
#2 Wikimedia AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 For more details see On the saying “We owe the debt to ourselves”

Related 'The Law of Interdependent Balances' and 'The profit theory is false since Adam Smith' and 'MMT: The one deadly error/fraud of Warren Mosler' and 'Down with idiocy!'. For the full-spectrum refutation of MMT see cross-references MMT.

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JFTR on billy blog on Nov 8

Clearly, neoliberal policy never had sound scientific foundations. Orthodox economics is a scientific failure. But, clearly, the same holds for MMT. Both approaches are proto-scientific garbage. See MMT and the promotion of Wall Street's idea of social policy.

Heterodoxy and Pluralism, too, are proto-scientific garbage

Note on Edward Fullbrook on ‘This intellectual cult threatening us all’

Blog-Reference

Edward Fullbrook summarizes: “Locke’s general conception of the human mind became commonplace among 18th-century philosophers, so when Adam Smith came to write the foundational text for economics, The Wealth of Nations (1776), he had the example not only of Newton’s material atomism but also of Locke’s extension of it to an altogether different area of inquiry. If atomism could form the basis of a theory of ideas, then why not apply it as well to a theory of human beings?”

Joseph Schumpeter characterized Adam Smith correctly as a storyteller: “… in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.”

In fact, Smith is the founder of economics as narrative or soapbox rhetoric or plain sophistry or sitcom entertainment. With Newton as the beacon of science before everyone’s eyes, 18th-century philosophers and economists were seen for what they were: scientifically incompetent blatherers who cannot be taken seriously.

This lead to a change of rhetoric in public discourse. Locke and Smith, among others, mimicked physics without ever understanding what science is all about. This is how the so-called social sciences became what Feynman famously called cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Understanding nothing, the fake scientists of Political Economy took determinism as the characteristic feature of science. This was a rather silly methodological mistake because it was long known that determinism does not apply to human action: “The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown) What scientists of all ages knew, the fake scientists of economics simply ignored.

But the incompetence of the representative economist goes even deeper. What economists never realized is that economics cannot be founded on any assumptions about Human Nature/motives/behavior/action. Economics is not a so-called social science but a systems science. There is, of course, no such thing as a deterministic law of human behavior but there are indeed deterministic laws of the economic system.#2

The state of economics is this: theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.#3 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 economics sits squarely at the proto-scientific level.

Heterodoxy’s crime against science consists in (i) praising the pluralism of false theories, (ii) misleading students about want science is all about, and (iii), the inability for 200+ years to come forward with something better than Orthodoxy.#4

Economists in their utter scientific incompetence ― right-wing or left-wing do not matter ― always were and still are a threat to their fellow citizens.

Egmont Kakarot-Handtke


#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 The existence of economic laws and the nonexistence of behavioral laws
#3 Economics: 200+ years of scientific incompetence and fraud
#4 The stupidity of Heterodoxy is the life insurance of Orthodoxy

Related 'Are economics professors really that incompetent? Yes!' and 'What it takes to become a great economist' and 'How Heterodoxy became the venue for science’s scum'. For details of the big picture see cross-references Heterodoxy and cross-references Pluralism and cross-references Failed/Fake Scientists and cross-references Political Economics/Stupidity/Corruption.

On the saying “We owe the debt to ourselves”

Own post, no external Blog-Reference

The best-known meme of Functional Finance and MMT with regard to internal public debt is “We owe it to ourselves” which is to say that there is nothing at all to worry about.

The growth of public debt is usually discussed within the Walrasian or the Keynesian framework. The problem is that both the microfoundations approach and the macrofoundations approach are axiomatically false. Methodologically it holds: if the axioms are inconsistent the whole analytical superstructure falls apart. Because of this, it is necessary to shift to the correct macrofoundations and to rethink the whole issue of public deficits/debt.#1

As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macro 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.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w, the price is given by P=C/X=W/R, i.e. the market-clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#2

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It holds Q_m≡−S_m, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.

There are three alternatives of how to redistribute output between the household and the government sector: (i) taxation, (ii) public deficit spending and compensatory household sector saving, (iii) public deficit spending with newly created money.

(i) The government needs, for some legitimate reason, a part of the output in period 1 and decides to tax the wage income receivers. Wage income is unchanged Y_w1=Y_w and disposable income is then Y_w1−T₁. The consumption expenditures of the household sector fall by the same amount under the condition of budget balancing, i.e. C_h1=Y_w1−T₁. Taken together, total expenditures of the household and government sector remain unchanged, i.e. C_h1+C_g1=C. The government sector’s budget is balanced, i.e. C_g1=T₁. Accordingly, one has these three sectoral balances.

Q_m1≡C_h1+C_g1−Y_w   monetary profit/loss, business sector,
S_m1≡Y_w−T₁−C_h1     monetary saving/dissaving, household sector,
B_m1≡T₁−C_g1           surplus/deficit, government sector,
----------------------
Q_m1+S_m1+B_m1=0 with Q_m1=0, S_m1=0, B_m1=0.

The market-clearing price remains unchanged, i.e. P₁=P=W/R. The real share of the household sector is O_h1=C_h1/P₁ and of the government sector O_g1=C_g1/P₁ with O_h1+O_g1=O₁=O.

Thus, the transfer of a share of current output from the household to the government sector is completed. In the following periods, government taxation and spending are again zero. Everything is as it was in the initial period.

(ii) The government needs again a part of the current output but does not tax the wage income receivers. Instead, a group A of the households saves, thus that household sector saving S_m1≡Y_w1−C_h1 is exactly equal to government spending, i.e. S_m1=C_g1. Total expenditures remain unchanged, i.e. C₁=C_h1+C_g1=C. The real shares of output are exactly equal to the taxation variant (i). The balances now look as follows.

Q_m1≡C_h1+C_g1−Y_w   monetary profit,
S_m1≡Y_w−C_h1          monetary saving,
B_m1≡−C_g1              government sector deficit,
---------------------
Q_m1+S_m1+B_m1=0 with Q_m1=0, S_m1>0, B_m1<0.

The public debt (= stock) has been zero and is at the end of the first period equal to the deficit C_g1. It may accumulate in subsequent periods or not. The household sector’s savings (= stock) have been zero and are at the end of the first period equal to S_m1. Both amounts are exactly equal and it is assumed that the government debt is fully consolidated by selling bonds to group A of the households = savers = creditors.

All households are taxed beginning with period 2, thus that the total of lump-sum individual tax is equal to the total of interest payments that go to the creditor households A. As a result, the disposable income of the creditor households increases and that of the complementary group B decreases. So, for the duration of the debt, an income redistribution takes place. It is NOT the case that “we” pay interest to “ourselves” but group A + B = “we” pay to group A = creditor households. The net income increase of group A is interest minus lump-sum tax of group A. Compared to the taxation case (i) group A is better off and group B is worse off depending on the interest rate and the duration of the debt.

Eventually, the public debt is redeemed. All households A+B are taxed in period t and the sum goes to the creditor households A. The tax in period t, i.e. T_t, is equal to the public debt C_g1. The households spend their current income, i.e. Ct=Y_wt, the lump-sum tax is paid by dissaving. The balances now look as follows.

Q_mt≡C_ht−Y_w       monetary profit, C_ht=Y_w,
S_mt≡Y_w−T_t−C_ht   monetary dissaving, S_mt=−T_t,
B_mt≡T_t               government budget surplus,
------------------
Q_mt+S_mt+B_mt=0 with Q_mt=0, S_mt<0, B_mt>0.

At the end of period t, the public debt is again zero. The household sector as a whole ends up with total savings of zero which are composed of deposits of group A and overdrafts of group B. The public debt becomes in part private debt = overdrafts at the central bank after the completion of the whole cycle. Group A can pay the tax out of savings and is left with deposits at the central bank. Group B is left with overdrafts of an equal amount.

So, public deficit spending plus compensatory household sector saving amounts to a deferred tax for the household sector as a whole. Instead of paying the tax in period 1, the household sector pays in period t. For the duration of the tax deferment, a redistribution of income from all taxpayers A+B to creditor households A takes place. The statement “We owe the debt to ourselves” is misleading. “We”, i.e. A+B, owe the debt to A. Compared to taxation (i) deficit spending (ii) makes group B worse off. In addition, group B is left with private debt at the end of the process.

Only if all households A+B save the same amount and are taxed the same amount the whole process is distributionally neutral.

(iii) The government again runs a budget deficit. Now, the households do not save but spend the whole period income C_h1=Y_w1=Y_w. Government spending is given with C_g1 and taxes T₁ is zero. Total expenditures are now C₁=C_h1+C_g1 and this yields a price hike: P₁=C₁/X=(C_h1+C_g1)/X=P+C_g1/X with market-clearing X=O.

The redistribution of output between the household sector and the government sector, that is, the REAL taxation, is now realized via the price mechanism and becomes thereby invisible. If deficit spending is exactly repeated period after period the price remains at the elevated level, otherwise, it falls back to the initial level. The balances now look as follows.

Q_m1≡C_h1+C_g1−Y_w    monetary profit, C_h1=Y_w, Q_m1=C_g1,
S_m1≡Y_w−C_h1           monetary saving,
B_m1≡−C_g1               government budget deficit,
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Q_m1+S_m1+B_m1=0 with Q_m1>0, S_m1=0, B_m1<0.

The amount C_g1 = government budget deficit comes from the central bank, i.e. is created out of nothing. The two sides of the central bank’s balance sheet, overdrafts, and deposits, rise by the same amount. The newly created money ends in the ‘cash box’ of the business sector, i.e. government sector’s overdrafts = business sector’s deposits. It is assumed that the government consolidates its overdrafts by selling bonds to the business sector. So overdrafts and deposits at the central bank vanish completely.

The household sector is then taxed with a lump-sum tax and the interest payments go to the business sector for the duration of the public debt. There is no redistribution of income between different groups within the household sector. The creditor is now the business sector.#3

Eventually, the public debt is redeemed. All households are taxed in period t and the total of the lump-sum tax, T_t=C_g1, goes to the business sector. The tax reduces current spending C_ht<Y_w. This causes the market-clearing price to fall. The balances now look as follows.

Q_mt≡C_ht−Y_w         monetary loss, C_ht<Y_w,
S_mt≡Y_w−T_t−C_ht     monetary saving, T_t+C_ht=Y_w, S_mt=0,
B_mt≡T_t                 government budget surplus,
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Q_mt+S_mt+B_mt=0 with Q_mt<0, S_mt=0, B_mt>0.

Monetary loss for the economy as a whole is now given by Q_mt=C_ht−Y_w=−T_t. The loss in period t is exactly equal to the profit of period 1. Deficit spending again amounts to a tax deferment for the household sector. The difference to variant (ii) is that the tax is not paid by dissaving but by saving in period t which causes the loss of the business sector. Eventually, the real taxation, i.e. the output transfer of period 1, is trailed in the nominal sphere. The household sector gains NOTHING by this delay. Just the opposite, the balanced budget case is the most advantageous for the household sector. Alternative (iii), i.e. budget deficit with money printing, is the most advantageous for the business sector. This is the version that is promoted by MMT and the other deficit spenders.#4

To argue in favor of deficit spending with the slogan “We owe the debt to ourselves” is either a testimonial of utter scientific incompetence or deliberate political deception of the general public.

Egmont Kakarot-Handtke


#1 10 steps to leave cargo cult economics behind for good
#2 Wikimedia AXEC31 Elementary production-consumption economy

#3 Gov-Deficits do NOT cause inflation
#4 Keynesianism as ultimate profit machine

Related 'Settling the Theory of Saving' and 'Meet the MMT smart arses' and 'No MMT illusions! YOU are going to pay for it' and 'How to pay for the war and to be bamboozled by economists' and 'Stephanie Kelton sells children into debt slavery'. For details of the big picture see cross-references Profit/Distribution.

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Wikimedia AXEC168

The economist as amateur journalist

Comment on Simon Wren-Lewis on ‘The journalist as amateur scientist’

Blog-Reference

The one question in science is about the truth of a theory, i.e. its material and formal consistency: “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)

Economists do not have the true theory. They have many opinions but nothing in the way of scientific knowledge. Since the founding fathers, there is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

The fact is that the agenda pushers of political economics have captured theoretical economics (= science) from the very beginning with the result that economics has produced nothing of scientific value in the last 200+ years. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the foundational concept of the subject matter ― profit ― wrong.#1, #2

Since the founding fathers, economists violate the principle of the separation of science and politics which has been clearly stated by J. S. Mill: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

Economics is what Feynman called a cargo cult science and neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations since the soapbox economists Adam Smith and Karl Marx. At present, neither Krugman nor Wren-Lewis nor Keen nor Varoufakis nor the rest of political loudspeakers, amateur journalists, bloggers, and blatherers can back up their political agenda pushing with a scientifically acceptable economic theory.

Scientific ethics forbids economists to dabble in politics. This is the one thing. The other thing is that economists have NOTHING of scientific value to add to the discussion and the political process.

Egmont Kakarot-Handtke


#1 For details of the big picture see cross-references Failed/Fake Scientists
#2 For details of the big picture see cross-references Political Economics/Stupidity/Corruption

Related 'The economist as storyteller' and 'Circus Maximus: Economics as entertainment, personality gossip, virtue signaling, and lifestyle promotion' and 'How to make economics a science' and 'Your economics is refuted on all counts: here is the real thing'.

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Wikimedia AXEC172