The profit effect of a Job Guarantee

Comment on Peter Cooper on ‘The Income-Expenditure Model with a Job Guarantee’

Blog-Reference

Peter Cooper analyses the effect of a Job Guarantee by applying the familiar Keynesian formalism. This formalism is false because it lacks the pivotal variable macroeconomic profit. Keynesian macro models are since 80+ years only good for the wastebasket.

Economics has to be reconstructed from scratch. As the new 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=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.

With this, the point to start with is clearly defined. Now it is assumed for simplicity that the business sector reduces initial employment L by half and that the government immediately absorbs the unemployment such that total employment remains unchanged, i.e. L_b+L_g=L=full employment. The wage rate W remains unchanged, and therefore, total wage income Y_w remains unchanged. Under the condition of budget-balancing C=Y_w consumption expenditures, too, remain unchanged.

Because labor input in the business sector is reduced from L to L_b=½L the initial output is reduced from O to O_b=½O. On the other hand, the output of the public good increases from zero to O_g=R_gL_g. This output is made available to the public for free by the government sector.

The wage bill of the business sector is reduced by half, i.e., Y_wb=WL_b with L_b=½ L. The other half of the wage bill is paid by the government sector, i.e., Y_wg=WL_g with L_g=½L. The government pays the wage bill Y_wg with money created by the central bank.

Consumption expenditures C remain constant, but the business sector’s output is halved. By consequence, the market-clearing price rises from P₀ to P₁. As a result, the profit of the business sector rises from Q_m0=C−WL=0 to Q_m1=C−WL_b=C−W½L.

Ultimately, the budget deficit of the government sector, i.e., Y_wg, ends up as profit in the cash box of the business sector, i.e., Q_m1=Y_wg. It holds Public Deficit = Private Profit. This configuration can continue for an indefinite time with public debt vis-à-vis the central bank rising continuously, and with the business sector’s pile of cash rising continuously.

What is rather strange is that the word profit does not appear once in Peter Cooper’s analysis of the Job Guarantee program, which is in effect a Profit Guarantee program. #2

Egmont Kakarot-Handtke

#1 Graphic AXEC31 Elementary production-consumption economy
#2 For the full-spectrum refutation of MMT, see cross-references

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REPLY to Six, Tom Hickey on Sep 27

You obviously have not noticed that the issue is MMT profit theory and NOT MMT employment theory.

MMT employment theory has already been refuted elsewhere, see ‘Macrofounded labor market theory’

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REPLY to Six, Matt Franko on Sep 27

In your utter confusion, you obviously have not noticed that the issue is MMT profit theory and NOT distributed and retained profit.

These issues have already been dealt with elsewhere, see Essentials of Constructive Heterodoxy: Profit, Sec. 7

Because MMT got profit theory wrong, it also got profit distribution wrong, nay, it got the whole analytical superstructure wrong. This brings us back to Peter Cooper’s provably false MMT income-expenditure model, which neither mentions profit, nor distributed profit, nor retained profit.

In sum: (i) the formal foundations of MMT are inconsistent,* (ii) MMT is a wholesale analytical failure, (iii) MMTers are incompetent scientists, (iv) MMT policy is a Profit Guarantee program for the one-percenters, (vi) the claim that MMTers support the cause of the ninety-nine percenters is either self-delusion or political fraud.

* For the axiomatically correct formal framework, see Graphic AXEC112c Elementary production-consumption economy incl. distributed profit and money.

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REPLY to Matt Franko on Sep 27

You say: “… all MMT is doing is relying on the well-established accounting methodology in National Income Accounting ...”

That is very bad because National Accounting is methodologically flawed and if MMTers were only a little above Trump University level they would have realized the blunder.#1

In addition, it is NOT true because profit appears in National Accounting but NOT in the MMT balances equations.#2

The fact is that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of accounting.

#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach and How Keynes got macro wrong and Allais got it right and National Accounting: scientific incompetence or political fraud?

#2 MMT and the magical profit disappearance

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REPLY to Six, Matt Franko on Sep 28

Let us agree on the essential points:

(i) A Job Guarantee program combined with deficit spending increases the business sector’s overall monetary profit by the exact amount of the deficit,

(ii) Peter Cooper’s income-expenditure model does not capture this effect,

(iii) all models that do not explicitly contain macroeconomic profit are scientifically worthless,

(iv) the MMT policy agenda has no sound scientific foundation,

(v) MMTers have to be expelled from the sciences.

The ethics of science is consistency ― economics is inconsistent

Comment on Lars Syll on ‘Neoliberal “ethics”’

Blog-Reference and Blog-Reference on Sep 28

There are political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, and 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.

Economics consists of the major approaches, Walrasianism, Keynesianism, Marxianism, and Austrianism, that are mutually contradictory, axiomatically false, materially/formally inconsistent, and have gotten the foundational economic concept of profit wrong. To repeat, the representative economist does to this day NOT know ― what he is supposed to know because it is his and nobody else’s subject matter ― what profit is: “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)

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. Economics is a failed science, or what Feynman called a cargo cult science.

There is the political sphere, and there is the scientific sphere. It is quite obvious that both are fundamentally different, and because of this, it is of utmost importance to radically separate the two. The mixing of the two is the economists’ moral equivalent of the Fall of Man.

Politics is about the realization of the Good Society. This presupposes an idea of what the Good Society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge, and the crucial distinction is between true/false, with truth unequivocally defined by material and formal consistency. To mix politics and science is to corrupt science. #1

Economics is meant to be a science, and the economist has to satisfy scientific standards and NOTHING else. Scientific standards have been well-defined since antiquity: “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)

Since Adam Smith/Karl Marx, economics has been explicitly defined as a science. The general public is year after year reminded of this fact with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. #2 And every economist learned in Econ 101: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Clearly, economics has been a self-declared science for 200+ years. Clearly, the major approaches are materially and formally inconsistent. Clearly, there is a contradiction. Clearly, economists violate the ethics of science.

Economics needs a Paradigm Shift. In methodological parlance, the Walrasian microfoundations and the Keynesian macrofoundations have to be fully replaced with an entirely new set of axioms. Therefore, the one and only question is: How is it done? That much is clear: it is NOT done
(i) by endlessly kicking the dead horse of Orthodoxy without ever coming up with a valid alternative, so traditional Heterodoxy, too, is a scientific failure;
(ii) by blind empiricism and microeconomic case studies;
(iii) by adapting the underlying morality of current political economics instead of executing the final separation of politics and science.

The point to grasp is that economics is a systems science, and all questions about Human Nature/motives/behavior/action are NOT the economist’s business but have to be left to psychology, sociology, anthropology, history, political science, biology, ethics, etcetera.

The representative supply-demand-equilibrium (S-D-E) economist is lost for science and can only continue with cargo cult science. For him, New Economic Thinking amounts to moral window dressing. #3

Both orthodox and heterodox economics are a continuation of cargo cult science. #4 Fresh moralizing is not a substitute for the urgently required New Economic Thinking. Moralizing is political economics, and political economics is fake science. #5

Egmont Kakarot-Handtke


#1 The irrelevance of populism for economics
#2 The real problem with the economics Nobel
#3 CORE: more lipstick on the dead economics pig
#4 Economics is NOT about Human Nature but the economic system
#5 10 steps to leave cargo cult economics behind for good

Related 'Economics: 200+ years of scientific incompetence and fraud' and 'Economists: Time to say goodbye' and 'Opinion, conversation, interpretation, blather: the economist’s major immunizing stratagems'. Use also the labels Ethics and NET (New Economic Thinking) in the box below.

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Graphic AXEC108l

National Accounting: scientific incompetence or political fraud?

Comment on David Graeber on ‘Accounting error spells chaos for global economy’

Blog-Reference and Blog-Reference

You say “Last month I noticed what appears to be a glaring error in the UK’s Office of Budget Responsibilities’ calculations of household debt levels — one with potentially frightening implications for the stability of the financial system as a whole.”

You have indeed identified a foundational error of macroeconomics. It exists already since Keynes and relates to profit theory. In simple terms, Keynes never understood what profit is and neither pro-Keynesians nor anti-Keynesians realized the blunder in Keynes’ foundational macro equations. Thus, the blunder sneaked into National Accounting and became eventually an essential part of MMT. For details see
• Economists: just too stupid for counting
• The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
• Rectification of MMT macro accounting

Egmont Kakarot-Handtke


Related 'Some fatal flaws of MMT' and 'Economists’ perennial trouble with accounting' and 'Profit' and 'The GDP-death-blow for the economics profession'. For more details of the big picture see cross-references Accounting.

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REPLY to Tom Hickey, MRW, Matt Franko on Sep 25

(i) Compared to the entirely faulty MMT accounting#1 the UK’s Office of Budget Responsibilities graphics at least includes the business sector explicitly.

(ii) The correct balances equation for total profit reads Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) [1] or rearranged (I−Q_m)+(Y_d−S_m)+(G−T)+(X−M)=0 [2] which says that the balances of the business sector, the household sector, the government sector, and the Rest of World add up to zero.#2 Hence, the sum of positive balances is always symmetrical to the sum of negative balances. This rearranged equation  (I−S_m)+(G−T)+(X−M)−(Q_m−Y_d)=0 finally compares to the false MMT equation (I−S)+(G−T)+(X−M)=0. The difference (Q_m−Y_d) denotes retained profit.

(iii) It is doubtful whether the UK’s Office of Budget Responsibilities got the balances equation [2] right.#3

(iv) That much is sure: the MMT balances equations are as false as can be. Because of this, the analytical superstructure of MMT is scientifically worthless. MMT policy has NO sound scientific foundations.

#1 MMT and the magical profit disappearance
#2 For more details see cross-references MMT
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

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REPLY to Matt Franko on Sep 26

The correct four-sector balances equation for the business sector’s total monetary profit reads Q_m≡Y_d+I−S_m+G−T+X−M. Profit is the pivotal magnitude of the market economy. This magnitude does NOT appear in the MMT balances equations. So, MMT misses the essence of economics. MMTers have not realized until this very day that their approach is lethally flawed.* MMTers have zero scientific/mathematical/accounting competence.

As a self-declared specialist in Accounting Science it should be easy for you to refute the equation above. Of course, you cannot — and nobody else of the scum of sciences called MMT can.

* For the full-spectrum refutation see cross-references MMT

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REPLY to Matt Franko on Sep 26

You say “They [MMTers] don’t see the ‘business sector’s total monetary profit’ as the ‘essence of economics’.... and they don’t have to... they are more interested in the general economic welfare ....”

If you do not know that 2+2=4 you are out as a mathematician. If you do not know what energy is you are out as a physicist. If you do not know what profit is you are out as an economist. In all cases, it does not help you much to pretend to be mainly interested in general human welfare.

Non-swimmers are not hired by Baywatch even if they assert that their highest ambition is to save fellow humans from drowning.

The fact is that MMTers do not understand the foundational concept of economics. Worse, because they do not understand that Public Deficit = Private Profit they do not realize that MMT policy is directly AGAINST general human welfare.

Macro accounting is the faithful recording of all economic transactions between the business and the household sector, the application of elementary mathematics, and the drawing of balances after the conclusion of a period of predetermined length. If done by intelligent persons, this yields the total monetary profit of the business sector in the most elementary case as Q_m≡−S_m which is identical with the auditable real quantity in the aggregate cash box. This formula is the core of profit theory and the indelible shame of economics is that economists in general and MMTers, in particular, do not understand after 200+ years what any person of average intelligence is supposed to understand in 20 minutes.*

* How the intelligent non-economist can refute every economist hands down

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REPLY to wilwon32 on Sep 26

You say “I could understand E K-H’s argument that business profitability is a prerequisite for survival in a competitive situation; I do not understand why profitability is a prerequisite for a desirable economic system to be constructed.”

The point is NOT what people think about profit or that profit is needed for survival or that the profit motive is morally good/bad. All this is the subjective side of profit. The point is to figure out the objective Profit Law and to verify it with the help of National Accounting, which is one of the most important measurement tools in economics. This is the objective side of profit.

The subjective side of profit is the proper business of psychology, sociology, and other so-called social sciences. The objective side of profit is the subject matter of economics.

The scandal of economics is that none of the main approaches, including MMT, can give you the Profit Law. Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” Economists simply do not know what profit is. And this means that the whole of economics, including MMT, is proto-scientific garbage.

You cannot construct the Good Society if you do not know how the economy works and what the economic laws are just as you cannot get three hundred coffee-sipping dullards in an aluminum box off the ground without knowing the laws of aerodynamics and thermodynamics. Psychology and sociology are not of much help.

The claim that economists in general or MMTers, in particular, contribute to the realization of the Good Society is one of the worst jokes of all time.

10 steps to leave cargo cult economics behind for good

Comment on Lars Syll/Pramit Bhattacharya on ‘Seven sins of economics’

Blog-Reference and Blog-Reference and Blog-Reference on Sep 26

Lars Syll gives a heterodox inventory of all that is wrong with economics. This, in turn, initiates the correct sequence for the next steps to be taken.

(i) Taking stock

The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― and their variants are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong.

Provably false:
• profit theory, for 200+ years, #1
• Walrasian microfoundations (including equilibrium), for 150+ years,
• Keynesian macrofoundations (including I=S, IS-LM), for 80+ years. #2

This means (1) that both orthodox and heterodox economics are cargo cult science, and (2) that the textbooks from Samuelson to Mankiw and Rodrik are proto-scientific garbage. #3

(ii) Paradigm Shift

Economics is a failed science. The major approaches are indefensible. The arguments of the representative economist about specific difficulties of his subject matter have to be taken for what they are: as excuses, more precisely, as thoroughly refuted excuses. #4

The fact that an approach is axiomatically false means that it cannot be improved but must be fully replaced.

(iii) Systems science

The representative economist maintains that economics is a social science. This is a popular misapprehension. In fact, economics is a systems science. Economics is about how the economy works and NOT about Human Nature/motives/behavior/action. #5 These issues are left to psychology, sociology, anthropology, history, Political Science, social philosophy, biology/evolution theory etcetera.

(iv) Separation of Politics and Science

The question about the Good Society is a political question that has to be answered in the political realm and NOT in the scientific realm. Already J. S. Mill was quite explicit about the separation of politics and science. #6

(v) True macrofoundations

The fact is that the subject matter of economics is ill-defined or, in methodological terms, that economics is axiomatically false.

A Paradigm Shift means in practical terms that economics has to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations because if it isn’t macro-axiomatized, it isn’t economics. #7

(vi) Methodology

The failure of economics is mainly due to the Fallacy of Insufficient Abstraction. In other words, economists cannot rise above the level of storytelling. One storyline is that of Supply-Demand-Equilibrium and the wonderful feats of the Invisible Hand, the other storyline is that of the struggle between the good guys = workers and the bad guys = capitalists. Storytelling is proto-scientific garbage but people like it.

The economy is an abstraction. The correct abstraction to start with is what Keynes called the ‘monetary theory of production’. Scientific theories are defined by material/formal consistency.

The analysis proceeds top-down, that is, it starts with macrofoundations, which are step by step differentiated; in other words, the analysis advances from the elementary to the complex.

There is no vague blather, no rhetoric, no metaphors, no psychologism, no sociologism, no second-guessing of motives or expectations, no sitcom talk, no narrative, and no storytelling. There is nothing but measurable variables, equations, and graphs. Because all variables are measurable, all conclusions are testable.

(vii) The elementary production-consumption economy

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. #8 The elementary production-consumption economy is formally given with
• Three macroeconomic axioms:
(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.
• Two initial conditions: market-clearing, i.e. X=O, and budget balancing, i.e., C=Y_w
• Two definitions: monetary saving of the household sector S_m≡Y_w−C, and monetary profit of the business sector Q_m≡C−Y_w. For the sectoral balances holds Q_m≡−S_m. This is the elementary version of the macroeconomic Profit Law.

(viii) The evolving economy

The axioms (A1) to (A3) refer to a period of predetermined length. The variables for one period and the next period are connected by rates of change (deterministic or random). The proper formal representation is not a system of equations but a simulation. The open-ended simulation is given with the Economics God Equation. #9

(ix) The market

It is a must to forget a whole bunch of NONENTITIES: utility, production function, supply function resp. SS-curve, demand function resp. DD-curve, equilibrium/disequilibrium. Supply-Demand-Equilibrium (S-D-E), the Totem of Micro/Macro, is a NONENTITY. The macroeconomic market is formally defined by the Law of Supply and Demand. #10

(x) Employment and real growth/decline

The elementary production-consumption economy has, of course, to be expanded to the investment economy. This yields the Employment Law. #11, #12 This equation shows how employment/unemployment depends on aggregate demand and the price- and profit mechanism, i.e. on the relative changes of wage rate, price, and productivity. The growth/decline of output and changes in the income distribution can be derived from the Employment Law. The stocks of inventory, money, and capital are consistently derived from the period flows as numerical integrals.

The Employment Law proves that the market economy is inherently unstable and delivers the levers for effective policy measures.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 Economics: 200+ years of scientific incompetence and fraud
#3 The father of modern economics and his imbecile kids
#4 Failed economics: The losers’ long list of lame excuses
#5 Economics is NOT about Human Nature but the economic system
#6 Economics: the emancipation of science from politics
#7 First Lecture in New Economic Thinking
#8 For the verbal description, see How the intelligent non-economist can refute every economist hands down
#9 Graphic AXEC25 The Economics God Equation
#10 Graphic AXEC107f The Four Basic Economic Laws
#11 Graphic AXEC46 Employment Law, Investment economy
#12 Graphic AXEC112 Elementary production-consumption economy incl. distributed profit and money

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Graphic AXEC121g

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Graphic AXEC107f

Forget Friedman, forget the Quantity Theory

Comment on David Glasner on ‘Milton Friedman and the Chicago School of Debating’

Blog-Reference

In economics, there are two starting points: microfoundations and macrofoundations. Both are provably false. Orthodoxy went micro: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). Keynes went macro: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Because both the axiomatic foundations of Walrasianism and Keynesianism are provably false, their analytical superstructures are also false. This means inter alia that profit theory, price theory, employment theory, and money theory are false. Friedman never realized the necessity of a Paradigm Shift but remained faithful to a paradigm that had, strictly speaking, already been dead in the cradle 100+ years ago. As a spokesperson for Monetarism, he incarnated the central tenet “that money causes prices”.

Because economics is a failed science, it has to undergo a Paradigm Shift. Economic analysis has to be based on entirely new macrofoundations, and the fundamental questions have to be put again at the top of the agenda.

Economics has to be reconstructed from scratch. As a new 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 in each period, the 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

The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts Friedman’s Quantity Theory to rest.

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 deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing, the 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 legitimate sovereign who 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 k 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. As a matter of principle, the production-consumption economy NEVER runs out of money.

The transaction equation reads M=κPX=κRL P in the case of budget-balancing C=Y_w and market-clearing X=O, and this yields the commonplace correlation between the average stock of money M and price P for given employment and productivity level, except for the fact that M is the DEPENDENT variable. If P doubles, M doubles. The commonplace correlation does NOT hold if L doubles and M doubles, and P remains constant.

Inflation ensues under the condition of market-clearing and budget-balancing if the wage rate rises over several periods faster than productivity, and deflation ensues in the opposite case. Under the condition of L, R → const., one always gets the commonplace correlation between the average stock of money M and price P, with the causality running from P to M.

This axiomatically correct kernel of the theory of money #3 ― which immediately makes it clear why the Fed cannot reach the inflation target ― fully replaces Friedman’s proto-scientific garbage.

Egmont Kakarot-Handtke


#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Transaction pattern, household sector, balanced budget
#3 For more details, see Reconstructing the Quantity Theory (I). The New Quantity Theory formula is shown under the label of Graphic AXEC111a.

Related 'Fact of life: your econ prof is scientifically incompetent' and 'Milton Friedman, fake scientist' and 'Forget Friedman, forget Keynes' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy' and 'Friedman and the cluelessness of fake scientists' and 'Will economics ever become a science?' and 'Common non-sense' and 'How money emerges out of nothing ― the functional account' and 'Indeed, Keynesianism and Monetarism are basically the same proto-scientific rubbish' and 'Clueless about money and profit' and 'Objective determinants of profit and interest' and 'Going beyond Wicksell, Keynes, and MMT' and 'Interest and profit' and 'How MMT got inflation wrong' and 'Inflation: back to basics' and 'Attention: there are THREE types of inflation' and 'Basics of monetary theory: the two monies' and 'Criminals and the Monetary Order'.

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Graphic AXEC210

Profit and the decline of workers’ nominal share (II)

Comment on Noah Smith on ‘Why Workers Are Losing to Capitalists’

Blog-Reference and Blog-Reference

Every economist knows from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO clue about the foundational concept of their subject matter. #1

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic  Profit Law is given as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) [1] and this reduces to Q_m=(I−S_m)+(G−T) [2] for Y_d, X, M=0; Legend: Q_m total monetary profit/loss, Y_d distributed profit, I investment expenditure, S_m monetary saving/dissaving, G government expenditures (consumptive), T taxes, X exports, M imports.

The nominal labor share λ is defined as the quotient of wage income Y_w and the sum of wage income and monetary profit Q_m, that is, λ≡Y_w/(Y_w+Q_m)≡1/(1+Q_m/Y_w) with Q_m given by [1] above.

Noah Smith concludes: “In other words, the two most conventional explanations for rising inequality and falling wages might both be correct. A perfect storm of robots and free trade … could be shifting power from the proletariat to the capitalists.” This conclusion is based on the traditional = false profit theory.

The fact is that market power and automation cannot account for a falling nominal labor share λ. The main drivers of increasing overall profit have been the increased deficit spending of the household and the government sector in the past decades. Market power and automation can only account for the distribution of overall profit Q_m among firms, but NOT for the total amount. #2

Traditional distribution theory is merely a stubborn Fallacy of Composition.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 For details of the big picture, see cross-references Profi/Distribution.

Related 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Profit and the decline of labor’s nominal share (I)' and 'Austerity: Who takes the little man for a ride?' and 'The abject failure of orthodox and heterodox distribution theory' and 'Debunking Squared' and 'Intellectual deficit spending' and 'The GDP-death-blow for the economics profession'.

For more about the so-called wage/profit share, see AXECquery.

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Graphic AXEC129d On closer inspection, it turns out that the concept of labor/share is formally/dimensionally defective because profit is a balance and wage income is a flow. This blunder is called Flow-Balance Inconsistency.

Solving Mill’s starting problem

Comment on Peter Cooper on ‘State Monies are Fundamental to Modern Monetary Economies’

Blog-Reference

After 20 posts about the MMT balances equations and the income-expenditure model, Peter Cooper gets second thoughts and asks himself: “What is the most appropriate entry point to the study of a monetary economy.” And he concludes, “There is no ‘natural’ field in economics that is anything like the natural sciences.”

Each science starts in the middle of a swamp: “We are lost in a swamp, the morass of our ignorance. … We have to find the roots and get ourselves out! … Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen) #1

The starting problem is as old as economics. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

In economics, there are two starting points, microfoundations and macrofoundations. Both are provably false. Orthodoxy went micro: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). Keynes went macro: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” MMT followed Keynes into the macro woods.

The methodologically correct solution consists of New Macrofoundations. #2 Here they are
(A0) 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.
(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 macro axioms satisfy all methodological requirements. The graphical representation of the elementary production-consumption economy is shown on Graphic. #3

The condition of market-clearing is X=O and of budget-balancing C=Y_w. From non-clearing and non-balancing follow the phenomena of inventory changes (O−X greater than 0 or less than 0) and of monetary saving/dissaving (Sm≡Y_w−C greater than 0 or less than 0), and of monetary profit/loss (Q_m≡C−Y_w greater than 0 or less than 0). It always holds Q_m≡−S_m, in other words, loss is the counterpart of saving, and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

The Profit Law tells us immediately that the Keynesian macrofoundations and the MMT sectoral balances equations are false. And because the axiomatic foundations are false, the whole analytical superstructure of MMT is false. #4

Poincaré once remarked: “The essential thing is to learn to reason with the axioms once admitted. Uncle Sarcey, who loved to repeat himself, often said that the audience at a theatre willingly accepts all the postulates imposed at the start, but that once the curtain has gone up, it becomes inexorable on the score of logic.”

It is just the same in economics, but economists in general and MMTers, in particular, have neither gotten the foundational postulates right nor the subsequent logic. What unfolds before the audience's eyes is an absurd proto-scientific farce.

Egmont Kakarot-Handtke


#1 Getting out of the economics swamp
#2 The new macroeconomic Paradigm
#3 Graphic AXEC31 Elementary production-consumption economy
#4 For details of the big picture, see cross-references MMT

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REPLY to Matt Franko on Sep 20

You say: “Accounting is its own science... here in the US the good schools award a Bachelor of SCIENCE in Accounting.”

Obviously, MMTers got their BSAcc from Trump University. #1

You say: “If you are in business, You may use a Cash Basis accounting method and someone else might use an Accrual Basis, you can’t say ‘your accounting is false!’ to the other guy using Accrual...”

I do NOT say such nonsense. Both methods lead ultimately to the same result. #2 Cash Basis accounting is merely a practical relief for small firms that shift profits BETWEEN periods but does NOT alter the sum of pre-tax profit over all periods. The difference between the business accounting methods plays NO role in macroeconomics. As a matter of principle, profit is NOT produced by accounting only measured, just like speed is NOT produced by the speedometer only measured. Different methods of measurement do NOT affect a vehicle’s speed and should always give the SAME result (± a tiny inaccuracy). If they do not, something is wrong with the measurement tools.

Macroeconomic profit is clearly defined, i.e., as Q_m≡C−Y_w in the most elementary case, and measurable with the precision of two decimal places. The macro balances equations of MMT are mathematically false #3, and this has NOTHING AT ALL to do with the practical determination of taxable profit of an individual firm.

If accounting and money transactions were fully computerized and all firms applied the accrual method, the sum of all firms’ profits/losses is necessarily equal to macroeconomic profit Q_m, and everyone could look this number up in real-time on the internet. Cash Basis accounting is not “false”; it is merely a stone-age method for the mom-and-pop store. As a matter of principle, National Accounting is as good a measurement tool as any simple tool in physics.

The fact is that neither orthodox nor heterodox economists have noticed the macro accounting blunder to this day. Economics is a failed science because economists are scientifically incompetent and do not even get the elementary mathematics of macro accounting right. #4

Make no mistake, what Mitchell, Tcherneva‏, Mosler, Wray, Kelton, Fullwiler, Forstater, and the other MMTers propagate is Trump University economics.

#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 MMT ― the economics moron as problem solver
#3 Rectification of MMT macro accounting
#4 For details of the big picture, see cross-references MMT

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REPLY to Matt Franko on Sep 20

(i) Wordplay does not help. 2+2=5 is mathematically false. The same holds for the MMT balances equation. For proof, see #1.

(ii) Monetary profit is measured by accounting, and if the accounting is properly done for an elementary production-consumption economy, then profit in the books is numerically identical to cash in the box. #2 Auditors carry out this check routinely. The macroeconomic Profit Law is testable just like the Law of the Lever. There is NO room for ambiguity and wordplay.

(iii) You say: “You can have production (real terms) without any accounting but you can’t have profit without accounting.” So what? Counting the inventory is part of the year-end profit determination.

(iv) Profit is not ‘created’ by accounting but by private and public deficit spending. For the economy as a whole, it holds that Public Deficit = Private Profit.

(v) Profit does not appear in the MMT balances equations. #3 How weird is this? The MMT balances equations hold only for a zero-profit economy. How weird is this?

(vi) Macro profit does not appear in macro models. It is absent in all I=S/IS-LM models since Keynes/Hicks. How weird is this? #4

(vii) Folks who cannot handle the pivotal concept of their subject matter and are too stupid for the elementary mathematics of accounting get economics diplomas and academic tenure. How laughable is this?

#1 Rectification of MMT macro accounting
The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 A tale of three accountants
#3 MMT and the magical profit disappearance
#4 Heterodoxy, too, is proto-scientific garbage

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REPLY to Matt Franko on Sep 21

You argue, “You say public deficit is private profit then you say the System of National Accounts doesn’t include profit: system of national accounts has G−T so there is your profit...”

I said “Public Deficit = Private Profit” and then “Profit does not appear in the MMT balances equations.” I did NOT say that the “System of National Accounts doesn’t include profit”.

You have obvious difficulties with understanding simple sentences.

The macroeconomic Profit Law has been derived from the set of macro axioms. This is the methodologically correct way. The question of Cash Basis or Accrual Basis accounting is absolutely irrelevant in the given context.

If C is total consumption expenditures during a given period, e.g., the calendar year, and Y_w is total wage income during the same period, then total period profit is defined as Q_m≡C−Y_w. C and Y_w reappear as the sums of all faithfully recorded transactions between Jan 1 and Dec 31 in the accounting system. The profit definition is a formal expression of what the accountants call striking a balance, which is something quite different from recording a transaction.

The big question is: Why does that balance ― the pivotal balance of the monetary economy ― not appear in the balances equations of MMT?

My hypothesis is that MMTers are extremely stupid, and your silly posts confirm this hypothesis.

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Graphic AXEC121i