August 25, 2017

Debunking MMT’s hallucinatory income-expenditure model

Comment on Peter Cooper on ‘Short & Simple 18 ― Income Determination in a Closed Economy’

Blog-Reference and Blog-Reference

Peter Cooper discusses income determination in a closed economy but, curiously, neither the word profit nor distributed profit appears once in his article. But equilibrium appears which is known to be a NONENTITY. Hence the reality-content of his standard MMT model is zero or even less.

In the following, a sketch of the formally and empirically correct price-, employment-, profit-, and income theory is given.#1 The elementary version of the objective-structural-macroeconomic Employment Law (Wikimedia AXEC62) reads

From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 means dissaving=credit expansion, a ratio ρE less than 1 means saving. The expenditure ratio fully replaces the consumption function.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

The complete AND testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’ arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. THIS is the key to full employment policy.

The axiomatically correct Profit Law reads Qm≡I−Sm. Legend: Qm monetary profit/loss, I investment expenditure, Sm monetary saving/dissaving. The business sector’s investment expenditures and the household sector’s saving/dissaving are completely independent and NEVER equal.

The Profit Law gets a bit longer when distributed profit import/export and government are included.

Note that overall profit and by consequence, the income distribution has NOTHING to do with productivity or low wages, or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Note also that Keynes, Marx, Kalecki, Keen, Minsky, and other heterodox economists got profit PROVABLY wrong.#2

Keynes’ approach is macrofounded but incomplete because he had no deeper understanding of the profit and price mechanism. MMT builds on Keynes’ defective income and profit definitions and this yields, of course, a materially and formally inconsistent income-expenditure-equilibrium model.

Egmont Kakarot-Handtke

#1 For the comprehensive treatment see Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster.
#2 Heterodoxy, too, is proto-scientific garbage

For the full-spectrum refutation of MMT see cross-references MMT.