August 21, 2017

Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother

Comment on Bill Mitchell on ‘When neo-liberal masquerades as anti-establishment’

Blog-Reference and Blog-Reference

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 hereditary mental disease of economics.

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.

That much is clear after more than 200 years: economics is a failed science. 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.

So, this is the situation: economists dabble in politics where they have, to begin with, NO legitimate business. Worse, economists’ policy guidance has NO sound scientific foundations at all. This starts with Adam Smith/Karl Marx and ends with current orthodox and heterodox economics. MMT is NO exception.

Political economics is not only cargo cult science but ― intentionally or unintentionally does not matter ― political fraud: “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 are supposed to deliver knowledge (= episteme) but produce for 200+ years scientifically worthless political opinion (= doxa). To promote opinion under the label of science is a fraud.

MMT is a case in point. Bill Mitchell criticizes mainstream economics in its incarnation of New Zealand’s TOP party. All his arguments are accurate, except when it comes to the theoretical underpinning of MMT policy proposals.

Bill Mitchell claims “… MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system. It helps us better understand the choices available to a currency-issuing government. It is not a regime but a perspective on reality. … In that sense, MMT is neither right-wing nor left-wing.”

MMT claims to be an objective scientific truth. The fact is that it is proto-scientific rubbish, qualitatively not at all different from orthodox economics. MMT’s profit/employment/ money theory is provably false. In methodological terms, MMT is NOT a valid new paradigm because its axiomatic foundations are false just like Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent.

One example. Bill Mitchell claims: “Third, it is 100% correct to say that if the government runs a fiscal surplus then it condemns the non-government sector to run a deficit (spending more than its income) as a matter of accounting, dollar for dollar.”

No, this is NOT 100% correct. This is misleading, to say the least. The correct accounting truth is this. There is no such thing as a non-government sector, to begin with, only a business sector and a household sector. So, if the household sector chooses its saving/dissaving in a given period then a government deficit/surplus “condemns” the business sector to profit/loss.

These are the axiomatically correct accounting identities:
Qm≡C+G−Yw     profit/loss Qm, business sector,
Sm≡Yw−T−C      saving/dissaving Sm, household sector,
Bm≡T−G           budget surplus/deficit Bm, government sector,

For THREE sectors, proper accounting yields THREE sectoral balances which add up to zero. It holds Public Deficit = Private Profit. The question is, why makes MMT profit disappear by creating an artificial sector called the non-government sector? In other words, why is MMT cooking the books? There is NO scientific justification, so it must be some political reason.#1

MMT is NOT a new scientific paradigm but old political crap in a new scientific bluff package. This holds for ALL of economics: when profit is false the whole analytical superstructure is false and economic policy guidance has NO sound scientific foundation.

Egmont Kakarot-Handtke

#1 For more details see ‘MMT and the magical profit disappearance’ and cross-references MMT

Related 'MMT is NOT an alternative to neoliberalism' and 'Cryptoeconomics ― the best of Bill Mitchell’s spam folder' and 'What is so great about cargo cult science? or, How economists learned to stop worrying about failure'.

REPLY to wilwon32 on Aug 22

(i) You ask: “Am I the only one who sees little value in attempting to infer some special significance in E K-H’s profit argument.”

Yes, you are the only one left who does not understand that profit is the core concept of economics.

(ii) You maintain: “I thought that the advancement of economic understanding provided by MMT related to the special character of national sovereignty …”

Sovereignty is the core concept of political science. The legitimate national sovereign decides every political question. This is NOT a new insight of MMTers but a tautological paraphrase of what sovereignty means.

Economics is NOT about how the political system works but about how the economic system works. Economics is a science and the subject matter is “the economy” in the abstract and the universal properties of a monetary economy and ― as a matter of principle ― NOT so much the accidental specifics of any national economy. Laypersons, of course, have a quite narrow perspective and are mainly interested in what happens in their backyard and who pays for the wall. Because of this, they cannot see that there are two economixes: political economics (= agenda-pushing) and theoretical economics (= science).

Politics and science do not fit together and have to be kept strictly apart. This is known since the founding fathers: “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.” (J. S. Mill)

As a rule of thumb, it can be said that every economist who dabbles in politics is NOT a competent scientist but a brainless blatherer who masquerades as a scientist. It does not matter whether the blather is right-wing or left-wing.

(iii) You say: “It seems as if one could also develop an argument for the importance of DEBT in economic arguments …”

Obviously, you do not understand the macroeconomic Profit Law, Qm≡−Sm, which says explicitly that the business sector’s profit/loss is equal to the change in the household sector’s debt. Profit and debt are the two sides of the SAME coin.

(iv) The trouble with you, Bill Mitchell, and the rest of the MMT crowd is that you suffer from a complete lack of understanding of how the profit- and price mechanism works. This is not so terribly bad because although stupidity is the criterion for exclusion in science it is at the same time the criterion for admission in politics. So, there stands nothing in the way of a clear-cut separation of science and politics. All, you, Bill Mitchell, and the rest of the MMT crowd have to do is to leave economics ― it is as simple as that.

REPLY to ANC Driver on Aug 23

You sum up: “there is no way we can all be solvent all at the same time. To prove this scientifically … is one thing, but it still leaves us with the ill-feeling of ‘what the hell am I supposed to do about this?’”

This, exactly, is the significance of profit theory.

The macroeconomic Profit Law in its most elementary form says Qm≡−Sm or monetary profit for the economy as a whole has nothing to do with greed or monopoly power or innovation or productivity but is the mirror image of dissaving. In other words, in the pure production-consumption economy profit depends in the most elementary case on the growth of the household sector’s debt.

Now, only if profit is greater than zero the business sector maintains or increases employment. This is the minimum condition. If overall profit turns into loss firms go bust and employment decreases. If the losses continue the economy eventually breaks down.

From the fact that profit is the mirror image of the growing household sector’s debt follows logically that overall profit turns into an overall loss as soon as the household sector starts to pay back the accumulated debt. Hence, the economy eventually breaks down because of immanent logical necessity (no crisis and no criminals and no banksters and no exploding real estate or stock market bubble is needed) as soon as private and/or public households start to redeem their debt in the aggregate (i.e. new credit, rollovers, and redemption netted out).#1

The macroeconomic Profit Law for the investment economy without profit distribution says Qm≡I−Sm or monetary profit for the economy as a whole is given by the difference between the business sector’s investment I and the household sector’s monetary saving/dissaving Sm. Let Sm for simplicity here be zero then profit depends directly on the GROWTH of the capital stock.#2

This worked fine since the Industrial Revolution but it cannot work for all eternity. The snag is this: if growth weakens or is stopped overall profit turns into overall loss and the whole economy breaks down. The situation is analogous to that of a car driver who cannot slow down because if he jams on the brakes the car explodes.

The challenge as it follows from the correct profit theory is this: how can the growth path be flattened or even reversed without causing a full-scale economic breakdown?

Because Walrasians, Keynesians+MMTers, Marxians, and Austrians have NO idea until this day what profit is they do not even see that the actual life-and-death question of economics is how to engineer a soft landing on a reasonably high plateau. All the rest of economics is sitcom blather.

#1 Mathematical Proof of the Breakdown of Capitalism
#2 Squaring the Investment Cycle

REPLY to ANC Driver on Aug 24

You say: “What I would love is for someone like you, who obviously can see things how they actually are (i.e. 100% solvency is not possible), is to channel your knowledge into helping people like me and others to find a way to use this knowledge to get some people away from the solvency game altogether.”

The task of the economist as a scientist is to figure out how the actual economy works. This is comparable to the task of a physicist/engineer to figure out how a heavy piece of metal can get off the ground, travel great distances at high altitudes, and arrive safely and in time at some faraway place. The physicist/engineer does NOT care who is on board the craft which he is designing/constructing and whether these folks are happy, drunk, or vomiting.

If you are in an identity crisis and need psychological or philosophical help do NOT go to an economics blog but google a self-help group in your neighborhood.

People who claim that they save the world, work for the welfare of humankind, promote liberty and democracy, make you rich and happy, and help the little guy to have a better life are NOT economists who are committed to well-defined scientific standards.

No scientist ever raises peoples’ hopes/expectations, only presidential candidates, political parties, and MMTers do.