September 30, 2017

MMT: Money-making for the one-percenters

Comment on Stephanie Kelton/Op-Ed on ‘Congress can give every American a pony (if it breeds enough ponies)’

Blog-Reference

Stephanie Kelton explains how the economy works. For laypersons the point to grasp is that government spending comes before taxation:
“1. Congress approves the spending and the money gets spent (S)
2. Government collects some of that money in the form of taxes (T)
3. If 1>2, Treasury allows the difference to be swapped for government bonds (B).”

The point is, of course, that it does NOT matter much whether (S) comes before (T) or vice versa, this is merely a question of cash management, the point is whether total spending (S) is greater, equal, or less than total taxes (T) in the period under consideration, i.e. whether one has a government deficit, a zero balance, or a surplus at the end of the current budget period.

The crucial point is NOT that the government can make money appear out of nowhere like magic, that has always been trivial, the crucial point is what happens in the economy. Stephanie Kelton does not tell us, most probably because she has no idea.

What the layperson cannot see is that MMT has NO sound scientific foundations. The MMT models are based on Keynesian macro which has been refuted long ago.#1 Because it is defective, MMT macro has to be fully replaced.

As the correct analytical starting point, the pure 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) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw 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 Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0 or Qm=−Sm  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.

Now, the government decides that in the next period every American should get a pony. So, government expenditures in period 1 are Cg1 and taxes T are zero. The government runs a deficit, the money comes from the central bank, i.e. is created out of nothing.

It is assumed for simplicity that the business sector doubles initial employment L0, i.e. L1=2L0. The wage rate W remains unchanged and therefore total wage income doubles, i.e. Yw1=W2L0. Under the condition of budget balancing, the household sector’s consumption expenditures, too, double Ch1=Yw1=2WL0.

So, total expenditures are Ch1+Cg1=2Ch0+Cg1, that is, are more than double the expenditures in the initial period. On the other hand, output exactly doubles O1=RL1=R2L0. The market clearing price is now P1=C1/X1=(2Ch0+Cg1)/2X0=P0+Cg1/2X0, that is, the market clearing price rises while employment and output double. This is a one-shot increase and has NOTHING to do with inflation. The price increase effects the redistribution of real output between the household and the government sector.

The profit of the business sector was zero in the initial period and is now positive, i.e. Qm=Cg1, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit. This configuration can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of cash rising continuously and with the number of ponies rising continuously and with price stability. Quite obviously, nobody has any reason to complain. In Stephanie Kelton’s words: “Just imagine how high those poll numbers would climb if everyone understood how easy it would be for Congress to pony up.”

It is remarkable that the word profit does not appear once in Stephanie Kelton’s op-ed but the word pony eight times. Never were more ponies used to propagate a profit booster program for the one-percenters.#3

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Wikimedia, Elementary production-consumption economy
#3 For the full-spectrum refutation of MMT see cross-references MMT

Related 'MMT: The one deadly error/fraud of Warren Mosler' and 'Selling public debt with Ricardo’s tear gland rhetoric' and 'Down with idiocy!' and 'Political economics: Who hijacks British Labour?' and 'MMT: Just another political fraud'.

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REPLY to Matt Franko on Sep 30

You say: “The govt bond accounting is Cash Basis (see US Daily Treasury Statement) while I don’t think the other terms in your equations are accounted for in Cash Basis ... they are accounted using a Modified Accrual Basis.”

The difference between Cash Basis and Accrual Basis plays no role in the present context. Monetary profit Qm is equal to the increase of the business sector’s deposits at the central bank which, in turn, are equal to the increase of the government sector’s overdrafts at the central bank because both sides of the central bank’s balance sheet are ALWAYS equal (as everyone knows from his accounting course, except Matt Franko). If and when the government consolidates its debt by selling bonds or T-bills or whatever to the business sector is independent of the development of the debt in a certain period. In the present context is important to realize that Public Deficit = Private Profit. It is of NO interest here if and how the deficit = increase of overdrafts is ultimately funded.#1, #2

Needless to emphasize that the household sector will be taxed somewhere in the future in order to pay back the government’s debt. So, the households get their ponies on credit without realizing it while the business sector gets its profit for good. The payback part is entirely missing from the pony story. Stephanie Kelton’s wonderful proposal is like the auto dealer saying I give you this brand new car for free, please confirm my generosity with your signature at the end of this credit agreement.

Stephanie Kelton is a scientifically incompetent economist and MMT is Trump University economics.


#1 Fixing the loanable funds blunder
#2 Reconstructing the Quantity Theory (I)

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REPLY to Matt Franko on Oct 1

Each government entity, each firm, and each bank around the world has incoming payments and outgoing payments. These are not synchronized and therefore there is a smart guy, let us call him the cash or liquidity manager or treasurer, whose main task it is to maintain constant financial solvency.

Imagine the following situation. The cash manager knows that the government spends the amount G on ponies on Jan 1 and that taxes T are paid on Dec 31. It holds G=T. So, the cash manager has to take up credit for one year either from the banking system or by selling some short-term paper. Vice versa, the taxes come in on Jan 1 and the ponies are bought on Dec 31. So, the cash manager can buy some ultra-safe paper and hold it for one year. No cash manger in this world has any problem with handling both situations. At the end of the year, both cases amount to the SAME, except for the interest. The cash manager has NO long-term financing problem.

Things are different if T is less than G. If this happens year after year government debt increases continuously and the cash manager eventually starts to issue government bonds of different maturities and to roll them over again and again. The growing government debt is the problem that alarms people and NOT the bridging of the short-term gaps between outgoing payments and incoming taxes.

The obvious mistake of Stephanie Kelton’s op-ed is to confound the two cases of short-term cash deficits and long-term budget deficits. Short-term cash deficits become budget deficits if T < G.

Why Stephanie Kelton forgets to mention that Public Deficit = Private Profit and that people have to pay for the ponies in the form of deferred budget surpluses which are needed to eventually redeem the accumulated public debt is a bit mysterious. But then, perhaps this is absolutely normal at Trump University.

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REPLY to Calgacus on Oct 1

You quote Wray “money is a cross-balance sheet RELATIONSHIP”. Yes, trivially true and known since the Middle Ages, but MMTers are too stupid to do the accounting properly. For the proof see #1, #2.

It is the most remarkable feature of MMT that macro profit does not appear in the balance equations. By consequence, MMTers miss the most important “cross-balance sheet relationship”, that is, Government Deficit = Profit of the business sector. Fact is that MMTers got profit theory wrong and this is disqualifying for every economist.#3

Accounting is elementary mathematics and one needs no Theoretical Computer Scientists to do it. The signature of arithmetic consists of addition, multiplication, and successor function symbols, the equality and less-than relation symbols, and a constant symbol for 0. (Wikipedia) That’s all, but MMTers fail already at the level of elementary logic.

You say “The government does not need a cash manager because the job of the government is to be financially INsolvent.” The cash manager of the government coordinates and bridges the gaps between outgoing and incoming payments. As long as the budget is balanced, i.e. G=T, the job of the government’s cash manager is essentially the same as the non-government’s cash manager. Their deficits = overdrafts at the credit side of the central bank’s balance sheet create uno actu deposits at the debit side = money. The only difference between the non-government cash manager and the government’s cash manager is that the central bank cannot limit the deficit creation = money creation of the latter. The point is, though, that the newly created money lands one-to-one as profit on the accounts of the business sector. Take all the technicalities of cash management away then MMT’s pony program turns out to be a profit booster program. It seems that some Wall Street folks understand this better than Stephanie Kelton.

At the end of the whole exercise, a sub-group of the general public is left with some ponies and all of the general public is indirectly left with the government’s debt. Whether the debt takes the form of overdrafts-deposits (= money) at the central bank or assets-liabilities in the form of bonds is a separate issue. Overdrafts-deposits (= money) is the most convenient and cheapest form of government debt.

The accumulated debt can be carried over for an indefinite time but this makes it only invisible but not to disappear. The household sector is ― indirectly via the government ― left with the debt and the business sector is left with profit which is held either in cash = deposits at the central bank/banking sector or in government paper. Government paper is Triple-A quality and carries interest which makes the folks in the business/banking sector even happier.

As long as the debt is revolved, all is fine. Interest for the public debt is reliably taken from the household sector and transferred to the bond holding business/banking sector. But the market economy breaks down as soon as the household sector starts to redeem private or/and public debt, which must happen eventually because this is the very Nature of debt.#4

What Stephanie Kelton is ― knowingly or unknowingly does not matter ― actually doing under the banner of social programs is to boost the profit of the business/banking sector and to postpone the breakdown of the economy. In political terms, this is what the MMT dog & pony act in the LA Times is all about. MMT is just another example of the scientifically degenerate state of economics.


#1 Rectification of MMT macro accounting
#2 A tale of three accountants
#3 Why economists don’t know what profit is
#4 Mathematical Proof of the Breakdown of Capitalism

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REPLY to Matt Franko on Oct 1

You say: “G−T does not equal the net amount of Treasuries issued... G is Accrual and T is Accrual... Treasury issuance is Cash...”

Roughly speaking, G and T are the sums of transactions that take place during one period on the Income Statement/Profit-Loss Accounts, while the buying and selling of government securities are transactions that are recorded on the balance sheet.

G and T are flows, while cash and the amounts of diverse government securities are stocks. The difference of flows Δ=G−T of the government sector changes the stock of money by Δ.

All this has NOTHING to do with the difference between Accrual Basis and Cash Basis Accounting. For the interrelationship between macro flows, their balances, and stocks see #1, #2. For the basics of National Accounting see Wikipedia.#3


#1 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#2 Essentials of Constructive Heterodoxy: Financial Markets
#3 Wikipedia “National accounts broadly present output, expenditure, and income activities of the economic actors (households, corporations, government) in an economy, including their relations with other countries’ economies, and their wealth (net worth). They present both flows (measured over a period) and stocks (measured at the end of a period), ensuring that the flows are reconciled with the stocks.”

Immediately following 'MMT: Just political heat, no scientific light'
Immediately preceding 'The profit effect of a Job Guarantee'

September 29, 2017

John Hicks, fake scientist

Comment on Lars Syll on ‘Hicks on neoclassical ‘uncertainty laundering’’

Blog-Reference and Blog-Reference and Blog-Reference on Oct 3

After 200+ years it is obvious to even the dullest news consumer that economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

What we have today is the pluralism of provably false theories.#1 This, of course, is no accident. Economists are fake scientists. The crucial point is this: the genuine scientist drives every problem he chooses to solve relentlessly to a clear-cut true/false answer, with truth defined as material and formal consistency. The fake scientist solves nothing but keeps everything in the swamp of inconclusiveness, where "nothing is clear and everything is possible" (Keynes). Inconclusiveness is what Popper called an immunizing stratagem because: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) This, of course, is good news to fake scientists.

If it so happens that a theory has been proven wrong, the follow-up stratagem is ignorance and business as usual. This malpractice has been addressed by Morgenstern already in 1941: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.”

These two stratagems could produce nothing else than the observable pluralism of false theories which, in turn, brings another stratagem into play: excuses and rationalizations. #2

It is not too hard to identify the genuine scientist and the fake scientist. The genuine scientist speaks thus: “We must not believe those, who today, with philosophical bearing and deliberative tone, prophesy the fall of culture and accept the ignorabimus. For us, there is no ignorabimus, and in my opinion none whatever in natural science. In opposition to the foolish ignorabimus, our slogan shall be: We must know — we will know!” (Hilbert)

The fake scientist speaks thus: “As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (Hicks) Feynman pointed the benefit of inconclusiveness out: “By having a vague theory it is possible to get either result.” Because of this, fake scientists subscribe to the methodology of anything-goes and the faux humility of ‘I know that I know nothing’.

The benefit of wish-wash and clueless filibuster is much appreciated by Post Keynesians: “It is better to be roughly right than precisely wrong.” This false dichotomy has its deep roots in the Cambridge School of Loose Verbal Reasoning: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. . . . Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates)

This is good news, in economics everybody is entitled to his own multiple truths: “What a tricky business this all is! In his Treatise on Money, Mr. Keynes told the world that savings and investment are only equal in conditions of equilibrium; that an excess of investment over saving means rising prices, and vice versa. In his General Theory, he told us that saving and investment are always equal, and that this is a mere identity or truism, without significance for the determination of prices. As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (Hicks)

In his utter scientific incompetence, Hicks did not realize the blunder in Keynes’ premises: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63) but incorporated I=S into IS-LM, which became one of the most extensively used silly constructs in the history of the failed science economics.#3

Egmont Kakarot-Handtke


#1 See also Getting out of the economics swamp
#2 Failed economics: The losers’ long list of lame excuses
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

For details of the big picture see cross-references Refutation of I=S

September 28, 2017

Setting the history of economic non-thought right

Comment on Barkley Rosser on ‘How I Came To No Longer Be A Kaldorian Economist’

Blog-Reference and Blog-Reference and Blog-Reference

Keynes has to be credited for realizing that the economics of Jevons/Walras/Menger/ Marshall was false at its core and that nothing less than a paradigm shift was needed: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”

After Keynes, every economist who still does not see the necessity of a paradigm shift is a moron. One loudspeaker of this prevailing majority is Krugman who debunks himself with: “…  most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Fact is that maximization-and-equilibrium economics has already been dead in the cradle 140+ years ago.

Keynes, though, messed up the shift from microfoundations to macrofoundations. His lethal blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This two-liner is conceptually and logically defective because Keynes never came to grips with profit. (Tómasson et al.)

Because profit is ill-defined, the whole analytical superstructure of Keynesianism is false.#1 Yet one of the outstanding characteristics of the cargo cult science economics is that refutation is simply ignored: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)

As a result of the continuous violation of scientific standards, the history of economic thought boils down to a history of incompetence or/and corruption. What we have today is the indefensible pluralism of provably false theories.

After-Keynesians never realized Keynes’ foundational blunder and thereby became part of the abysmal failure of what was meant as a paradigm shift.#2 Barkley Rosser, of course, had his finger in every After-Keynesian pie but, like the rest, cannot define macroeconomic profit until this very day.#3 He concludes his synopsis of After-Keynesianism: “Anyway, probably this is all just picking at minor niggling and unimportant divisions and wrangles, but standing back from it I find it curious, both in terms of the development of these labels and controversies, as well as what the heck is going on with the Wikipedia accounts of all this.”

Every account that characterizes the history of economic non-thought as anything other than as a history of incompetence or/and fraud misleads the general public just as the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” misleads the general public year after year.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Why Post Keynesianism Is Not Yet a Science
Heterodoxy, too, is scientific junk
The futile attempt to recycle Sraffa
For the full-spectrum refutation of MMT see cross-references MMT
#3 Economists: scientists or political clowns?

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REPLY to Barkley Rosser on Sep 28

Let us agree on the essentials:

(i) Keynes defined the macroeconomic premises in the GT as follows “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

(ii) The first proposition is provably false. By consequence, all I=S/IS-LM models are false. Worse, the whole theoretical superstructure of Keynesianism is false. Worst, the whole of After-Keynesianism is false.

(iii) The valid formal refutation of Keynes’ false premises has been given by Allais (Nobel Memorial Prize in Economics 1988)

(iv) The correct macro profit formula, inclusive distributed profit, reads according to Allais Qre=I−Sm. This formula obviously contradicts the Keynesian I=S/IS=LM.

(v) During his whole professional life as a cargo cult economist, Barkley Rosser never realized that there is something fundamentally wrong with both Walrasianism and Keynesianism. Neither did he resolve any contradictions nor rectify anything, except perhaps the family tree of the House of Sa’ud.

(vi) The significance of Barkley Rosser consists of being a living example for the scientifically degenerate state of economics.

September 27, 2017

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) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw 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 Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, 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 government immediately absorbs the unemployment such that total employment remains unchanged, i.e. Lb+Lg=L=full employment. The wage rate W remains unchanged and therefore total wage income Yw remains unchanged. Under the condition of budget balancing C=Yw consumption expenditures, too, remain unchanged.

Because labor input in the business sector is reduced from L to Lb=½L the initial output is reduced from O to Ob=½O. On the other hand, the output of the public good increases from zero to Og=RgLg. 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. Ywb=WLb with Lb=½ L. The other half of the wage bill is paid by the government sector, i.e. Ywg=WLg with Lg=½L. The government pays the wage bill Ywg 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 Qm0=C−WL=0 to Qm1=C−WLb=C−W½L.

Ultimately, the budget deficit of the government sector, i.e. Ywg, ends up as profit in the cash box of the business sector, i.e. Qm1=Ywg. It holds Public Deficit = Private Profit. This configuration can continue for an indefinite time with public debt vis-a-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 Wikimedia, 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 got also profit distribution wrong, nay, it got the whole analytical superstructure wrong. Which 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 on Wikimedia ‘Pure 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

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


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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.

September 26, 2017

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 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.

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. To repeat, the representative economist does until 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 are 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 is explicitly defined as 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 is since 200+ years a self-declared science. Clearly, the four main 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 by 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; 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: economics is a system 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 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 is 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'. Use also the labels Ethics and NET (New Economic Thinking) in the box below.

September 25, 2017

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'. For details of the big picture see cross-references Accounting.

***

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 Qm=Yd+(I−Sm)+(G−T)+(X−M) [1] or rearranged (I−Qm)+(Yd−Sm)+(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−Sm)+(G−T)+(X−M)−(Qm−Yd)=0 finally compares to the false MMT equation (I−S)+(G−T)+(X−M)=0. The difference (Qm−Yd) 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

***
REPLY to Matt Franko on Sep 26

The correct four-sector balances equation for the business sector’s total monetary profit reads Qm=Yd+I−Sm+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 of 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

***
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.

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 Qm=−Sm 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

***
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 times.

September 23, 2017

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 four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

Provably false:
• profit theory, since 200+ years,#1
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.#2

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


(ii) Paradigm shift


Economics is a failed science. The four main 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) System science


The representative economist maintains that economics is a social science. This is a popular misapprehension. In fact, economics is a system 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 *


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 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 (world-) 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 by:
• Three macro axioms:
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
• Two initial conditions: market clearing, i.e. X=O, and budget balancing, i.e. C=Yw
• Two definitions: monetary saving of the household sector Sm≡Yw−C and monetary profit of the business sector Qm≡C−Yw. For the balances holds Qm+Sm=0 or Qm=Sm.

(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, the totem of micro/macro, is a NONENTITY. The macroeconomic market is formally defined with 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 of the income distribution can be derived from the employment equation. 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 Wikimedia, The Economics God Equation
#10 Wikimedia, The Four Basic Economic Laws
#11 Wikimedia, Employment Law, Investment economy
#12 See also Wikimedia, Elementary production-consumption economy incl. distributed profit and money

*

September 22, 2017

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 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 new analytical starting point, the pure 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) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price 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 Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, 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 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 which 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 Yper 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=Yw.

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=Yw, 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=κYw, 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. The economy NEVER runs out of money.

The transaction equation reads M=κPX=κRL P in the case of budget balancing C=Yand market clearing X=O and this yields the commonplace correlation between average stock of money M and price P for a 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 faster than the 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 rubbish.

Egmont Kakarot-Handtke

#1 Wikimedia, Pure production-consumption economy
#2 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#3 For more details see ‘Reconstructing the Quantity Theory (I)’. The New Quantity Theory formula is shown on Wikimedia.


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'.

September 21, 2017

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 can know 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 idea what the pivot of their subject matter is.#1

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

The nominal labor share λ is defined as the quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, λ≡Yw/(Yw+Qm) with Qm 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.

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 in the past decades the increased deficit spending of the household- and the government sector. Market power and automation can only account for the distribution of overall profit Qm among firms but NOT for the total amount.#2

Traditional distribution theory is merely a stubborn Fallacy of Composition.

Egmont Kakarot-Handtke


#1 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 For details see cross-references Profit

*

Related '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 'Intellectual deficit spending'.

September 20, 2017

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)

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 in New Macrofoundations.#2 Here they are:
(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) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These macro axioms satisfy all methodological requirements. The graphical representation of the elementary production-consumption economy is shown on Wikimedia.#3


The condition of market clearing is X=O and of budget balancing C=Yw. 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≡Yw−C greater than 0 or less than 0) and of monetary profit/loss (Qm≡C−Yw greater than 0 or less than 0). It always holds Qm+Sm=0 or Qm=−Sm, 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 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, neither got 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 Wikimedia: The pure production-consumption economy
#4 For more details 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 which shifts 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 Qm≡C−Yw 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 apply the accrual method the sum of all firms’ profits/losses is necessarily equal to macroeconomic profit Qm 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.

Fact is that neither orthodox nor heterodox economists have noticed the macro accounting blunder until 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 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 See ‘MMT ― the economics moron as problem solver
#3 Rectification of MMT macro accounting
#4 For the details 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 the 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 with 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 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 scientific junk

***
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 Yw is total wage income during the same period, then total period profit is defined as Qm≡C−Yw. C and Yw 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.

September 19, 2017

The new macroeconomic paradigm

Comment on Brian Romanchuk on ‘DSGE Wars (Again)’

Blog-Reference and Blog-Reference adapted to context and Blog-Reference

(i) Every economist knows by now that DSGE is a failed approach. Strictly speaking, the microfoundations approach has already been dead in cradle 140+ years ago.

(ii) The microfoundations approach is defined by this axiom set: “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) Fact is that every model that contains just one of the axioms is false.

(iii) Because the microfoundations approach is axiomatically false a paradigm shift is imperative. Methodologically it holds: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle) The paradigm shift consists of the replacement of false premises, i.e. microfoundations, by true premises, i.e. macrofoundations.#1

(iv) This is the correct core of macroeconomic premises:#2
(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) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is MINIMALISTIC, that is, it cannot be reduced further, only expanded. The graphical representation of the pure production-consumption economy is given on Wikimedia.#3, #4


(v) The condition of market clearing is X=O and of budget balancing C=Yw. 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≡Yw−C greater than 0 or less than 0) and of monetary profit/loss (Qm≡C−Yw greater than 0 or less than 0). It always holds Qm+Sm=0 or Qm=−Sm, 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.#5

(vi) Given the minimalist core propositions (A0) to (A3) one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. Differentiation is the opposite of bottom-up or aggregation. The bottom-up = microfoundations approach has always been methodologically indefensible because it runs with necessity into the Fallacy of Composition.

(vii) Note that the macro axioms are composed of measurable variables. This is the precondition for testing the derived complex relationships = economic laws.

(viii) The correct systemic macrofoundations FULLY replace the false Walrasian microfoundations and the false Keynesian macrofoundations. There can be NO pluralism of axiom sets. For ALL economic research, the macroeconomic premises (A0) to (A3) are ABSOLUTELY necessary. It holds: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke


#1 Keynes’ macrofoundations are false, see ‘How Keynes got macro wrong and Allais got it right
#2 For the complete set of macro axioms see Wikimedia


#3 Wikimedia: The pure production-consumption economy
#4 True macrofoundations: the reset of economics
#5 From the macro axiom set follow the Five Basic Economic Laws