Blog-Reference and Blog-Reference
In economics, it is important to separate politics and science. While anybody can make a plausible and populistic economic policy proposal, the economist can NOT. What the economist says must be backed up by the true theory. The economist who lacks the true theory is at one level with the cranks that populate the political arena.
“A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties, we had Major Douglas, and social credit — it can all be done with a fountain pen — and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Robinson)
Not much has changed since Joan Robinson. The only difference between the ordinary crank and the economist is that the latter has a diploma.
The policy MMT stands for is backed in the main by Keynesian macroeconomics. The thing about Keynesianism is that it is scientifically worthless since the General Theory, that is, provably false, that is, materially and formally inconsistent. The thing about MMTers is that they are mindlessly repeating Keynes’ awkward blunders.
Peter Cooper combines key Keynesian macro identities with particular behavioral assumptions to provide a theory of income determination. The behavioral equations add causation to the model. The starting point is given with the macro identity S+T=G+I.
When the government sector is taken out for a moment, i.e. G, T = 0, then the equation reduces to the formal core of the General Theory, i.e. to I=S. To recall: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)#1
All I=S/IS-LM models are false because Keynes’ premise “Income = value of output” is false.#2 Scientists know since Aristotle that if the premises are false the whole theoretical superstructure falls apart. Because only “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.”
Because Peter Cooper starts from a false premise, i.e. the macro identity S+T=G+I, there is no use at all to add causal equations and then to derive economic policy conclusions. The only sensible thing to do is to throw this rubbish without further ado into the wastebasket.
The proof has been given that Qm≡−Sm in the elementary production-consumption economy and Qm≡I−Sm in the investment economy. In plain text, the proof says that saving and investment are NEVER equal.#3 So, Keynesianism and, by implication, MMT is refuted on all counts.#4
Note that not only Peter Cooper’s model is refuted but ALL models that contain I=S back to Wicksell and even further.#5
#1 Keynesians ― terminally stupid or worse?
#2 How Keynes got macro wrong and Allais got it right
#3 For more details see cross-references MMT
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#5 Going beyond Wicksell, Keynes, and MMT
Immediately following Rectification of MMT macro accounting.