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' 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.


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 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

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 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 time.