September 3, 2017

Rectification of MMT macro accounting

Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’

Blog-Reference

MMTers and other incompetent economists apply this sectoral balances equation (S−I)+(T−G)=0 which says that the non-government sector’s surplus, i.e. S−I greater zero, is equal to the government sector’s budget deficit G−T, respectively, that the non-government sector’s deficit, i.e. I−S greater zero, is equal to the government sector’s budget surplus T−G. This sectoral balances equation is used to demonstrate that a government deficit is advantageous for the non-government sector.

The MMT sectoral balances equation violates the rules of accounting.#1 What should be self-evident is that macroeconomic profit is entirely missing.

In the following, the correct relationships are derived by successively increasing the complexity. The pure production-consumption economy is the most elementary economic configuration and therefore the point to start from.

(i) Elementary production-consumption economy,#2 two sectors, balances


Qm≡C−Yw     profit/loss Qm is household sector’s spending C minus wages Yw,
Sm≡Yw−C     saving/dissaving Sm is wage income Yw minus expenditures C,
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Qm+Sm=0 or Qm=−Sm.

It always holds for the balances Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

(ii) Production-consumption economy with government sector GS, three sectors, balances


Qm≡C+G−Yw     profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡(Yw−T)−C    saving Sm is net income (Yw–T) minus expenditures C,
Bm≡T−G            budget surplus/deficit Bm is taxes T minus government expenditures G,
------------------------------------
Qm+Sm+Bm=0 or Qm=−Sm–Bm or Qm=−Sm+(G−T).

The business sector’s profit is equal to the household sector’s dissaving and the government sector’s budget deficit. Or, given the household sector’s saving/dissaving the business sector’s profit is equal to the government sector’s deficit. In a neat formula, Public Deficit = Private Profit.

(iii) Investment economy, two sectors with business sector differentiated, balances


Qmc≡C−Ywc         profit of consumption good industry is spending C minus wages Ywc,
Qmi≡I−Ywi            profit of investment good industry is investment minus wages Ywi,
Sm≡(Ywc+Ywi)−C  saving/dissaving Sm is wage income minus expenditures C,
Äc≡−I                   change of the asset side of the consumption sector’s balance sheet
------------------------
Qmc+Qmi+Sm+Äc=0
Qm≡Qmc+Qmi
Qm+Sm+Äc=0 or Qm=−Sm−Äc or Qm=−Sm+I or Qm=I−Sm.

The business sector’s profit/loss is equal to the difference of business sector’s investment expenditures and household sector’s saving/dissaving.

(iv) Investment economy with government sector, three sectors with business sector differentiated, balances


Qmc≡C+G−Ywc          profit of CGI is HS and GS spending C+G minus wages Ywc,
Qmi≡I−Ywi                profit of IGI is investment expenditures minus wages Ywi,
Sm≡(Ywc+Ywi−T)−C   saving Sm is net wage income minus expenditures C,
Bm≡T−G                    budget surplus Bm is taxes T minus government expenditures G,
Äc≡−I                        change of the asset side of the consumption sector’s balance sheet,
-----------------------------
Qmc+Qmi+Sm+Bm+Äc=0
Qm≡Qmc+Qmi
Qm+Sm+Bm+Äc=0 or Qm=−Sm−Bm−Äc or Qm=(I−Sm)+(G−T).

Given the difference between the business sector’s investment expenditures and the household sector’s saving/dissaving (I−Sm) the monetary profit of the business sector Qm is equal to the government sector’s deficit (G−T).

The original MMT balances equation (S−I)+(T−G)=0 rewritten as 0=(I−S)+(G−T) compares to the correct equation Qm=(I−Sm)+(G−T). Formally, the original MMT balances equation covers a zero-profit economy. Overall monetary profit has NOT been zero in the last 200+ years and will NOT be zero in the future. What is MMT talking about?

When macroeconomic profit is factored into the balances equations according to the elementary mathematics that underlies double-entry accounting then it becomes obvious that public and private deficit spending determines the overall profit of the business sector. More specifically, public deficits are always advantageous to the business sector.#3 Whether they have also a positive employment effect depends on the absence or presence of synchronous price increases.#4

Because the MMT sectoral balances equations are false the whole analytical superstructure vaporizes and therefore MMT policy guidance has no sound scientific core. MMT is brain-dead soapbox economics, just like Walrasianism, Keynesianism, Marxianism, and Austrianism.

Egmont Kakarot-Handtke

#1 A tale of three accountants
#2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C–Yw, monetary saving Sm≡Yw–C). For details see ‘How to restart economics
#3 Keynesianism as ultimate profit machine and 'Who or what exactly did Keynes save?'
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


Immediately preceding 'MMT: NO sound scientific foundations'

Related 'Keynesians ― terminally stupid or worse?' and 'MMT and the magical profit disappearance' and 'MMT, fake science' and 'MMT ― the economics moron as problem solver' and 'MMT: The one deadly error/fraud of Warren Mosler'. For details of the big picture see cross-references MMT.

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LINK at Bill Mitchell – billy blog on Sep 3

The MMT sectoral balances equations violate the rules of accounting. See ‘Rectification of MMT macro accounting

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COMMENT on Short & Simple 20 on Sep 5

As Popper said, science proceeds by conjecture and refutation.

This does not happen in economics. Morgenstern reminded his fellow economists back 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.”

Economics is a failed science because it does get neither conjecture nor refutation right. This applies obviously to Peter Cooper.
• To begin with, he does not realize that the MMT balances equations are false since Keynes.
• When given the explicit mathematical refutation* he does understand it but presents the same analytical garbage in graphical form “as if nothing had happened”.

For the record: Not only Walrasians, Keynesians, Marxians, Austrians violate scientific standards on a daily basis but MMTers, too.

* Rectification of MMT macro accounting

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ADDENDUM on Oct 2

The Wikipedia entry ‘Modern Monetary Theory’ states:

“Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity:
G−T=S−I−NX
where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.

The conclusion that MMT draws from this is that it is only possible for the non-government sector to accumulate a surplus if the government runs budget deficits. The non-government sector can be further split into foreign users of the currency and domestic users.”

Let us ignore foreign trade here, i.e. NX=0, and regroup the MMT equation, then one gets
0= (G−T)+(I−S). This compares to Qm=(G−T)+(I−Sm) above which is simplified to
Q=(G−T)+(I−S).

The MMT balance equation applies only to a zero-profit economy, i.e. Q=0. This follows in detail from the rectification above. The point to notice is that Q is the balance of the business sector.

Because the fundamental balances equation in the Wikipedia entry is false most of the content is worthless or even misleading.

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Compilation: AXEC Profit Law (with increasing complexity) and Balances Equation