October 2, 2017

MMT: Just political heat, no scientific light

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


The selling proposition of MMT is that the government can solve all economic problems because as a sovereign currency issuer, it is not financially in any way restricted. In other words, in contradistinction to private households or firms, the government can run deficits without any risk of going bankrupt. This is true in principle but leads to some unintended consequences which are due to the fact that MMTers do not know how the economy works. In other words, MMTers lack the true economic theory. This is rather bad for people who claim to be scientists: “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)

What the layperson cannot see is that MMT has NO sound scientific foundations. The MMT policy proposals are based on Keynesian macro which has been refuted long ago.#1

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, 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 Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Now, the sovereign government decides that in the next period wage income is taxed and that a certain number of hitherto unemployed are taken into a Job Guarantee Program. So, net wage income is now Yw−T and the hitherto unemployed receive the guarantee income Yg. Total income is Y1=(Yw−T)+Yg and if the government’s budget is balanced, i.e. T=Yg, then total income does not change, it is only redistributed. Under the condition of budget-balancing C1=Y1=Y, consumption expenditures remain unchanged and so does the market-clearing price P1=C1/X=W/R=P. What changes is the distribution of output O. The real share of wage income receivers is Ow1=(Yw−T)/P and those of Job Guarantee participants is Og1=Yg/P. So, what is achieved with income redistribution is a proportional output redistribution.

MMTers maintain that for the sovereign government, there is no need to balance the budget and they propose a tax reduction for the wage income receivers. Under the condition T=0 total income changes from Y1=(Yw−T)+Yg to Y2=Yw+Yg. The amount Yg = government budget deficit comes from the central bank, i.e. is created out of nothing. Under the condition of C2=Y2 consumption expenditures rise with total income. This leads to an increase of the market-clearing price P2=C2/X=C2/O. This, in turn, reduces the share of real output for the wage income receivers from Ow1=Yw/P in the initial period to Ow2=Yw/P2.

In the MMT variant, the wage income receivers are now taxed in real terms via the price increase, that is,  Ow1=(Yw−T)/P compares to Ow2=Yw/P2. Let us assume for simplicity that both variants lead to the same outcome, i.e. Ow1=Ow2. Hence in real terms, the wage income receivers do NOT benefit from the tax reduction.

The profit of the business sector was zero in the initial period, i.e. Qm≡C−Yw=0 because of C=Yw, and is now positive Qm2≡C2−Yw=Yg because of C2=Yw+Yg. So, the identical redistribution of output O creates a profit for the business sector. It always holds Public Deficit = Private Profit.

This 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 no inflation. As long as the debt is revolved, all is fine. Interest for the public debt is reliably taken from the household sector via taxes and transferred to the bond-holding business/banking sector. This is an additional benefit for the one-percenters of the MMT way of doing things.

Compared to the redistribution via a balanced budget, the same real redistribution via budget deficits has only the optical advantage of T=0 for the wage income recipients yet palatable and long-lasting advantages for the one-percenters in the form of higher profits and subsequent interest incomes.

The snag of the MMT policy agenda is that it simply shifts taxes into the indefinite future. Those people who suspect that the MMT economic policy agenda is too good to be true have fine instincts. MMT is not a new economic school with a superior problem-solving capacity. Instead ― intended or unintended does not matter ― scientifically retarded MMTers actually do the PR for the economic policy agenda of the one-percenters.

Egmont Kakarot-Handtke

#1 For the full-spectrum refutation of MMT see cross-references
#2 Wikimedia, Pure production-consumption economy

Related 'The profit effect of a Job Guarantee'

REPLY to Calgacus on Oct 2

(i) I interpreted Wray’s statement “money is a cross-balance sheet RELATIONSHIP” as a reference to the development of double-entry bookkeeping in medieval Europe. If the credits for the correct definition of money go actually to Mitchell-Innes I appreciate your clarification.

(ii) You say: “Computer science in education today plays a similar role to Euclid for millennia ― providing intellectual rigor and discipline.” I fully agree as you could infer from the fact that I strictly apply the axiomatic-deductive method.#1

(iii) You say: “These errors are due, like all errors, to not subjecting ones thought to discipline like mathematical proof, the discipline of writing programs that work or of testing theory by experiments. Another mistake is in debating technique ― if you want to say MMT is wrong, you have to quote an MMT statement, try to read it as the author meant, and show that it is wrong by logic, leads to a conclusion universally held to be wrong.”

I agree. From the fact that you obviously have not realized that the proofs have already been given#2,#3 I conclude that you do not heed your own advice. Take notice that it is proven that MMT is axiomatically false. Because the foundational premises of MMT are false the whole analytical superstructure is false. MMT is scientifically worthless.#4

(iv) You say: the lack of slow and careful reasoning leads to making flatly false, indeed absurd statements like ‘budget surpluses are needed to pay off earlier deficits.’ Do you really believe this?” This is not a question of belief but of logic. Money is a credit relationship, a generalized IOU that is continuously created and destroyed. If the government runs a deficit in period 1 this takes the form of overdrafts on the asset side of the balance sheet of the central bank and of deposits = money on the liability side. This is the creatio-ex-nihilo step. Being a credit relationship there must LOGICALLY be the inverse operation. Practically, the government can redeem its overdrafts at the central bank if it taxes the household sector, that is, by running a budget surplus. What the government can also practically do, though, is to indefinitely postpone the logically inverse operation to money creation. It is self-contradictory of MMTers to say money is basically an IOU without taking into consideration that IOUs have to be redeemed in finite time. Practically, this has NOT been done yet, of course, and the proof is in the continuously growing public debt. But logically it has to be done. It is one of the political dishonesties of MMT to assert that money is a debt that has never been paid back and never will. Money that is created by government deficits has eventually to be destroyed by government surpluses. What we have historically seen is only the first part of the whole story. Note that this is NOT an obsession with balanced budgets but follows logically from the concept of money as a credit relationship. If it is credit it has to be paid back eventually. But logic has never been the strong point of MMT.

(v) As the example above shows, MMT policy makes the household sector WORSE off. In real terms, the wage income receivers’ part of output is reduced in period 1 and it does NOT matter whether this happens via a tax or via a price increase. But with immediate taxation, the matter is settled in real AND financial terms in period 1. With government deficit spending the matter is NOT settled in financial terms. The wage income receivers have to pay via taxes the interest for the government debt as long as it is revolved. The government taxes on behalf of the business sector which holds part or all of the government debt in the form of securities. Ultimately, the household sector has to pay the tax of period 1 because the government debt has eventually to be redeemed. MMT policy simply amounts to a tax deference program with income redistribution via interest over a very long time. Seen from the beginning to the logical end, MMT policy makes the household sector worse off compared to immediate taxation. ALL benefits are clearly on the side of the business sector. To sell MMT as a social program to Sanders/Corbyn is either self-deceptive stupidity or fraud.

(vi) Deficit spending is since Keynes the main cause of the declining share of wage income.#5

(vii) MMT is simply the wrong way to boost employment and to realize all the other social improvements MMT claims to bring. For the correct macro employment theory see #6.

(viii) Stated MMT policy goals are one thing. They are NOT the issue here. The point is that MMT policy guidance has no sound scientific foundations. MMT economic theory is axiomatically false. Scientifically, MMT is not different from the flat earth theory. MMT has NO truth value, only some political use-value. All poofs can be found in #4.

Time for all MMTers to stop blathering and advancing the cause of the one-percenters under a social pretext and finally to do their scientific homework.

#1 From Marshall to Georgescu-Roegen
#2 Rectification of MMT macro accounting
#3 Solving Mill’s starting problem
#4 For the details of the big picture see cross-references MMT
#5 Keynesianism as ultimate profit machine
#6 Macrofounded labor market theory

REPLY to Tom Hickey on Oct 6

You say: “There is a tendency to see economic issues and solely or chiefly economic. This is a huge mistake, since the economy is the life support system of society and society has social and political aspects in addition to economic. … Conventional macroeconomics is junk science and involves special pleading when used for justification in policy formulation.”

Both micro and macro are junk science. And MMT is a prolific junk producer because it is based on provably false macrofoundations. Because MMT lacks the true theory it is not more than soapbox economics.

It holds: “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)

There is political economics and theoretical economics. The main differences are: (a) The goal of political economics is to successfully push an agenda, and the goal of theoretical economics is to successfully explain how the actual economy works. (b) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) has been body-snatched by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. MMT is part of political economics.

Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.#1 Because of this, neither Walrasianism, Keynesianism/MMT, Marxianism, or Austrianism is economics. The four main approaches have no truth value, merely some political use-value. Politics needs no true theory only some populist rhetoric and some pseudo-scientific make-up.

MMT is refuted on all counts.#2 There is NO place for MMTers in science. Politics and science have to be strictly separated and MMT has to be given the marching orders because of proven scientific incompetence.

#1 The ethics of science is consistency ― economics is inconsistent
#2 See cross-references MMT

References 'MMT: Money-making for the one-percenters' and 'Why is MMT so false?' and 'Gov-Deficits do NOT cause inflation.