November 8, 2017

MMT and the promotion of Wall Street's idea of social policy

Comment on Peter Cooper on ‘If it’s Doable, it’s Affordable’*


Peter Cooper summarizes the core of MMT: “Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments: If something can be done, it is ‘affordable’. If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it.” So, why “… we do not just spend our way out of the current mess. And while we are it ― give the NHS more money, shelter the homeless and feed the poor of the world.”

Time to do some serious economics. Because economics is a failed science it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.

As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic 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 macroeconomic 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. The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. 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, 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.

What is needed for a start is two things (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii), a legal system which 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 Yw per 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 κ 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=κYw=κPX=κPRL in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given level of employment and productivity, except for the fact that M is the DEPENDENT variable. In other words, money is endogenous.

Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side. This deposit is then transferred to the household sector as wage payment and returns in the form of consumption expenditures.

Now it is assumed that employment in the initial period is L but full employment is 2L. Is full employment feasible? Yes, as a matter of principle. Given the productivity R and the wage rate W the variables O, X, Yw, C, M double under the condition of market-clearing and budget-balancing with P=W/R=constant. This basic scenario serves as a reference.

Scenario (i) It is now assumed that full employment is established by improving healthcare services. The state taxes the initial wage income Yw, so disposable income is now Yw−T. The newly employed workers in the healthcare service receive the income Yg, such that total disposable wage income in period 1 is Yw1=Yw−T+Yg=Yw and Yg=T, i.e. the government budget is balanced. Under the condition of the household sector’s budget-balancing, total consumption expenditures remain constant, i.e. C1=Yw1=C. As a result, the total output of the economy consists now of the unchanged quantity of the consumption good, i.e. O1=O, and in addition, of healthcare services H1 which are not sold but distributed according to some medical criteria. What we now have is full employment and reasonable healthcare and all budgets balanced. The profit of the business sector is zero.

Scenario (ii) Now it is assumed that the income in the healthcare sector is not provided via taxation but via the central bank. So total disposable wage income in period 1 is now Yw1=Yw+Yg. Accordingly, consumption expenditures are higher, i.e. C1=Yw1, and this results in an increase of the market-clearing price, i.e. P1>P. The profit of the business sector is now Qm1=C1−Yw=Yg.

For the household sector, the real situation, i.e. labor input 2L and output O1 and H1, is IDENTICAL in both scenarios. The relevant difference is that the profit of the business sector is higher in scenario (ii) due to the creation of central bank money.#3

With MMT policy, Wall Street has found a way to endorse full employment, healthcare, or other social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state. It holds Public Deficit = Private Profit. MMT is a social bluff package.

Egmont Kakarot-Handtke

* Refers to Youssef El-Gingihy/The Independent Actually the magic money tree does exist, according to modern monetary theory.

#1 Wikimedia AXEC31 Elementary production-consumption economy
#2 Wikimedia AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 For more details see On the saying “We owe the debt to ourselves”

Related 'The Law of Interdependent Balances' and 'The profit theory is false since Adam Smith' and 'MMT: The one deadly error/fraud of Warren Mosler' and 'Down with idiocy!'. For the full-spectrum refutation of MMT see cross-references MMT.

JFTR on billy blog on Nov 8

Clearly, neoliberal policy never had sound scientific foundations. Orthodox economics is a scientific failure. But, clearly, the same holds for MMT. Both approaches are proto-scientific garbage. See MMT and the promotion of Wall Street's idea of social policy.