Bill Mitchell recounts a recent Twitter exchange: “… where a person who says he is ‘all over MMT’… has been arguing ad nauseam that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive.”
This, of course, is a straw man and Bill Mitchell easily knocks him down. What people do not understand is that monetary theory is NOT about the operational details of the Treasury/FED interactions. Monetary theory is an integral part of what Keynes called the ‘monetary theory of production’. By sticking to operational details, the average common sense person commits the Fallacy of Insufficient Abstraction.
Bill Mitchell is right: “The problem with this ‘obvious’ argument is that it fails to consider what is actually going on in a fiat monetary system at the level beyond the accounting arrangements.” Monetary theory is macroeconomics and who does not understand macro better takes the remote control and never stops again watching sitcoms.
MMT proponents are NOT a laughing stock because they get the operational details/ accounting conventions of deficit spending/money creation wrong but because they get the essentials of macro wrong.
The error/fraud of MMT consists in misplaced consolidation. Here you have it in a nutshell: “The notion of a consolidated government sector is a basic MMT starting point and allows us to demonstrate the essential relationship between the government and non-government sectors whereby net financial assets enter and exit the economy without complicating the analysis unduly.” And: “At this simple level ― that the currency-issuing ‘government’ comprises the consolidation of the central bank and the treasury functions ― makes it obvious that taxes and borrowing do not fund ‘government’ spending.”
Exactly at this point, Bill Mitchell runs into the Fallacy of Insufficient Abstraction. Independently of all operational/organizational specifics in different countries, proper economic analysis requires the functional distinction between business sector, household sector, government sector, and banking sector which consists initially alone of the money creating central bank. Upfront consolidation of any two sectors is methodologically inadmissible.
In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).#1
It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. This Law refutes the MMT profit theory. So, the whole of MMT is scientifically dead already at this point.
Money is needed by the business sector to pay the workers who receive the wage income Yw per period (econ-speak for wages + salaries). The workers/employees spend C per period. Given the two conditions, the market-clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.
As a corollary, this macroeconomic Law kills the commonplace Quantity Theory because the “Quantity of Money” is NOT among the price determinants. The average stock of transaction money follows as M=κYw, with κ determined by the payment pattern. In other words, the “Quantity of Money” M is determined by the autonomous transactions of the household and business sector and created out of thin air by the central bank. The economy never runs out of money. The government is NOT needed to supply the economy with money.
Starting from the elementary production-consumption economy, complexity is then successively increased. To make matters short, the axiomatically correct relationships are given here without further explanation. It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Yd distributed profit:
(i) Qm≡−Sm in the elementary production-consumption economy,
(ii) Qm≡I−Sm in the elementary investment economy,
(iii) Qm≡(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
(iv) Qm≡Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.
From (i)/(ii) follows that saving and investment are NEVER equal and that ALL I=S/IS-LM models are false since Keynes/Hicks and that ALL After-Keynesians are stupid.
From (iii) follows that ― given business sector investment I and household sector monetary saving Sm ― Public Deficit = Private Profit. The government deficit (co-)determines the cumulative stock of financial assets in the business sector.
Exactly at this point, Bill Mitchell’s error/fraud happens. He states: “The government deficit [of $20] is exactly the non-government savings [of $20].” No! The mirror image of the government’s deficit is the business sector’s profit.
The MMT error/fraud lies in the word non-government sector. There is NO such thing as the “non-government sector”, there are TWO sectors, the business- and the household sector. And the business sector does NOT save.* Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The word profit, though, does not appear once in Bill Mitchell’s analysis.
The Iron Rule of Methodology says: Every economic theory/model that does not explicitly contain the foundational economic magnitude profit is scientifically worthless.#2, #3, #4 MMT falls squarely into this category.
#1 Macro for retarded economists
#2 MMT is idiocy and fraud
#3 DSGE and profit―forget it! MMT and profit―forget it!
#4 Deficits matter for distribution