March 11, 2018

MMT is idiocy and fraud

Comment on Steve Roth/Asymptosis on ‘Wealth and the National Accounts: Response to Matthew Klein’

Blog-Reference and Blog-Reference

Randall Wray says about the foundations of MMT: “In this blog we are going to begin to build the necessary foundation to understand modern money. Please bear with us. It may not be obvious, yet, why this is important. But you cannot possibly understand the debate about the government’s budget (and critique the deficit hysteria that has gripped our nation across the political spectrum from right to left) without understanding basic macro accounting. So, be patient and pay attention. No higher math or knowledge of intricate accounting rules will be required. This is simple, basic, stuff. It is a branch of logic. But it is extremely simple logic.”

This is true, of course, the point is that economists in general and MMTers, in particular, do not even get the extremely simple logic of accounting right. In other words, MMTers are just as incompetent as the representative economist.#1

There is no need to plow through the heap of MMT verbiage about income/profit/saving/ wealth. The elementary points MMTers do not get is (i) that business sector profit/loss is the mirror image of household sector dissaving/saving, and (ii), that profit is NOT a flow like wage income but a difference of flows, hence the simple operation 'add profit and wage income' is a methodological blunder called Humpty Dumpty Fallacy.*

MMT policy advice is patently false because MMT theory is false, more specifically, MMTers do not know how the price- and profit mechanism works. They do not know the difference between profit and income, between profit and distributed profit, between monetary profit Qm and nonmonetary profit Qn, and between monetary saving Sm and nonmonetary saving Sn.#2 Monetary profit emerges in the production-consumption economy, nonmonetary profit/saving stems from the revaluation of real and financial assets/ liabilities.

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).#3

It always holds Qm+Sm=0 or 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 collateral, 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 nothing by the central bank. The economy never runs out of 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 immediately 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.#4

From (iii) follows that ― given business sector investment I and household sector monetary saving Sm ― Public Deficit = Private Profit.

It never follows the MMT tripartite balances equation (I−S)+(G−T)+(X−M)=0. Because this foundational equation is provably false the whole of MMT is worthless.

Right policy depends on true theory. MMT is proto-scientific junk because it NEVER got the foundational concepts of economics right. Politically, MMT is a fraud because it claims to benefit the ninety-nine-percenters but, in fact, benefits the one-percenters.

Egmont Kakarot-Handtke

#1 For an ― masochists only ― overview see:
The Basics of Macro Accounting
Deficits are here to stay … get used to it
JKH on the recent MMR/MMT Debates
Where MMT Gets Its Accounting Wrong — And Right
Wealth and the National Accounts: Response to Matthew Klein
Savings ― Explaining the Humpty Dumpty word
The Upside-Down World of MMT
#2 For the full-spectrum refutation of MMT see cross-references MMT
#3 True macrofoundations: The reset of economics
#4 For details see cross-references Refutation of I=S

Related 'Why economists don’t know what profit is' and 'Why economists know nothing' and 'Note on saving and investment' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'Primary and Secondary Markets'. For details of the big picture see cross-references Accounting.