Blog-Reference and Blog-Reference
MMT consists of a political part and a theoretical part. The political part, in turn, consists of the progressive message for the ninety-nine percenters that the sovereign government can solve most, if not all, social and economic problems by deficit spending/money creation.
MMT policy proposals have no sound scientific foundation, that is, MMT theory is provably false. This means that MMT is soapbox economics/political fraud.
Of course, Bill Mitchell, one of the chief proponents of MMT, does not realize this and is mainly occupied with auto-hypnosis: “Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that it is coherent, logically consistent and grounded in a strong evidence base.”
Fact is that MMT is refuted on all counts.#1 MMTers do NOT understand to this day how the price- and profit-mechanism works. Because of this, their policy guidance is, contrary to their progressive claim, inimical to the ninety-nine-percenters.
To prove this, macroeconomics has to be reconstructed from scratch. As the correct 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 price is given by P=W/R (1), 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. For the graphical representation see Figure 1.#2
The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
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, or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. 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. Under the condition of budget balancing, total monetary profit is zero.
What is needed for a start is two things (i) a central bank which 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, which is a generalized IOU, 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.#3
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 (2) 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 employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.
As long as the central bank finances a growing wage bill Yw=WL with money creation out of thin air and wage rate W and productivity R remain fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/ decreases according to (2) but there is NO inflation/deflation.
Let us now introduce government deficit spending. Total expenditures consist now of household sector spending Ch, with Ch=Yw, and government sector spending Cg. The money for government spending is created out of nothing by the central bank.
The market clearing price is according to the macroeconomic Law of Supply and Demand P1=(Ch+Cg)/X0=P+Cg/X0, that is, there is a hike of the market clearing price which depends on the amount of additional nominal government demand Cg. Employment, productivity, and output are kept constant, i.e. O1=O0=X1=X0. The one-shot price increase has NOTHING to do with inflation. The price increase effects the redistribution of real output between the household and the government sector in the period under consideration. In other words, the households are taxed in real terms without realizing it. The tax collector comes in the disguise of the market price mechanism.
The profit of the business sector was zero in the initial period and is now positive, i.e. Qm=Cg, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit. This configuration 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. As MMT claims, there is no operational limit to coordinated government/central bank deficit spending/money creation.
• MMT policy is NOT progressive, that is, in the interest of the ninety-nine-percenters.
• MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
• The abuse of the fiat money order consists in the collusion of the central bank and the government and the creation of money for consumptive purposes.
• With money creation and deficit spending, the household sector = ninety-nine-percenters is taxed in real terms by an almost imperceptible price hike (NOT inflation).
• Because Public Deficit = Private Profit, the one-percenters enjoy an immediate profit boost.
• In addition, part or all of the increased public debt can become a long-term source of interest income for the one-percenters depending on whether and how the public debt is consolidated.
• The effects of MMT policy reinforces the transformation from democracy to oligarchy which is a latent feature of the laissez-faire market order.#4
• Public debt can accumulate indefinitely and is thereby pushed beyond the time-horizon of the general public. However, this does NOT mean that public debt vanishes. Public debt is nothing but accumulated deferred taxation.
• Because technically the sovereign government cannot go bankrupt, at some point in the future there will be either a debt jubilee, i.e. financial assets including money will be declared non-valeur, or there will be taxation/redemption. Whether the monetary economy survives these operations is doubtful.
Only those who live according to the slogan of the dying Ancien Régime, Après Nous le Déluge, will subscribe to MMT policy. Nobody with more than two brain cells will accept MMT theory or agree with Bill Mitchell’s ridiculous selling proposition “that it is coherent, logically consistent and grounded in a strong evidence base.” Politically, MMT is a fraud and scientifically it is garbage.
#1 For the full-spectrum refutation see cross-references MMT
#2 Wikimedia, Elementary production-consumption economy
#3 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#4 MMT: So-called progressives as trailblazers for Trumponomics
Related 'MMT is dead: An unfriendly critique of Bill Mitchell' and 'New insight from Meta-Learning: delete economics' and 'Economists― standing on the shoulders of dwarfs' and 'Economics has arrived at the bottom of the proto-scientific shithole' and 'How MMT enlightens Washington'.
You say: “If you cannot explain economics in a way that a child can understand, then you do not understand economics. Everything you say will be meaningless gibberish.”
This, of course, is correct. So, here is the Disney version of monetary economics.
Once upon a time, there was one giant firm. The workers were promised 10 $ per hour. They agreed to work 1 million hours and accordingly their annual income was 10 million $. But at this point, the firm’s boss had an obvious problem, how should he pay the workers? In those old days, there was no money only barter, you know, cigarettes against bread and so on.
Being innovative and cooperative the boss and the workers wrecked their brains and discussed the matter. But then a smart child stood up and said, hey, why don’t we pay the wage bill with IOUs and these, in turn, are accepted by the firm’s store, so the workers can buy the consumption good they have produced?
This they did and money was created out of nothing. All went fine. The price was set equal to unit wage costs and fluctuated freely with productivity. The boss issued the IOUs and the workers returned them in full by buying the output.
All lived happily thereafter but then something strange happened. The folks from the mafia saw the weak spot of the scheme and they started to produce counterfeit IOU’s. They stuffed the pockets of their buddies and wives and kids full with newly created money who, in turn, spent it at the firm’s store.
Lo and behold, this worked just fine. The price went up a little but nobody took much notice. The firm’s boss was happy because he got more IOU’s back than he had issued. Everybody called him a genius because he had made a profit.
The mafia was very much puzzled that they had found a way to make everyone happy without any obvious casualties and they called their friends from academia ― Warren, Stephanie, and Bill ― and told them in great operative detail how the monetary system really works. The question was now how to scale up the scheme.
This is how MMT ― the Modern Mafia Theory of money ― developed. The IOU’s were replaced by fiat money, the mafia was replaced by central bank/government and the new scheme was sold by respectable academics as a beneficial social program. Stephanie Kelton got standing ovations from the media when she promised a pony for every American.#1
Needless to emphasize that the idea caught fire in all political quarters and this is how public debt went off like a rocket into the blue sky and out of sight. Warren, Stephanie, and Bill simply told the public not to worry and that debt does not matter. They pointed to Japan as empirical proof and this finally convinced everybody.
This, dear children, is how the modern money system and MMT developed. And, bear in mind, this is also a fine example of how the hidden hand of the market system miraculously turns the evil deeds of bad guys into a big time benefit for all people. Economists have proven this wonderful property with the so-called welfare theorems. One day, when you are grown up you will understand and appreciate this and become POTUS and make the deficit great again.#2
#1 MMT: Money-making for the one-percenters
#2 MMT: So-called progressives as trailblazers for Trumponomics