June 4, 2018

Neoclassics and MMT ― much like pest and cholera

Comment on Lars Syll on ‘From Wicksell to Le Bourva and MMT’

Blog-Reference and Blog-References and Blog-Reference on Jun 5

Compared to neoclassical economics, MMT looks like an improvement. But this is a rather small feat because compared to the proto-scientific garbage of mainstream economics almost everything is an improvement.

However, after 150+ years of repetition, the critique of neoclassical economics has turned out to be pointless: “… it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

Does MMT beat the old theory? No! MMT is macrofounded, this is the improvement compared to microfounded Neoclassics, but the macrofoundations are inconsistent.#2 Methodology tells us that if the foundations are false the whole analytical superstructure is false.

MMT’s strong points are advertised as follows: “… a strong focus on balance sheets as opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.” (Ehnts, Barberoux) and “… MMT [is] also updated macroeconomics based on not only the existing monetary systems but also by bringing together previous contributions, notably Wynne Godley’s stock-flow consistent modeling, Abba Lerner’s functional finance, and Hyman Minsky’s financial instability theory and job guarantee proposal.” (Hickey)

The problem is that all these elements do not fit consistently together because the underlying macroeconomic balance sheet mathematics, i.e. the sectoral balances equation, is provably false.#3, #4 From the scientific standpoint, MMT is as inconsistent and worthless as neoclassical economics. The policy guidance of both schools has NO sound scientific foundations.

The two main blunders of MMT are value and distribution theory
  • “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them.” (Syll) This is simply false, the value of money is independent of taxation.#5
  • Because Public Deficit = Private Profit the money creation/deficit spending in all economic situations as proposed by MMTers has detrimental consequences for distribution. MMT policy proposals amount ultimately to agenda pushing for the one-percenters.#6
The difference between Neoclassics and MMT is on closer inspection analogous to the difference between pest and cholera. There is no difference in the scientific incompetence between orthodox and heterodox economists.

Egmont Kakarot-Handtke

#1 Stop beating mainstream economics ― it is long dead
#2 For the full-spectrum refutation of MMT see cross-references MMT
#3 Keynesians ― terminally stupid or worse?
#4 Rectification of MMT macro accounting
#5 The objective value of money
#6 Austerity and the political games Progressives play

Related 'Poor Wicksell — abused as a testimonial for MMT' and 'Macro imbeciles'.

Immediately following The Third Way: Towards the happy zero-tax economy.

REPLY to Ralph Musgrave on Jun 5

You say: “E.K-H keeps claiming that a public sector deficit benefits the 1% not the 99%. Complete nonsense: if a deficit is targeted on the 99%, then the deficit would benefit the 99%, amazing as that might seem.”

As Marx told already all Flat-earthers and Flat-thinkers: “But all science would be superfluous, if the appearance, the form, and the nature of things were wholly identical.”

The point of science is to figure out what is appearances and what is reality.

So let us assume the government creates money and distributes it to the households according to a social criterion. Let the total amount be A, the number of beneficiary households be n, and the amount per household a, then A=na.

In this case two, things happen:
(i) If all beneficiary households spend this money, the price goes up a little (NO inflation) and the household sector as a whole gets the SAME total real output under the conditions of market clearing.
(ii) The profit of the business sector increases because of Qm1=C1−Yw in comparison to Qm0=C0−Yw=0 with C1 greater C0. The difference between C1 and C0 is the amount A, i.e. the deficit-spending/money-creation of the government sector.

The real situation of the household sector remains unchanged because the price hike counteracts the nominal demand increase. The situation of the business sector as a whole improves, i.e. monetary profit Qm rises from Qm0=0 to Qm1=A. In other words, Public Deficit = Private Profit.

So, the social measure of the government only redistributes the output O between the ninety-nine-percenters. The real situation of the household sector as a whole does NOT change at all. The whole act is called stealth taxation#1 because the price hike reduces the real quantity the wage income receivers can buy with their wage income Yw.

So, yes, E.K-H keeps claiming (i) that a public sector deficit benefits the 1% not the 99%, (ii) MMT is a political fraud, and (iii) Ralph Musgrave is a clueless blatherer who does not know how the monetary economy works.

#1 MMT, money creation, stealth taxation, and redistribution

REPLY to Calgacus on Jun 6

You cite from my answer to Ralph Musgrave: “If all beneficiary households spend this money, the price goes up a little (NO inflation) and the household sector as a whole gets the SAME total real output under the conditions of market clearing.” and then go on to claim: “That isn’t always true; the deeper a depression is ― and that will make such a distribution more likely ― the less true it is.”

Note that there are TWO issues here: (i) real and nominal distribution and (ii) employment. My answer to Ralph Musgrave addressed explicitly the issue of distribution under the condition of given employment.

This, of course, does not mean that it escaped my attention that there is also a relationship between money-creation/deficit-spending and employment. In fact, I addressed it on multiple occasions.#1, #2

The point is that you are too stupid/lazy to look up with the omnipresent Search Function what I have written about employment/NAIRU/wage-led growth and the whole Neoclassical/Keynesian/MMT garbage that fills the textbooks and blogs.#3

The axiomatically correct employment theory says (i) yes, of course, it is possible to increase employment through money-creation/deficit spending, (ii) it is better economic policy to apply the price-mechanism for this purpose#1 because (iii) deficit-spending causes unintentionally/intentionally the distributional effects that are before everybody’s eyes#4 and produce a lot of hypocritical surprises and communicative hyperventilation.

All these relationships between deficit-spending, employment, distribution are well-understood albeit NOT by MMT academics who are either scientifically incompetent or politically corrupt or both.

#1 Full employment through the price mechanism
#2 Full employment, the Phillips Curve, and the end of Gaganomics
#3 For details of the big picture see cross-references Employment
#4 Keynes, Lerner, MMT, Trump and exploding profit