February 14, 2019

Krugman vs MMT ― like the blind talking about colors

Comment on Brian Romanchuk on ‘Functional Finance Versus New Keynesian Economics, Krugman Edition’*

Blog-Reference and Blog-Reference and Blog-Reference on Feb 16 adapted to context and Blog-Reference on Feb 18

The characteristic of economic debates is to talk about everything except the point at issue.

Krugman starts the talk show with: “Well, it looks as if policy debates over the next couple of years will be at least somewhat affected by the doctrine of Modern Monetary Theory, …” Then he realizes that he is not up-to-date but this does not matter because: “The good news is that MMT seems to be pretty much the same thing as Abba Lerner’s ‘functional finance’ doctrine from 1943.” And off he goes parroting the worn-out stuff about inflation and crowding-out with the finale: “The bottom line is that while functional finance has a lot going for it, it’s not the kind of axiomatically true doctrine that Lerner ― and, I think, modern MMTers ― imagined it to be.”

No word about that MMT is just proto-scientific garbage. And, of course, no state-of-art refutation of the MMT approach, no proof of material/formal inconsistency.

Brian Romanchuk’s answer remains on the same low level and consists of pointing out that Krugman himself clings to a rather crappy approach: “The fundamental problem with the New Keynesian approach of Paul Krugman, Brad DeLong, Simon Wren-Lewis, etc., is that the model is fundamentally neoclassical rather than Keynesian., only departing somewhat in assumptions but not methodology. This methodology falls into the class formal (mathematical) rather than empirically based and it ignores the role of institutions and operations.”

Both parties are spot on in their critique of the other approach. The irony is that both approaches share a common blunder. Krugman refers via the IS-LM model back to Keynes and MMT via the sectoral balances equation, i.e. via (I−S)+(G−T)+(X−M)=0 which boils down to I=S when the public sector and the foreign sector are taken out of the picture for a moment.

The common blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Keynes, like his academic colleagues, NEVER understood what profit is and thus ended with I=S ― one of the greatest blunders in the history of modern science. Neither New Keynesians nor MMTers, though, have realized anything for 80+ years.#1 Both are too stupid for the elementary mathematics that underlies macroeconomics.

The correct macroeconomic relations are given by Q≡−S for the elementary production-consumption economy and Q≡I−S for the elementary investment economy with Q business sector’s monetary profit, S household sector’s monetary saving, business sector’s I investment expenditures. From this follows that all I=S/IS-LM models and their derivatives are scientifically worthless.#2

Both New Keynesianism and MMT are provably false.#3 By consequence, the economic policy arguments of both sides have NO scientifically valid foundations. What Krugman advertises as wonkish is just the usual brain-dead blather of failed/fake scientists.

Egmont Kakarot-Handtke

* NYT, Paul Krugman, What’s Wrong With Functional Finance? (Wonkish)
#1 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 For details of the big picture see cross-references Refutation of I=S
#3 See cross-references Keynesianism and cross-references MMT

Related '#DrainTheScientificSwamp' and 'Macroeconomics: Drain the scientific swamp'.

REPLY to Brian Romanchuk on Feb 15

You say: “You’re defining profits wrong.”

Macroeconomic profit is defined for the most elementary case as Q≡C−Yw.

Stop waffling, just write down your definition with 6 or 7 characters. This is what a real mathematician would do.

REPLY to Brian Romanchuk on Feb 15

Just write down YOUR definition with 6 or 7 characters.


REPLY to Brian Romanchuk on Feb 16 and Blog-Reference

You say: “The cost of goods sold is itself complicated, since it depends on the valuation of inventory. … Depreciation is also based on the historical cost of capital. In summary, way more complex than the junk you blather on about.”

The alleged complexity is merely a projection of your own confusion.

(i) Total macroeconomic profit Q is composed of monetary profit Qm and nonmonetary profit Qn.

(ii) Nonmonetary profit Qn is the sum of all positive/negative changes of valuation including depreciation.

(iii) Qn has been dealt with elsewhere and is taken out of the picture for a moment.

(iv) Monetary profit Qm for the one-fully-integrated-macroeconomic firm is defined as Qm≡C−Yw. In your words: Qm is “sales revenue” C minus “cost of goods sold” Yw in the most elementary production-consumption economy with market-clearing, i.e. X=O. Changes of inventory, i.e. X≠O, have been dealt with elsewhere.

(v) The investment economy has been dealt with elsewhere.

(vi) Monetary saving of the household sector is defined as Sm≡Yw−C. Total saving S is the sum of monetary Sm and nonmonetary saving Sn. The latter has been dealt with elsewhere.

(vii) Monetary profit Qm and monetary saving Sm are measurable with the precision of two decimal places. There is NOT the slightest ambiguity here. Qm and Sm are as real as cash in the box or as money in the bank.

(viii) From this follows: the macroeconomic Profit Law for the most elementary case of a production-consumption economy with market-clearing reads Qm≡−Sm. This is the irreducible hardcore of the macroeconomic Profit Law.

For the more complex cases see the overview on Wikimedia.#1 From this overview follows that the MMT sectoral balances equation is provably false.

That you have not realized anything to this day disqualifies you as a mathematician and economist.

#1 Wikimedia, Profit Law

REPLY to Brian Romanchuk on Feb 16

You say: “You missed the entire point. There is no market-clearing in the model I referred to; there are inventories.”

The model you published last week is NOT the point at issue. The definition of macroeconomic profit is at issue. You said: “You’re defining profits wrong.”

The fact is that there are two cases (i) market-clearing (ii) inventory changes.

Case (ii) has been dealt with elsewhere.#1 This leaves one with (i). And in this case, macroeconomic profit is in the elementary production-consumption economy Qm≡−Sm. This formula is sufficient to disprove Keynes and MMT and you. There is NO need to go any further. You got the basics wrong.

#1 Primary and Secondary Markets, Levy Economics Institute of Bard College Working Paper No. 741

Feb 16