March 27, 2019

MMT: fundamentally false

Comment on Warren Mosler's ‘MMT White Paper’


The purpose of Warren Mosler’s White Paper is “to publicly present the fundamentals of MMT.”

This is the first fundamental proposition:
“MMT Alone Recognizes that the US Government and its Agents are the Only Supplier of That Which it Demands for Payment of Taxes
That is, the currency itself is a simple public monopoly.
The US government levies taxes payable in $US
The $US to pay those taxes can only originate from the US government and its agents.
The $US to purchase US Treasury securities can only originate from the US Government and its agents.
The economy has to sell goods and services to the US Government or borrow from the US Government, or it will not be able to pay its taxes or purchase US Treasury securities.
Ramifications: 1. The US government and its agents, from inception, necessarily spend first, only after that can taxes be paid or state securities purchased.”

Because the first MMT axiom is false the rest of MMT is false.

MMT lacks sound macroeconomic foundations. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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 the 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 (1a). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.#1 The elementary production-consumption economy is shown on Wikimedia.#2

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. These institutions have to be established by the state.

Deposit money 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.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the Central Bank over the course of one period is shown on Wikimedia.#3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern.

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium.

Ramifications: (i) The state is needed for the institutional setup of the monetary order, (ii) the state is NOT needed for injecting money into the economy, (iii) what is needed is an accommodative Central Bank, (iv) neither the state nor the Central Bank interferes with the autonomous transactions of the household and business sector, (v) money is a generalized IOU, (vi) money is created and destroyed by the transactions between the household and the business sector, (vii) the value of money is given by W/P=R (1b), i.e. is equal to the productivity, (viii) the value of money does NOT depend on the (average) stock of money M, (ix) the functionality of monetary institutions and the value of money does NOT depend on the taxing power of the state.

If the state deficit-spends money into the elementary production-consumption economy it follows from the macroeconomic Profit Law#4, #5 that Public Deficit = Private Profit.

Bringing money into the economy by public deficit spending is NOT distributionally neutral, just the opposite: it is a free lunch for the Oligarchy.

So, MMT is not only scientifically worthless#6 but economically harmful to the ninety-nine-percenters.

Egmont Kakarot-Handtke

#1 Geometrical Exposition of Structural Axiomatic Economics
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 Wikimedia AXEC98 Idealized transaction pattern
#4 Profit Law Q≡Yd+(I−S)+(G−T)+(X−M)
#5 How counterfeiters save America with an extra profit and make WeThePeople pay for it
#6 Refuting MMT’s Macroeconomics Textbook

Related 'Understanding public deficits, money, and profit' and 'The miracle cure of economists’ micro-macro schizo' and 'The Third Way: Towards the happy Zero-Tax Economy'.


COMMENT on Brad DeLong on Mar 28 and Blog-Reference MNE

Science is NOT about love/hate but true/false. So, to begin with, the question Why Does Everyone Hate MMT? leads directly into the bottomless swamp of political economics.#1

The problem with MMT is that it is axiomatically false.#2 Because employment and distribution theory is provably false MMT’s policy guidance has NO sound scientific foundations. This, though, applies also to New Keynesianism. IS-LM is refuted on all counts.#3 This answers the question Why is the MMT vs Mainstream debate utterly absurd?

Brad DeLong summarizes: “Perhaps the key to the eagerness of Wray to dismiss me (and James Montier) for saying that MMT is Lerner+ is sociological. Perhaps MMT is not model-based (‘IS-LM with a near-vertical IS curve’) and not idea-based (‘Functional Finance’) so that it can be guru-based.”

Whether MMT is sociology-based, model-based, idea-based, or guru-based is a mute question. Theories are axiom-based and the macroeconomic axioms of MMT are provably false.#4 By consequence, the whole analytical superstructure is untenable.

Macrofoundations are false for 80+ years, microfoundations are false for 150+ years. Methodologically, mainstream economics is even worse than MMT’s proto-scientific garbage.

#1 Love and hate in economics: the PsySoc shell game
#2 MMT: fundamentally false
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#4 For the full-spectrum refutation of MMT see cross-references MMT

Related 'MMT for beginners' and 'Warren Mosler: scientific dilettante and political fraudster' and 'MMT sucks' and 'MMT Progressives: The knife in the back of WeThePeople' and 'MMT: The fusion of Wall Street and Academia' and 'MMT: A free lunch for the Oligarchy'.