March 21, 2019

MMT is better than mainstream economics but still not good enough

Comment on James Galbraith on ‘Is there a better model to explain economics in the Trump era?’*


MMT now gets the eagerly awaited attention and James Galbraith jubilates: “A specter is haunting mainstream economics. It is the specter of . . . modern monetary theory? So recent essays from Harvard luminaries Kenneth Rogoff and Lawrence Summers attest. For Rogoff, MMT is ‘just nuts,’ ‘folly,’ and ‘nonsense.’ For Summers, MMT adherents are ‘fringe economists’; their ideas are ‘voodoo,’ or what is worse, ‘supply-side economics.’ The flood of invective suggests that the two professors feel a threat. Probably not to themselves, but to the orthodoxies they represent and uphold.”

Whether the loudspeakers of mainstream economics feel threatened or not is a matter of indifference because nobody takes them seriously anyway. Nobody with more than two brain cells, that is.

Then, James Galbraith remembers that economics is not a propaganda exercise but a science: “Is something, perhaps, wrong with the mainstream’s models?”

This is a rhetorical question because it is well-known that mainstream economics is long dead. Among all blunders in modern science, economics is the worst. It has never been anything else than what Feynman called a cargo cult science.

The foundational blunder of economics is microfoundations.#1 Microfounded approaches are worthless from Walras/Jevons/Menger onward to DSGE and New Keynesianism. However, the majority of economists has not realized anything.

Keynes has to be credited for realizing that economics needs a Paradigm Shift from microfoundations to macrofoundations. James Galbraith emphasizes: “MMT is built on the work of John Maynard Keynes and Hyman Minsky. A core insight is that money in ‘modern States’ ― meaning, as Keynes wrote, for the ‘past four thousand years at least’ ― is defined by government.”

This is accurate. However, under a broader perspective, one cannot fail to realize that Keynes messed up the move from micro to macro. MMT inherited Keynes’ macro blunder which is encapsulated in the sectoral balances equation (I−S)+(G−T)+(X−M)=0.#3

James Galbraith summarizes: “MMT is about the way the world actually works.#4 It explains why big deficits do not drive up interest rates or ‘crowd out’ private investment, and why big governments in big countries don’t go bankrupt. … So I admire and support the MMT group, which is voicing a powerful common sense in the face of grumpy resistance.”

The keyword is common sense. Mainstream economics is so idiotic that it can be beaten by common sense. At this point, though, the superiority of MMT ends already.

Because of false macrofoundations, Keynesianism, Post-Keynesianism, and MMT are scientifically worthless. The foundational MMT sectoral balances equation is false because it lacks the balance of the business sector. Because profit is false, the whole of MMT is false, and because the theory is false, MMT policy guidance has no sound scientific foundations.#5

Egmont Kakarot-Handtke

* Boston Globe
#1 Microfoundations are given with this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 The correct macrofoundations are given with this axiom set: (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.
#3 Refuting MMT’s Macroeconomics Textbook
#4 Keynes, Lerner, MMT, Trump, Biden, and exploding profit
#5 Hype does not help: MMT is toast