Albert Edwards sets the frame: “MMT’s adherents often sell MMT as a prescriptive school of thought rather than a descriptive one. They come out of the gate with all sorts of big spending policy proposals they say are based on MMT. …
People need to understand how the economics fits together first. Then they can buy into the prescriptions. And even then, they may not buy the policy prescriptions MMT adherents hawk. For me, MMT is not about policy prescriptions, it’s about a description of how an advanced economy works for a fiat currency issuer.”
True. The problem is that MMTers do not know how the economy works. More precisely, they get the interaction of the macroeconomic balances wrong. The lethal blunder is in Wynne Godley’s contribution to MMT.
The FT’s Martin Wolf explained Godley’s insight this way…: “I look at this through the lens of ‘sectoral financial balances’, an analytical framework learned from the work of the late Wynne Godley. The essential idea is that since income has to equal expenditure for the economy, as a whole, (which is the same thing as saying that savings equals investment) so the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero. These differences can also be described as ‘financial balances’. Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors.
The crucial point is that, since sectoral balances must sum to zero, a rise in the deficit of one sector must be matched by an offsetting change in the others. It follows that if the fiscal deficit is increasing, the sum of the surpluses of the other sectors of the economy must be increasing in a precisely offsetting manner.”
Here is the short proof that economists in general and MMTers, in particular, get the elementary mathematics that underlies macroeconomics wrong.
(i) The elementary production-consumption economy is given by three macroeconomic axioms: (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.
(ii) The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. X=O.
(iii) The monetary profit of the business sector is defined as Q≡C−Yw,
(iv) The monetary saving of the household sector is defined as S≡Yw−C.
(v) Ergo Q≡−S.
The balances add up to zero. The counterpart of household sector saving S is business sector loss −Q. The counterpart of household sector dissaving (-S) is business sector profit Q. Both Q and S are measurable with the precision of two decimal places.
For the elementary investment economy, it holds Q≡I−S.
For the elementary investment economy plus government holds Q≡(I−S)+(G−T).
From this follows that (1) saving and investment are causally INDEPENDENT and NEVER equal, (2) all I=S/IS-LM models are false since Keynes/Hicks, (3) Keynesianism, Post-Keynesianism, New Keynesianism and all variants are scientifically worthless, (4) the foundational MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is false because it lacks the balance of the business sector Q, (5) because profit is false, the whole of MMT is false, (6) because the theory is false, MMT policy guidance has no sound scientific foundations.#1
This holds also for Walrasianism, Keynesianism, Marxianism, Austrianism, and all their variants. Because of this, all economic policy debates are devoid of sense.
* Credit Writedowns
#1 For the full-spectrum refutation of MMT see cross-references MMT
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