April 15, 2019

Yes, economists are really that stupid

Comment on Alan Longbon on ‘U.S. Private Domestic Sector Balance Books A $147 Billion Surplus Through March 2019’


Alan Longbon reports: “The US budget deficit is $147 billion in March 2019; this is a net add to private domestic sector income. Dollars added to the economy by the federal government allow the private sector to post a $147 billion surplus and add to its stock of net financial assets.”

This statement proves that, to this day, economists have no idea what profit is and what the decisive difference between income and profit is.

To make matters short here, the macroeconomic Profit Law is given as Q≡Yd+(I−S)+(G−T)+(X−M). In the elementary case of a pure production-consumption economy, this reduces to Q=−S, i.e. the mirror image of household sector saving S is business sector loss (-Q). The mirror image of household sector dissaving (-S) is business sector profit Q.#1, #2 The point to grasp is that profit for the business sector as a whole depends on deficit spending and nothing else. With regard to the State, the Profit Law boils down to Q=(G−T), i.e. Public Deficit = Private Profit.

The Profit Law implies: (1) the business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures C are greater than wage income Yw, (2) macroeconomic profit/loss Q does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup-setting, nor on risk-taking, (3) in order that profit comes into existence for the first time in the production-consumption economy, the household sector must run a deficit at least in one period, (4) this presupposes the existence of a credit-creating entity, (5) profit/loss is, in the most elementary case, determined by the increase/decrease of the household sector’s debt, (6) profit/loss Q is a factor-independent residual and qualitatively different from wage income Yw, (7) it is an elementary mistake to maintain that total income is the sum of wages and profits, (8) profit is NOT income, i.e. a flow, but a balance, i.e. the difference of flows, (9) distributed profit Yd is income and adds up with wage income Yw to total income, (10) total income is NEVER equal to total spending/value of output,#3 (11) saving and investment are causally independent and NEVER equal, (12) Keynesianism, Post-Keynesianism, I=S/IS-LM, New Keynesianism and all variants are scientifically worthless, (13) 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.

“The US budget deficit is $147 billion in March 2019; this is a net add to private domestic sector income.” is false and has to be replaced by “The US budget deficit is $147 billion in March 2019; this is a net add to the Oligarchy’s financial wealth.” Income is a flow and financial wealth is a stock. And the link between stocks and flows are the differences of flows called profit/loss of the business sector Q or saving/dissaving of the household sector S. There is NO such thing as a “private sector” or a “private domestic sector income”.#4 Economists in general and MMTers, in particular, simply don’t get it.#5

Egmont Kakarot-Handtke

#1 The elementary production-consumption economy is for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Q≡C−Yw, S≡Yw−C).
#2 For details of the big picture see cross-references Profit/Distribution
#3 Keynes got it wrong: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
#4 Dear idiots, government deficits do NOT fund private savings
#5 Why is MMT so false?

Related 'How the intelligent non-economist can refute every economist hands down' and 'Debunking Squared' and 'From Keynes’ fatal blunder to the true economic model' and 'MMT and the canonical macroeconomic model' and 'The clock runs down on economics' and 'Still beyond the reach of economists: The Holy Grail of Science' and 'Econogenics in action'. For details of the big picture see cross-references Failed/Fake Scientists.


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