July 17, 2019

The right and the wrong way to bring money into the economy

Comment on Dirk Ehnts/Skender Fani on ‘Modern Monetary Theory’s promise’*


“Politicians seem ill-equipped to put scientific findings into practice.” says the MMT propagandist Dirk Ehnts. The problem is that MMT has no sound scientific foundations, to begin with, but is political agenda-pushing in the bluff package of science. Dirk Ehnts, for example, has not realized to this day that Keynesian macroeconomics is proto-scientific garbage.#1

The fact that economists, i.e. Walrasians, Keynesian, Marxians, Austrians, MMTers, lack the true scientific theory has never hindered them to give economic policy advice. Economists have always been a menace for their fellow citizens.#2

Dirk Ehnts repeats the MMT mantra: “The state is the originator of currency as it puts money into circulation through its spending. If we have to pay our taxes in euros, the state has to spend a sufficient amount beforehand. That is the only chance we have of getting the right amount of money.” This assertion is false because MMT’s macroeconomic foundations are false.

There are two ways to bring money into the economy (i) by financing the wage bill, and (ii), by deficit-spending.

To get economics right, it has to be consistently reconstructed from scratch.#3 As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of 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 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 (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#4

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 conditions define a fiat money system without commercial banks as intermediaries.

Deposit money, which is a generalized IOU, 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. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#5

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, 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 simply 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. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.

As long as the central bank finances a growing wage bill with money created out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/ decreases according to (2) but there is NO inflation/deflation.

Obviously, this is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy by government deficit spending. This has an immediate effect on macroeconomic profit.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds QmSm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

The 4-sector Profit Law reads Qm≡Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm≡G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the Oligarchy.

Conclusion: MMT academics in general and Dirk Ehnts, in particular, are not scientists but political agenda pushers, i.e. Wall Street’s useful idiots.#6 Dirk Ehnts’s claim: “As a theoretical basis, Modern Monetary Theory provides a stable scientific foundation to underpin new political instruments and policy measures” is an empty promise. MMT is plain proto-scientific garbage.

Egmont Kakarot-Handtke

* International Politics and Society Modern Monetary Theory’s promise
#1 Keynesians ― terminally stupid or worse?
#2 Econogenics in action
#3 The canonical macroeconomic model
#4 Wikimedia AXEC31 Elementary production-consumption economy

#5 Wikimedia AXEC98 Transaction pattern, household sector, balanced budget

#6 How counterfeiters save America with an extra profit and make WeThePeople pay for it

Related 'From MMT misunderstandings to the true Theory of Money' and 'MMT: fundamentally false' and 'The MMT-Yawner: Government is not a household' and 'It has been said before but economists still don’t get it' and 'Money: from silly stories to the true theory' and 'How money emerges out of nothing ― the functional account' and 'Money and debt in six elementary steps' and 'The ultimate ― analytical ― origin of money' and 'Money and time' and 'Nick Rowe’s soapbubbling about money' and 'MMT: Richard Murphy’s battle-for-money hoax' and 'The objective value of money' and 'The creation and value of money and near-monies' and 'MMT, money creation, stealth taxation, and redistribution' and 'Basics of monetary theory: the two monies' and 'Forget Friedman, forget the Quantity Theory' and 'Criminals and the monetary order' and 'Putting the Quantity Theory of inflation to rest'.

For more on money see AXECquery.