August 30, 2019

Bill Mitchell’s dishonorable discharge from the sciences

Comment on Bill Mitchell on ‘Spending equals income whether it comes from government or non-government’

Blog-Reference and Blog-Reference

The well-known problem of economics is that it is a failed/fake science. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all have gotten the foundational economic concept of profit wrong.

Bill Mitchell is right in summarizing that not only the credibility of the mainstream is “in tatters” but also that of the “self-proclaimed Left”. How does MMT fit into this picture of overall academic failure/fake/fraud?

MMT, too, has no sound scientific foundations and therefore MMT’s economic policy guidance, too, is nothing but brain-dead agenda-pushing. From the scientific standpoint, MMT is not qualitatively different from mainstream garbage. MMT shares the lethal methodological blunder with the rest of economics.

Bill Mitchell enumerates the basics of MMT as follows:
“1. Aggregate demand is total spending in the economy.
2. Given the way we measure economic activity (as an aggregate of output and income produced per period), nominal (money) values of spending must equal income as an accounting statement.
3. If inflation is stable, then increased spending equals increased real income.
4. …”

The blunder is in “nominal (money) values of spending must equal income as an accounting statement.” NO! Economists are too stupid for the elementary math that underlies macroeconomic accounting. Keynes is the most prominent example. He wrote in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

Income is NEVER equal to the “nominal (money) values of spending”. Here is the proof.
1. Premises: 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 expenditures C is equal to price P times quantity bought/sold X.
2. Logical implications: In the elementary production-consumption economy, THREE configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
• In case (i) the monetary saving of the household sector S≡Yw−C is zero and the monetary profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases. For a start, the market-clearing price as the dependent variable is given by P=C/X=W/R for any employment level.
• In case (ii) saving S is positive and the business sector makes a loss, i.e. Q is negative. The market-clearing price P is less than W/R.
• In case (iii) saving S is negative and the business sector makes a profit, i.e. Q is positive.

It always holds Q≡−S, in other words, the balances of the business and the household sector always add up to zero. This is the Fundamental Law of Macroeconomic Accounting.#1

In other words, the business sector’s loss is equal to the household sector’s saving. Vice versa, the business sector’s profit is equal to the household sector’s dissaving, i.e. the growth of the household sector’s debt. The non-equality of “nominal (money) values of spending” and wage income is the very cause of profit/loss. Profit/loss is the difference of flows and not a flow like wage income. Wage income and profit are NOT two different forms of income. So the lethal methodological blunder of the representative economist consists of confusing a balance with a flow.

3. Conclusion: Elementary algebra tells one that the premise of macroeconomics, i.e. “nominal (money) values of spending must equal income as an accounting statement”, is provably false since Keynes.

Because MMTers in general and Bill Mitchell, in particular, are too stupid for elementary math they have to be expelled from the sciences just like their mainstream colleagues. Economics, including MMT, is failure/fake/fraud from the curriculum to the peer-review of journals to the faux Nobel Prize.

Egmont Kakarot-Handtke

#1 Macro for dummies (II)

Related 'Economists/MMTers: agenda pushers, distractors, blockers, muters, censors' and 'Mission accomplished: Economists as useful idiots of the Oligarchy' and 'Economics ― the science that never was'.