November 5, 2021
Where MMT goes wrong
Comment on Bill Mitchell on ‘MMT economists do not seek to enumerate how many angels can dance on the head of a pin’
Bill Mitchell characterizes the New Keynesian paradigm: “The summary point … is that the mainstream macroeconomics paradigm claim they are rigourous because they begin with a set of first principles based on stylised assumptions of human behaviour that no psychologist or sociologist would recognise. These assumptions about rationality and maximising strategies, individually pursued (devoid of social influence) are mathematically specified to allow a ‘solution’.”
Bill Mitchell then shows in detail that New Keynesianism is proto-scientific garbage: “One of the major issues with this approach is that it is inherently dishonest ― persuading us that it is scientific and worthy of authority yet being so compromised as to be worthless.”
So, clearly, there is no use in criticizing mainstream economics for the umpteenth time. The task is, as Joan Robinson put it: “Scrap the lot and start again”. This is what Bill Mitchell does: “Modern Monetary Theory (MMT) economists are clearly developing a new paradigm, which we believe is incommensurate with the old New Keynesian approach.” and “It is not an imaginary approach that deals with imaginary problems. It is about the real world and starts with some basic macroeconomic principles like ― spending equals income.”
Now, this was also Keynes' macroeconomic starting point and it is provably false. To recall: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, 1973, p. 63)
Both Keynes and MMTers got the foundational concepts wrong and from this follows that the whole theoretical superstructure is false and from this follows that Keynesian and MMT policy prescriptions have NO sound scientific foundations.
Macroeconomics has to be based on a set of objective and consistent axioms:
(A0) The objectively given and most elementary systemic configuration of the economy consists of the household sector 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.
The price P follows as the dependent variable under the conditions of budget-balancing, i.e. C=Yw, and market-clearing, i.e. X=O, as P=W/R, i.e. the market-clearing price is for a start equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
By lifting the condition of budget-balancing (i.e. spending equals income) one gets the saving/dissaving of the household sector as S≡Yw−C and the profit/loss of the business sector as Q≡C−Yw. S and Q are the balances of two flows. It holds Q≡−S, that is, the profit of the business sector is equal to dissaving/deficit-spending of the household sector and loss of the business sector is equal to saving of the household sector. This is the most elementary form of the macroeconomic Profit Law.
Profit Q is a balance, i.e. the difference of flows, and NOT a flow like wage income Yw. So, profit is NOT income. The Flow-Balance Inconsistency makes the whole of established economics proto-scientific garbage.
It is inadmissible to speak of profit/loss as a type of income. This blunder carries over to the concept of National Income and thus ruins National Accounting and the concept of GDP.#1
Because the foundational concepts of macroeconomics ― profit and income ― are ill-defined, the whole analytical superstructure is provably false. Economics is a failed science for 200+ years. MMT is no exception.