#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) August 4, 2025
The axiomatically correct macroeconomic Law of Supply and Demand tells one how ― in the elementary case ― the avg price P moves under the condition of market clearing as a function of avg wage rate W, inverse avg productivity R, and… pic.twitter.com/Tt961xKamp
Showing posts with label Monetarism. Show all posts
Showing posts with label Monetarism. Show all posts
August 4, 2025
Occasional Xs: Clueless economists / Money (XL)
July 23, 2025
Occasional Xs: The futile attempt to recycle Milton Friedman (XL)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) July 23, 2025
“Milton Friedman destroys the myth that inflation is caused by unions, consumers, or foreign countries. Inflation is made in Washington because only the government can create money.” (Students for Liberty)
Economics claims to be science but is NOT.… pic.twitter.com/NaTF0iMAed
March 4, 2025
Occasional Xs: Clueless economists / Inflation (XLIV)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) March 4, 2025
The axiomatically correct macroeconomic Law of Supply and Demand ⇓ tells one how ― in the elementary case ― the avg price P moves under the condition of market clearing as a function of avg wage rate W, inverse avg productivity R, and… pic.twitter.com/JoCiSW6RV7
September 21, 2024
Occasional Xs: Clueless economists / Inflation (XXXIII)
#LearnRealEconomics
— E.K-H (@AXECorg) September 21, 2024
The axiomatically correct macroeconomic #LawOfSupplyAndDemand ⇓ tells one how ― in the elementary case ― the avg #Price P moves under the condition of #MarketClearing as a function of avg #WageRate W, inverse #Productivity R, and… pic.twitter.com/NAicBB9585
May 19, 2023
Occasional Tweets: The history of economic thought is the history of scientific failure (X)
#FailedFakeScience
— E.K-H (@AXECorg) May 19, 2023
What determines the level of #AggregateProfit? #Keynes got macroeconomic #Profit wrong because he was too stupid for elementary #Algebra. Bc of this, #Economics is scientifically worthless to this day. #Monetarism is NO exception. ⇒https://t.co/ABFUc41eMs pic.twitter.com/4F88h3JBTw
January 10, 2022
Occasional Tweet: In essence, economics is the endless recycling of proto-scientific garbage
#Economics#FailedScience#FakeScience
— E.K-H (@AXECorg) January 10, 2022
Like #Walrasianism, #Keynesianism has been buried long ago at the Flat-Earth-Cemetery. #Keynes messed up #MacroEconomics because he was too stupid for elementary #Algebra.
Forget Keyneshttps://t.co/T6Y8aFo72J pic.twitter.com/t9uyU0fmvm
Related 'Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true'
For more about microfoundations see AXECquery.
For more about macrofoundations see AXECquery.
January 29, 2019
Here is the long-overdue scientific death certificate for Marx and Marxists
Comment on Michael Roberts on ‘Modern monetary theory ― part 1: Chartalism and Marx’
Blog-Reference and Blog-Reference
Michael Roberts evaluates the commonalities and differences between MMT and Marxianism. This is a futile exercise because both approaches are proto-scientific garbage. Let us prove this here for Marxianism. Marxianism is supposed to deliver the scientific foundations for the political doctrine of Marxism.
Michael Roberts summarizes: “Marx’s theory of money is specific to capitalism as a mode of production while MMT and Chartalism are ahistorical. For Marx, under capitalism, money is the representation of value and thus of surplus value. In M―C―P-C’―M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange but instead is the monetary representation of exchange value, or socially necessary labour time.”
There are some serious blunders in this account, more specifically, Marx’s theory of value and profit is false.#1, #2, #3 To see this, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.
As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e., the real wage is equal to the productivity. Under the initial condition of market-clearing X=O, the workers get the whole product.
Monetary profit/loss of the business sector is defined as Qm≡C−Yw, and monetary saving/dissaving of the household sector is defined as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal 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. Under the initial condition of budget-balancing C=Yw, total monetary profit is zero.
What is needed for a start is two things: (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii) a legal system that declares the central bank’s deposits as legal tender. This is the analytical interface to Chartalism.
Deposit money 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.
For the case of a balanced budget, C=Yw, the idealized transaction pattern of deposits/ overdrafts of the household sector at the central bank throughout one period is shown on AXEC98. #4
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money 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 (3) 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.
The transaction equation reads M=κWL in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. In a fiat money economy, growth is not hampered by a lack of a transaction medium. If the wage rate W is doubled, M doubles. Because of (1), the price P doubles and the real wage (2) remains unchanged. In this case, one gets a strict proportionality of M and P, which seems to confirm the Quantity Theory.
In sum, (i) money is NOT a commodity, (ii) there is NO fixed quantity of money, (iii) money is created and destroyed by the transactions between the household and the business sector, (iv) money is endogenous, (v) the value of money is given by W/P=R, i.e. is equal to the productivity, (vi) the creation of fiat money (= a generalized IOU) for the payment of wages is the correct way of bringing money into the economy, (vii) MMT’s deficit-spending is the incorrect way of bringing money into the economy, (viii) there is neither government-spending nor taxation needed to get the elementary production-consumption economy going and growing, (ix) if the rate of change of the wage rate W is equal to the rate of change of productivity R there is neither inflation nor deflation.
The elementary production-consumption economy has the following properties: (i) there is no exploitation, i.e. the workers get the whole product. (ii) there is no profit, (iii) there is no surplus value, i.e. whether the wage rate W is lowered or labor time L is extended does not matter, it always holds W/P=R, i.e. the workers get what they produce.
Where, then, does profit come from? The macroeconomic Profit Law Qm≡−Sm tells one that profit comes from dissaving, i.e. comes only into existence if the household sector spends more than its wage income, i.e. if C>Yw. In this case, Marx’s formula for the business sector holds, i.e. money M thrown into the circulation creates more money M’. This extra money, though, does NOT come from exploitation or surplus value but from deficit spending = growth of the household sector’s debt. This process is reversed as soon as the household sector starts to redeem the debt. Then profit turns into loss and capitalism breaks down.
The same holds for the deficit spending of the government sector.#5
This is Michael Roberts characterization of how capitalism works: “Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour power (and its exploitation), eventually delivers new value that is realised in more money capital.”
This is pure proto-scientific garbage. From Marx onward to Michael Roberts, Marxians never had any idea of how the monetary economy works. Michael Roberts is so stupid that he does not even realize that MMT is a program for the permanent self-alimentation of the Oligarchy. As an anti-capitalist, you cannot sink deeper.
Egmont Kakarot-Handtke
#1 Profit for Marxists
#2 Capitalism, poverty, exploitation, and cross-over exploitation
#3 If we only had classes
#4 Wikimedia, Idealized transaction pattern
#5 Stephanie Kelton on how to become fabulously wealthy
Related 'Karl Marx, fake scientist' and 'Marx’s bicentennial ― nothing to discuss, nothing to celebrate' and 'The Law of Economists’ Increasing Stupidity' and 'Marx and the curious coexistence of provably false economic theories' and 'Marx, the moron' and 'Confounding sociology and economics' and 'MMT and Marxism: A debate between proto-scientific zombies' and '200 years in the dark ― how Marx got it wrong' and 'Marx and Marxists ― too stupid for the elementary algebra of profit' and 'Note on ‘Duncan Foley On Socialist Alternatives to Capitalism’'. For details of the big picture see cross-references Profit.
Wikimedia AXEC143f Macroeconomic Profit Law with the increasing complexity of the economy
Blog-Reference and Blog-Reference
Michael Roberts evaluates the commonalities and differences between MMT and Marxianism. This is a futile exercise because both approaches are proto-scientific garbage. Let us prove this here for Marxianism. Marxianism is supposed to deliver the scientific foundations for the political doctrine of Marxism.
Michael Roberts summarizes: “Marx’s theory of money is specific to capitalism as a mode of production while MMT and Chartalism are ahistorical. For Marx, under capitalism, money is the representation of value and thus of surplus value. In M―C―P-C’―M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange but instead is the monetary representation of exchange value, or socially necessary labour time.”
There are some serious blunders in this account, more specifically, Marx’s theory of value and profit is false.#1, #2, #3 To see this, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.
As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e., the real wage is equal to the productivity. Under the initial condition of market-clearing X=O, the workers get the whole product.
Monetary profit/loss of the business sector is defined as Qm≡C−Yw, and monetary saving/dissaving of the household sector is defined as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal 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. Under the initial condition of budget-balancing C=Yw, total monetary profit is zero.
What is needed for a start is two things: (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii) a legal system that declares the central bank’s deposits as legal tender. This is the analytical interface to Chartalism.
Deposit money 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.
For the case of a balanced budget, C=Yw, the idealized transaction pattern of deposits/ overdrafts of the household sector at the central bank throughout one period is shown on AXEC98. #4
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money 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 (3) 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.
The transaction equation reads M=κWL in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. In a fiat money economy, growth is not hampered by a lack of a transaction medium. If the wage rate W is doubled, M doubles. Because of (1), the price P doubles and the real wage (2) remains unchanged. In this case, one gets a strict proportionality of M and P, which seems to confirm the Quantity Theory.
In sum, (i) money is NOT a commodity, (ii) there is NO fixed quantity of money, (iii) money is created and destroyed by the transactions between the household and the business sector, (iv) money is endogenous, (v) the value of money is given by W/P=R, i.e. is equal to the productivity, (vi) the creation of fiat money (= a generalized IOU) for the payment of wages is the correct way of bringing money into the economy, (vii) MMT’s deficit-spending is the incorrect way of bringing money into the economy, (viii) there is neither government-spending nor taxation needed to get the elementary production-consumption economy going and growing, (ix) if the rate of change of the wage rate W is equal to the rate of change of productivity R there is neither inflation nor deflation.
The elementary production-consumption economy has the following properties: (i) there is no exploitation, i.e. the workers get the whole product. (ii) there is no profit, (iii) there is no surplus value, i.e. whether the wage rate W is lowered or labor time L is extended does not matter, it always holds W/P=R, i.e. the workers get what they produce.
Where, then, does profit come from? The macroeconomic Profit Law Qm≡−Sm tells one that profit comes from dissaving, i.e. comes only into existence if the household sector spends more than its wage income, i.e. if C>Yw. In this case, Marx’s formula for the business sector holds, i.e. money M thrown into the circulation creates more money M’. This extra money, though, does NOT come from exploitation or surplus value but from deficit spending = growth of the household sector’s debt. This process is reversed as soon as the household sector starts to redeem the debt. Then profit turns into loss and capitalism breaks down.
The same holds for the deficit spending of the government sector.#5
This is Michael Roberts characterization of how capitalism works: “Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour power (and its exploitation), eventually delivers new value that is realised in more money capital.”
This is pure proto-scientific garbage. From Marx onward to Michael Roberts, Marxians never had any idea of how the monetary economy works. Michael Roberts is so stupid that he does not even realize that MMT is a program for the permanent self-alimentation of the Oligarchy. As an anti-capitalist, you cannot sink deeper.
Egmont Kakarot-Handtke
#1 Profit for Marxists
#2 Capitalism, poverty, exploitation, and cross-over exploitation
#3 If we only had classes
#4 Wikimedia, Idealized transaction pattern
#5 Stephanie Kelton on how to become fabulously wealthy
Related 'Karl Marx, fake scientist' and 'Marx’s bicentennial ― nothing to discuss, nothing to celebrate' and 'The Law of Economists’ Increasing Stupidity' and 'Marx and the curious coexistence of provably false economic theories' and 'Marx, the moron' and 'Confounding sociology and economics' and 'MMT and Marxism: A debate between proto-scientific zombies' and '200 years in the dark ― how Marx got it wrong' and 'Marx and Marxists ― too stupid for the elementary algebra of profit' and 'Note on ‘Duncan Foley On Socialist Alternatives to Capitalism’'. For details of the big picture see cross-references Profit.
***
The macro accounting graph AXEC198b shows how the business sector's stock of money increases. It explains (for the most elementary case of a production-consumption economy) Marx's famous formula of how capitalists use money M in order to get more money M' i.e. M―C―M'.
September 24, 2018
Economics as tireless production of proto-scientific garbage: inflation theory as an example
Comment on Brian Romanchuk on ‘Primer: Understanding The Post-Keynesian Rejection Of Mainstream Inflation Theory’
Blog-Reference and Blog-Reference and Blog-Reference
Economics is a failed/fake science or what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. The pluralism of provably false theories is evidence of the representative economist’s scientific incompetence.
After 200+ years, there is still no such thing as a valid profit-, employment-, or inflation theory, there is always a whole bunch of theories/models and everyone is free to pick the one that suits him politically. This guarantees that economics has remained what it is since the founding fathers: a brain-dead talk show.
Brian Romanchuk gives a vivid description of how economists produce their proto-scientific garbage: “So imagine that your boss tells you to come up with ‘an inflation model’ for some country (which is a pretty common demand for employees of central banks or investment firms). According to the Post-Keynesian theory, the ‘correct’ answer is to respond that inflation is a historical accident. However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”
This characterization of the representative economist fits the definition of a pseudo-inquirer: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)
There is no use to untangle the multiple idiocies in Brian Romanchuk’s treatment of inflation theory. What has to be done is to replace his blather with the scientifically correct approach.
In order to go back to the basics, the elementary production-consumption economy is for a start clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Qm≡C−Yw, saving/dissaving Sm≡Yw−C).
Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market-clearing price is derived for a start as P=W/R (i). So, the macroeconomic price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R.
The average stock of transaction money follows for a start as M=κYw, with κ determined by the payment pattern. In other words, the quantity of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. This, to begin with, kills the commonplace Quantity Theory of inflation.#1, #2
The market-clearing price is given in the general case with the macroeconomic Law of Supply and Demand P = ρEW⁄R (ii), with ρE≡C/Yw.#3 An expenditure ratio ρE greater than 1 indicates credit expansion = dissaving, a ratio ρE less than 1 the opposite. In the initial period ρE=1, i.e. the household sector’s budget is balanced. The ratio ρE establishes the link between the product market and the money/capital market.
Now we have deficit spending, i.e. ρE greater than 1, which yields a price hike. If deficit spending is repeated period after period, the price remains at the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase. The same holds for the government sector.#4
The macroeconomic Law of Supply and Demand makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the original Phillips Curve.#5
The explanation for the fact that inflation in the USA has been some time below the FED’s target value of 2 percent is that the rate of change of the average wage rate has been lower than the rate of change of productivity. Things become a bit more complex, of course, when foreign trade, investment etcetera are taken into account. This does not change the fact that the core of inflation theory is given with eq. (ii). This tiny equation fully replaces Brian Romanchuk’s gigantic heap of proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Inflation: back to basics
#2 Attention: there are THREE types of inflation
#3 Wikimedia AXEC101 Macroeconomic Law of Supply and Demand
#4 Gov-Deficits do NOT cause inflation
#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia
You are obviously deep in the woods. The issue is inflation theory, but now you are at employment theory. The former has already been treated above, for the latter see
Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
Essentials of Constructive Heterodoxy: Employment
It would be a good thing if economists could get economic theory right before they pester the world with their brain-dead policy proposals: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum) … or senseless blather.
You say: “There is also the ‘structuralist’ approach to inflation.” Indeed, almost everybody has an opinion about inflation. The problem is that the goal of science is NOT to have many contradicting opinions but the one materially/formally consistent theory: “That the settlement of opinion is the sole end of inquiry is a very important proposition.” (Peirce)
Post-Keynesianism has been refuted long ago,#1 hence there is no use to try to reanimate post-Keynesian inflation theory or to produce one more roll of proto-scientific garbage.
#1 Why Post Keynesianism Is Not Yet a Science
You say: “Within modern conventional economics, there is an aversion to discussing the division of national income. (Back when economics was ‘political economy,’ this was not the case.) Standard mainstream models assume that wages and prices are determined by marginal considerations, and so the ratio between wages and prices is fixed by the shape of the production function. Conversely, post-Keynesian economics is entirely based on wage and profit shares. Although I did not discuss pricing in the articles, I would refer the reader back to my (three-part) primer on the Kalecki Profit Equation.”
There are three lethal facts to note with regard to your approach:
• The profit theory is false since Adam Smith and because of this, distribution theory is false, too. This includes Post-Keynesianism.#1, #2, #3, #4
• Your ‘very simple economic model, in which there is just a business sector and a household sector’ is a good start except for the fact that ‘Profits are equal to the dividends paid’.#5
• Because profit is ill-defined, income is ill-defined, and as a consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income but the difference of flows. Distributed profit is income but profit is NOT income. Distributed profit and profit are NOT the same thing. By consequence, total income is NOT the sum of wages and profits, which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”.#6
This means that the sequel to your inflation post is also a vacuous blather because all is based on false premises. Your profit theory is provably false.#7 Therefore, your distribution and inflation theory are false, too. What you still have to realize is that Orthodoxy is dead and traditional Heterodoxy including Post-Keynesianism is dead and that the necessary paradigm shift means to leave this heap of proto-scientific garbage behind and move on to Constructive Heterodoxy.#8
#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Ricardo, too, got profit theory wrong
#3 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#4 Why Post Keynesianism Is Not Yet a Science
#5 The Emergence of Profit and Interest in the Monetary Circuit
#6 There is NO such thing as a “labor share of income”
#7 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#8 For details see cross-references Constructive Heterodoxy
You say: “Fine. When you can convince the accounting profession that paying dividends is an expense, I’ll re-write my text. Deal?”
I wonder, what makes you think that my mission is to convince economists in general and you in particular. The representative economist is a failed/fake scientist and has to be expelled from the sciences as fast as possible. His final resting place is the farthest corner of the Flat-Earth-Cemetery.
My mission is NOT to convince you of anything but to prove that you are too stupid for the elementary mathematics that underlies profit- and distribution theory.
For the correct treatment of distributed profit in National Accounting see
The Common Error of Common Sense: An Essential Rectification of the Accounting Approach.
For the correct treatment of profit and distributed profit in distribution theory see
Income Distribution, Profit, and Real Shares.
Quod erat demonstrandum.
You say: “If there were profit sharing arrangements with workers, then how might that affect inflation?”
If you were a serious researcher you would have checked Google and found out that your question has already been answered.#1
Distributed profit is itself a source of profit. The Profit Law for the elementary case of the production-consumption economy reads Qm≡Yd−Sm. Yd is distributed profit.#2
For the case of the investment economy, the Profit Law reads Qre≡I−Sm which is known since Allais.#3 Qre is macroeconomic retained profit.
Profit distribution/spending causes a one-off price hike but NO inflation.#4, #5
Just in case you and Brian Romanchuk start to wonder why you are so badly behind the curve, the problem is NOT in economics but in your goldfish brain and the corresponding complete lack of scientific competence.
#1 Enter in the Google search field “distributed profit Egmont Kakarot-Handtke”
#2 Profit Theory in less than 5 minutes
#3 How Keynes got macro wrong and Allais got it right
#4 The Structural Price Mechanism
#5 The final implosion of MMT
You say: “I forgot what a relable source you are. My bad.”
It is too obvious that you are a fake mathematician. A genuine mathematician does not care at all about “reliability” or “credibility” or other subjective social criteria but alone about objective proof.
If you had done the routine job of a competent scientist you would have found out two things:
(i) The equation Qre≡I−Sm is logically true given the correct macroeconomic axioms and is objectively testable because all variables are measurable with the precision of two decimal places.
(ii) That this equation has been derived independently by Allais on a different route.#1
According to Wikipedia, Allais was a major proponent of mathematical economics and as a winner of the economics Nobel in 1988 he certainly satisfies your standard of “reliability”.
So, what you would have done as a genuine mathematician is to check the references and then to perform a little exercise in elementary algebra. The fact is that you are a scientifically incompetent blatherer.
#1 How Keynes got macro wrong and Allais got it right
You say: “I suggest that you give this article a rest. Please wait until I write another article before regurgitating your stories.”
There is no need to produce another heap of proto-scientific garbage. Either you present the proof that the Allais/AXEC equation Qre≡I−Sm is materially/logically inconsistent or you shut up completely.
Keynesianism and I=S/IS-LM are dead for 80+ years but the representative economist still doesn’t get it.#1,#2 There is no refutation of the axiomatically correct Profit Law, though.#3 So, what should anybody wait for? Failed/fake scientists are simply left behind the curve.#4
#1 Why Post Keynesianism Is Not Yet a Science
#2 Economists simply don’t get it
#3 Go! ― test the Profit and Employment Law
#4 Forget mainstream economics, scrap MMT, move on to the new Paradigm
Blog-Reference and Blog-Reference and Blog-Reference
Economics is a failed/fake science or what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. The pluralism of provably false theories is evidence of the representative economist’s scientific incompetence.
After 200+ years, there is still no such thing as a valid profit-, employment-, or inflation theory, there is always a whole bunch of theories/models and everyone is free to pick the one that suits him politically. This guarantees that economics has remained what it is since the founding fathers: a brain-dead talk show.
Brian Romanchuk gives a vivid description of how economists produce their proto-scientific garbage: “So imagine that your boss tells you to come up with ‘an inflation model’ for some country (which is a pretty common demand for employees of central banks or investment firms). According to the Post-Keynesian theory, the ‘correct’ answer is to respond that inflation is a historical accident. However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”
This characterization of the representative economist fits the definition of a pseudo-inquirer: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)
There is no use to untangle the multiple idiocies in Brian Romanchuk’s treatment of inflation theory. What has to be done is to replace his blather with the scientifically correct approach.
In order to go back to the basics, the elementary production-consumption economy is for a start clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Qm≡C−Yw, saving/dissaving Sm≡Yw−C).
Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market-clearing price is derived for a start as P=W/R (i). So, the macroeconomic price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R.
The average stock of transaction money follows for a start as M=κYw, with κ determined by the payment pattern. In other words, the quantity of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. This, to begin with, kills the commonplace Quantity Theory of inflation.#1, #2
The market-clearing price is given in the general case with the macroeconomic Law of Supply and Demand P = ρEW⁄R (ii), with ρE≡C/Yw.#3 An expenditure ratio ρE greater than 1 indicates credit expansion = dissaving, a ratio ρE less than 1 the opposite. In the initial period ρE=1, i.e. the household sector’s budget is balanced. The ratio ρE establishes the link between the product market and the money/capital market.
Now we have deficit spending, i.e. ρE greater than 1, which yields a price hike. If deficit spending is repeated period after period, the price remains at the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase. The same holds for the government sector.#4
The macroeconomic Law of Supply and Demand makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the original Phillips Curve.#5
The explanation for the fact that inflation in the USA has been some time below the FED’s target value of 2 percent is that the rate of change of the average wage rate has been lower than the rate of change of productivity. Things become a bit more complex, of course, when foreign trade, investment etcetera are taken into account. This does not change the fact that the core of inflation theory is given with eq. (ii). This tiny equation fully replaces Brian Romanchuk’s gigantic heap of proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Inflation: back to basics
#2 Attention: there are THREE types of inflation
#3 Wikimedia AXEC101 Macroeconomic Law of Supply and Demand
#4 Gov-Deficits do NOT cause inflation
#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia
***
REPLY to Joe Leote, Jerry Brown on Sep 26You are obviously deep in the woods. The issue is inflation theory, but now you are at employment theory. The former has already been treated above, for the latter see
Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
Essentials of Constructive Heterodoxy: Employment
It would be a good thing if economists could get economic theory right before they pester the world with their brain-dead policy proposals: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum) … or senseless blather.
***
REPLY to Crossover on Sep 26You say: “There is also the ‘structuralist’ approach to inflation.” Indeed, almost everybody has an opinion about inflation. The problem is that the goal of science is NOT to have many contradicting opinions but the one materially/formally consistent theory: “That the settlement of opinion is the sole end of inquiry is a very important proposition.” (Peirce)
Post-Keynesianism has been refuted long ago,#1 hence there is no use to try to reanimate post-Keynesian inflation theory or to produce one more roll of proto-scientific garbage.
#1 Why Post Keynesianism Is Not Yet a Science
***
REPLY to Brian Romanchuk on Sep 28 and Blog-ReferenceYou say: “Within modern conventional economics, there is an aversion to discussing the division of national income. (Back when economics was ‘political economy,’ this was not the case.) Standard mainstream models assume that wages and prices are determined by marginal considerations, and so the ratio between wages and prices is fixed by the shape of the production function. Conversely, post-Keynesian economics is entirely based on wage and profit shares. Although I did not discuss pricing in the articles, I would refer the reader back to my (three-part) primer on the Kalecki Profit Equation.”
There are three lethal facts to note with regard to your approach:
• The profit theory is false since Adam Smith and because of this, distribution theory is false, too. This includes Post-Keynesianism.#1, #2, #3, #4
• Your ‘very simple economic model, in which there is just a business sector and a household sector’ is a good start except for the fact that ‘Profits are equal to the dividends paid’.#5
• Because profit is ill-defined, income is ill-defined, and as a consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income but the difference of flows. Distributed profit is income but profit is NOT income. Distributed profit and profit are NOT the same thing. By consequence, total income is NOT the sum of wages and profits, which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”.#6
This means that the sequel to your inflation post is also a vacuous blather because all is based on false premises. Your profit theory is provably false.#7 Therefore, your distribution and inflation theory are false, too. What you still have to realize is that Orthodoxy is dead and traditional Heterodoxy including Post-Keynesianism is dead and that the necessary paradigm shift means to leave this heap of proto-scientific garbage behind and move on to Constructive Heterodoxy.#8
#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Ricardo, too, got profit theory wrong
#3 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#4 Why Post Keynesianism Is Not Yet a Science
#5 The Emergence of Profit and Interest in the Monetary Circuit
#6 There is NO such thing as a “labor share of income”
#7 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#8 For details see cross-references Constructive Heterodoxy
***
REPLY to Brian Romanchuk on Sep 28 and Blog-ReferenceYou say: “Fine. When you can convince the accounting profession that paying dividends is an expense, I’ll re-write my text. Deal?”
I wonder, what makes you think that my mission is to convince economists in general and you in particular. The representative economist is a failed/fake scientist and has to be expelled from the sciences as fast as possible. His final resting place is the farthest corner of the Flat-Earth-Cemetery.
My mission is NOT to convince you of anything but to prove that you are too stupid for the elementary mathematics that underlies profit- and distribution theory.
For the correct treatment of distributed profit in National Accounting see
The Common Error of Common Sense: An Essential Rectification of the Accounting Approach.
For the correct treatment of profit and distributed profit in distribution theory see
Income Distribution, Profit, and Real Shares.
Quod erat demonstrandum.
***
REPLY to stone on Oct 1You say: “If there were profit sharing arrangements with workers, then how might that affect inflation?”
If you were a serious researcher you would have checked Google and found out that your question has already been answered.#1
Distributed profit is itself a source of profit. The Profit Law for the elementary case of the production-consumption economy reads Qm≡Yd−Sm. Yd is distributed profit.#2
For the case of the investment economy, the Profit Law reads Qre≡I−Sm which is known since Allais.#3 Qre is macroeconomic retained profit.
Profit distribution/spending causes a one-off price hike but NO inflation.#4, #5
Just in case you and Brian Romanchuk start to wonder why you are so badly behind the curve, the problem is NOT in economics but in your goldfish brain and the corresponding complete lack of scientific competence.
#1 Enter in the Google search field “distributed profit Egmont Kakarot-Handtke”
#2 Profit Theory in less than 5 minutes
#3 How Keynes got macro wrong and Allais got it right
#4 The Structural Price Mechanism
#5 The final implosion of MMT
***
REPLY to Brian Romanchuk on Oct 2 and Blog-ReferenceYou say: “I forgot what a relable source you are. My bad.”
It is too obvious that you are a fake mathematician. A genuine mathematician does not care at all about “reliability” or “credibility” or other subjective social criteria but alone about objective proof.
If you had done the routine job of a competent scientist you would have found out two things:
(i) The equation Qre≡I−Sm is logically true given the correct macroeconomic axioms and is objectively testable because all variables are measurable with the precision of two decimal places.
(ii) That this equation has been derived independently by Allais on a different route.#1
According to Wikipedia, Allais was a major proponent of mathematical economics and as a winner of the economics Nobel in 1988 he certainly satisfies your standard of “reliability”.
So, what you would have done as a genuine mathematician is to check the references and then to perform a little exercise in elementary algebra. The fact is that you are a scientifically incompetent blatherer.
#1 How Keynes got macro wrong and Allais got it right
***
REPLY to Brian Romanchuk on Oct 2You say: “I suggest that you give this article a rest. Please wait until I write another article before regurgitating your stories.”
There is no need to produce another heap of proto-scientific garbage. Either you present the proof that the Allais/AXEC equation Qre≡I−Sm is materially/logically inconsistent or you shut up completely.
Keynesianism and I=S/IS-LM are dead for 80+ years but the representative economist still doesn’t get it.#1,#2 There is no refutation of the axiomatically correct Profit Law, though.#3 So, what should anybody wait for? Failed/fake scientists are simply left behind the curve.#4
#1 Why Post Keynesianism Is Not Yet a Science
#2 Economists simply don’t get it
#3 Go! ― test the Profit and Employment Law
#4 Forget mainstream economics, scrap MMT, move on to the new Paradigm
July 28, 2018
The Magic Money Tree is real ― too bad that the magic is a fraud
Comment on Tom Hickey/Ben Wray on ‘The magic money tree is real: Treasury confirms taxes are not needed to fund government spending’
Blog-Reference
The often repeated argument goes as follows: “While it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money, allowing governments to increase spending or reduce taxation, without raising the corresponding financing from the private sector, there is a risk that money financing could rapidly undermine the stability of inflation expectations.”
It is true and known since time immemorial that governments can do deficit-spending/money-creation. It is NOT true that this causes inflation.#1 However, it is true that increased deficit-spending/money-creation causes a profit explosion and as a consequence an extremely unequal distribution of income/financial wealth.#2
Because of the Profit Law, which entails Public Deficit = Private Profit, the Magic Money Tree magically benefits WeTheOligarchy but NOT WeThePeople. As long as MMT academics use the Magic-Money-Tree metaphor in their seminars they are doing junk economics just like their Walrasian, Keynesian, Marxian, and Austrian colleagues. To the extent that MMTers use the Magic-Money-Tree metaphor in discussions with the general public they are committing political fraud and scientific suicide.#3, #4. #5, #6
The magic of the Magic Money Tree consists of WeThePeople unintentionally sponsoring the WeTheOligarchy which in turn sponsors WeTheAcademics which in turn communicates the Magic-Money-Tree story to WeThePeople.
Egmont Kakarot-Handtke
#1 MMT and the inflation-red-herring
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 MMT is criminal economics
#4 The Kelton-Fraud
#5 Richard Murphy: the MMT fraudster dressed up as realist
#6 For the full-spectrum refutation of MMT see cross-references MMT
Related 'MMTers make capitalism work' and 'MMT: How mathematical incompetence helps the Kelton-Fraud' and 'MMT: A new myth for WeThePeople'.
“Empirical/historical data demonstrates that future generations do not suffer higher taxes in order to pay back past deficits.”
A scientist realizes immediately that this statement is self-contradictory. There is no historical data for the future. It holds Public Debt = Deferred Taxes.
The relationship between economics and science is roughly the same as between a pit latrine and a cathedral. This holds, of course, for MMT in general and you personally.#1
#1 For the full-spectrum refutation of MMT see cross-references MMT
From Adam Smith/Karl Marx onward, economics claims to be not only science but sciences: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.
How many sciences is economics? Zero! Economics is what Feynman called a cargo cult science.
Science is knowledge about how the universe or some greater or smaller part of it works. Scientific knowledge takes the form of a consistent theory “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant) A theory is the best mental representation of reality that is humanly possible. The rest of human communication is opinion, gossip, propaganda, and piffle, and cannot be taken seriously.
A theory is NOT about singular historical events but about invariances that apply always and everywhere. Example: The First Defenestration of Prague involved the killing of seven members of the city council by throwing them out of the window on 30 July 1419. The Law of Falling Bodies says d=½gt2 and it applies to the members of the city council of Prague and to the moon and to the cannonballs that Galileo threw off the Leaning Tower of Pisa and to the falling feather in a vacuum and to the apple that hit Newton’s head. Scientists abstract from all historical and practical details which are so dear to the commonsenser.
The subject matter of economics is the monetary economy but economists have to this day not figured out how the price- and profit mechanism works and whether the system is inherently stable/unstable. This holds for Walrasianism, Keynesianism, Marxianism, Austrianism, and also for MMT. All these approaches are materially and formally inconsistent.
Inconsistency has been proven for the MMT balances equation.#1 This proof is sufficient to refute MMT as a whole. MMTers, of course, do not understand/accept this. To ignore refutation and simply continue talking BS is the standard operating procedure in economics. Because of this, it is NOT impolite but a statement of fact to summarize that MMTers in general, and Matt Franko/Tom Hickey, in particular, are stupid or corrupt or both. That both have a university degree casts a negative light on their respective universities.#2, #3
#1 For the full-spectrum refutation of MMT see cross-references MMT
#2 Cryptoeconomics ― the best of Bill Mitchell’s spam folder
#3 The Kelton-Fraud
REPLY to Tom Hickey, jrbarch, Matt Franko on Aug 4
Stop blathering about scientific methodology in general and answer one simple/real/ practical/concrete/relevant economic question.
This is the sectoral balances equation the MMT salesforce presents on any occasion (i) (X−M)+(G−T)+(I−S)=0.
This is the axiomatically correct balances equation (ii) (X−M)+(G−T)+(I−S)−(Q−Yd)=0.
Both equations consist of variables that are measurable with the precision of two decimal places.
Question: Which of the two macroeconomic equations is materially/formally consistent? Just answer with (i) or (ii).
REPLY to Andrew Anderson on Aug 4
The Bible says: “But let your ‘Yes’ be ‘Yes,’ and your ‘No,’ ‘No.’ For whatever is more than these is from the evil one.”
So, stop blathering and answer with (i) or (ii) lest the evil one will get you as he has already gotten the blatherers Tom Hickey, jrbarch, and Matt Franko.
You say: “The first [equation] is an accounting identity. The second is an axiom. There’s a difference.”
Indeed, there is a vast difference. Unfortunately, you do not understand it. The often heard sentence ‘This is an accounting identity’ is one of the most idiotic assertions in economics. For proof see the comment on the Wikipedia entry Accounting Identity Wikipedia and the promotion of economists’ idiotism
The most elementary accounting identity is Qm≡−Sm and from this follows immediately that the MMT balances equation is false and from this follows immediately that the whole of MMT is false and from this follows immediately that all MMTers are either stupid or corrupt or both.
The methodologically relevant quote from Aristotle reads: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Wikipedia)
The certain, true, and primary economic premises are given with the set of macroeconomic axioms.#1
From these premises formally follows the testable conclusion (X−M)+(G−T)+(I−S)−(Q−Yd)=0.
From this, in turn, follows immediately that the MMT balances equation is false. And from this finally follows that the whole of MMT is scientifically unacceptable.
To copy/paste Aristotle from the Stanford Encyclopedia is neither philosophy nor science. The point is how to apply Aristotle’s methodology to economics. And here the wannabe philosopher Tom Hickey fails badly.
#1 Wikimedia, New Foundations of Economics
Your attempt to avoid the admission that the MMT balances equation has been conclusively proven to be materially/formally inconsistent is silly and futile.
The fact is that MMT is NOT a scientifically valid theory but academic snake oil.#1, #2, #3, #4
As a consequence, the actual task is NOT to convince any MMTer of anything but to throw these fake scientists and their social media sales trolls without further ado out of science and the econblogosphere.
#1 MMT: Academic snake oil for the people
#2 The Kelton-Fraud
#3 Richard Murphy: the MMT fraudster dressed up as realist
#4 MMT and grassroots movements
This thread is about the economic implications of public deficits and how the conventional and the MMT view on this important issue differ.
Now, re-read your posts. They are consistently off-topic and entirely vacuous.
The main and direct effect of public deficit spending is, according to the macroeconomic Profit Law, on the business sector’s profit. There can be secondary effects on employment or prices but the primary and absolutely certain effect is on distribution.
So, people who argue for deficit-spending/money-creation argue ― whether they are aware of it or not does NOT matter ― for the agenda of the one-percenters.
To be sure, this is legitimate in the political realm. Free speech means practically also free speech for imbeciles, crooks, madmen, liars, detractors, warmongers, etcetera with the vague hope that in the course of the discussion error and fraud will be successively eliminated and that eventually, truth prevails. In the scientific realm, it is not sufficient to have an opinion, what is expected is a contribution to the growth of certain knowledge with certainty established by rigorous material and formal proof.
The observable unequal distribution of income and financial wealth is the empirical proof (i) of the Profit Law, and (ii), that the deficit-agenda-pushing from Keynes to Lerner to MMT to Trump has been successful beyond the wildest dreams.
What our discussion clearly shows is:
The good thing that can be said about the Mike Norman Economics blog is that it does not directly block/suppress the refutation of MMT but only tries to bury it under a massive heap of philosophical shit. Compared to the rest of the politically corrupted econblogosphere, the Mike Norman Economics blog is a beacon of free speech.
Bob argues: “One argument in favor of welfare is that money given to individuals will end up as increased sales for businesses. The same would apply to a UBI or a JG that results in income for consumers who then distribute it to businesses. The purpose of these schemes is to help individuals; that it increases the business’s sector profit is secondary.”
You folks simply do not get it. Roughly speaking, if welfare is paid for by taxes, then, in the most elementary case, the spending of the taxed goes down and the spending of the welfare recipients goes up by the same amount. The effect on macroeconomic profit is ZERO.
If, on the other hand, the welfare is provided by deficit-spending/money-creation then macroeconomic profit goes UP by exactly the same amount. Because of this, MMT social programs are nothing but a cover for the self-alimentation of the Oligarchy.
Bob argues: “The sum of spending on different programs for various purposes has precious little to do with economics, let alone science.”
Again false. There is a second way to increase welfare expenditures, that is, by changing the composition on the expenditure side and keeping the volume of the budget and taxes constant. It is well known that by reducing military spending one can finance any social program for any number of years. Reducing military spending and increasing welfare spending by the same amount leaves macroeconomic profit unchanged.
So, as a matter of principle, social spending can be increased without increasing macroeconomic profit. But that is NOT MMT policy. MMT social policy, i.e. deficit-spending/money-creation is designed to increase macroeconomic profit. Clearly, MMT's social policy is a fraud.
In fact, things are politically worse. The constant mockery of the simple-minded balanced-budget folks obscures the fact that the main argument against credit-financed government spending came from the philosopher Kant. Kant realized that there is a rather obvious connection between deficit-spending/growth of government debt and war. Therefore, in his essay Zum Ewigen Frieden. Ein philosophischer Entwurf = Perpetual Peace: A Philosophical Sketch under #4 Kant ruled out deficit-spending: “National debts shall not be contracted with a view to the external friction of states”.
Needless to emphasize war/military spending has always been the main driver of public debt: “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by ‘political economy’ a ‘branch of the science of the statesman or legislator’, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt through the conquest of her colonial Empire.” (Halévy)
So, the classical balanced-budget hawks were NOT social sadists hell-bent on torturing the poor in the name of austerity. Kant’s prohibition of deficit spending was clearly aimed a the warmongers.
Whether you are aware of it or not does not matter: as promoters of MMT you are pushing the agenda of the oligarchy in general and of the war-mongers among them in particular. MMT is NOT a scientifically valid economy theory but a political bluff package. The philosopher Tom Hickey as MMT's chief ideologue is a living example of how degenerated and corrupt philosophy has become since Kant.
You say: “Yet some fiat creation is needed to keep up with population growth since SOME risk-free savings are legitimate as needed liquidity and initial capital formation. The question then is how fiat shall be created in a way that does not deny citizens equal protection under the law …”
Yes, indeed. The correct way for the central bank to inject fiat money into the economy is by financing a growing wage bill. The incorrect way is the counterfeit-money printer's way.#1, #2
#1 The MMT-Yawner: Government is not a household
#2 MMT is criminal economics
Blog-Reference
The often repeated argument goes as follows: “While it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money, allowing governments to increase spending or reduce taxation, without raising the corresponding financing from the private sector, there is a risk that money financing could rapidly undermine the stability of inflation expectations.”
It is true and known since time immemorial that governments can do deficit-spending/money-creation. It is NOT true that this causes inflation.#1 However, it is true that increased deficit-spending/money-creation causes a profit explosion and as a consequence an extremely unequal distribution of income/financial wealth.#2
Because of the Profit Law, which entails Public Deficit = Private Profit, the Magic Money Tree magically benefits WeTheOligarchy but NOT WeThePeople. As long as MMT academics use the Magic-Money-Tree metaphor in their seminars they are doing junk economics just like their Walrasian, Keynesian, Marxian, and Austrian colleagues. To the extent that MMTers use the Magic-Money-Tree metaphor in discussions with the general public they are committing political fraud and scientific suicide.#3, #4. #5, #6
The magic of the Magic Money Tree consists of WeThePeople unintentionally sponsoring the WeTheOligarchy which in turn sponsors WeTheAcademics which in turn communicates the Magic-Money-Tree story to WeThePeople.
Egmont Kakarot-Handtke
#1 MMT and the inflation-red-herring
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 MMT is criminal economics
#4 The Kelton-Fraud
#5 Richard Murphy: the MMT fraudster dressed up as realist
#6 For the full-spectrum refutation of MMT see cross-references MMT
Related 'MMTers make capitalism work' and 'MMT: How mathematical incompetence helps the Kelton-Fraud' and 'MMT: A new myth for WeThePeople'.
***
REPLY to Matt Franko on Jul 3“Empirical/historical data demonstrates that future generations do not suffer higher taxes in order to pay back past deficits.”
A scientist realizes immediately that this statement is self-contradictory. There is no historical data for the future. It holds Public Debt = Deferred Taxes.
The relationship between economics and science is roughly the same as between a pit latrine and a cathedral. This holds, of course, for MMT in general and you personally.#1
#1 For the full-spectrum refutation of MMT see cross-references MMT
***
REPLY to Matt Franko, Tom Hickey on Aug 3From Adam Smith/Karl Marx onward, economics claims to be not only science but sciences: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.
How many sciences is economics? Zero! Economics is what Feynman called a cargo cult science.
Science is knowledge about how the universe or some greater or smaller part of it works. Scientific knowledge takes the form of a consistent theory “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant) A theory is the best mental representation of reality that is humanly possible. The rest of human communication is opinion, gossip, propaganda, and piffle, and cannot be taken seriously.
A theory is NOT about singular historical events but about invariances that apply always and everywhere. Example: The First Defenestration of Prague involved the killing of seven members of the city council by throwing them out of the window on 30 July 1419. The Law of Falling Bodies says d=½gt2 and it applies to the members of the city council of Prague and to the moon and to the cannonballs that Galileo threw off the Leaning Tower of Pisa and to the falling feather in a vacuum and to the apple that hit Newton’s head. Scientists abstract from all historical and practical details which are so dear to the commonsenser.
The subject matter of economics is the monetary economy but economists have to this day not figured out how the price- and profit mechanism works and whether the system is inherently stable/unstable. This holds for Walrasianism, Keynesianism, Marxianism, Austrianism, and also for MMT. All these approaches are materially and formally inconsistent.
Inconsistency has been proven for the MMT balances equation.#1 This proof is sufficient to refute MMT as a whole. MMTers, of course, do not understand/accept this. To ignore refutation and simply continue talking BS is the standard operating procedure in economics. Because of this, it is NOT impolite but a statement of fact to summarize that MMTers in general, and Matt Franko/Tom Hickey, in particular, are stupid or corrupt or both. That both have a university degree casts a negative light on their respective universities.#2, #3
#1 For the full-spectrum refutation of MMT see cross-references MMT
#2 Cryptoeconomics ― the best of Bill Mitchell’s spam folder
#3 The Kelton-Fraud
***
Stop blathering about scientific methodology in general and answer one simple/real/ practical/concrete/relevant economic question.
This is the sectoral balances equation the MMT salesforce presents on any occasion (i) (X−M)+(G−T)+(I−S)=0.
This is the axiomatically correct balances equation (ii) (X−M)+(G−T)+(I−S)−(Q−Yd)=0.
Both equations consist of variables that are measurable with the precision of two decimal places.
Question: Which of the two macroeconomic equations is materially/formally consistent? Just answer with (i) or (ii).
***
REPLY to Andrew Anderson on Aug 4
The Bible says: “But let your ‘Yes’ be ‘Yes,’ and your ‘No,’ ‘No.’ For whatever is more than these is from the evil one.”
So, stop blathering and answer with (i) or (ii) lest the evil one will get you as he has already gotten the blatherers Tom Hickey, jrbarch, and Matt Franko.
***
REPLY to Tom Hickey on Aug 4You say: “The first [equation] is an accounting identity. The second is an axiom. There’s a difference.”
Indeed, there is a vast difference. Unfortunately, you do not understand it. The often heard sentence ‘This is an accounting identity’ is one of the most idiotic assertions in economics. For proof see the comment on the Wikipedia entry Accounting Identity Wikipedia and the promotion of economists’ idiotism
The most elementary accounting identity is Qm≡−Sm and from this follows immediately that the MMT balances equation is false and from this follows immediately that the whole of MMT is false and from this follows immediately that all MMTers are either stupid or corrupt or both.
***
REPLY to Tom Hickey on Aug 4The methodologically relevant quote from Aristotle reads: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Wikipedia)
The certain, true, and primary economic premises are given with the set of macroeconomic axioms.#1
From these premises formally follows the testable conclusion (X−M)+(G−T)+(I−S)−(Q−Yd)=0.
From this, in turn, follows immediately that the MMT balances equation is false. And from this finally follows that the whole of MMT is scientifically unacceptable.
To copy/paste Aristotle from the Stanford Encyclopedia is neither philosophy nor science. The point is how to apply Aristotle’s methodology to economics. And here the wannabe philosopher Tom Hickey fails badly.
#1 Wikimedia, New Foundations of Economics
***
REPLY to Tom Hickey, Bob, jrbach on Aug 5Your attempt to avoid the admission that the MMT balances equation has been conclusively proven to be materially/formally inconsistent is silly and futile.
The fact is that MMT is NOT a scientifically valid theory but academic snake oil.#1, #2, #3, #4
As a consequence, the actual task is NOT to convince any MMTer of anything but to throw these fake scientists and their social media sales trolls without further ado out of science and the econblogosphere.
#1 MMT: Academic snake oil for the people
#2 The Kelton-Fraud
#3 Richard Murphy: the MMT fraudster dressed up as realist
#4 MMT and grassroots movements
***
REPLY to Tom Hickey, Bob, jrbach on Aug 6This thread is about the economic implications of public deficits and how the conventional and the MMT view on this important issue differ.
Now, re-read your posts. They are consistently off-topic and entirely vacuous.
The main and direct effect of public deficit spending is, according to the macroeconomic Profit Law, on the business sector’s profit. There can be secondary effects on employment or prices but the primary and absolutely certain effect is on distribution.
So, people who argue for deficit-spending/money-creation argue ― whether they are aware of it or not does NOT matter ― for the agenda of the one-percenters.
To be sure, this is legitimate in the political realm. Free speech means practically also free speech for imbeciles, crooks, madmen, liars, detractors, warmongers, etcetera with the vague hope that in the course of the discussion error and fraud will be successively eliminated and that eventually, truth prevails. In the scientific realm, it is not sufficient to have an opinion, what is expected is a contribution to the growth of certain knowledge with certainty established by rigorous material and formal proof.
The observable unequal distribution of income and financial wealth is the empirical proof (i) of the Profit Law, and (ii), that the deficit-agenda-pushing from Keynes to Lerner to MMT to Trump has been successful beyond the wildest dreams.
What our discussion clearly shows is:
- your political/philosophical/religious blather does NOT contribute anything to the growth of scientific knowledge,
- MMT is refuted according to the criteria of material/formal consistency,
- the MMT sales crowd promotes a falsified theory on social media and the econblogosphere,
- MMT academics do NOT promote science but provide a cover for the agenda of the one-percenters,
- MMT academics suppress free speech on their blogs,
- neither universities nor institutions like the American Economic Association enforce well-defined scientific standards among their members as they are supposed to do but uphold the claim that economics is a science which is provably false for 200+ years.
The good thing that can be said about the Mike Norman Economics blog is that it does not directly block/suppress the refutation of MMT but only tries to bury it under a massive heap of philosophical shit. Compared to the rest of the politically corrupted econblogosphere, the Mike Norman Economics blog is a beacon of free speech.
***
REPLY to Bob, Tom Hickey, jrbach, Andrew Anderson on Aug 7Bob argues: “One argument in favor of welfare is that money given to individuals will end up as increased sales for businesses. The same would apply to a UBI or a JG that results in income for consumers who then distribute it to businesses. The purpose of these schemes is to help individuals; that it increases the business’s sector profit is secondary.”
You folks simply do not get it. Roughly speaking, if welfare is paid for by taxes, then, in the most elementary case, the spending of the taxed goes down and the spending of the welfare recipients goes up by the same amount. The effect on macroeconomic profit is ZERO.
If, on the other hand, the welfare is provided by deficit-spending/money-creation then macroeconomic profit goes UP by exactly the same amount. Because of this, MMT social programs are nothing but a cover for the self-alimentation of the Oligarchy.
Bob argues: “The sum of spending on different programs for various purposes has precious little to do with economics, let alone science.”
Again false. There is a second way to increase welfare expenditures, that is, by changing the composition on the expenditure side and keeping the volume of the budget and taxes constant. It is well known that by reducing military spending one can finance any social program for any number of years. Reducing military spending and increasing welfare spending by the same amount leaves macroeconomic profit unchanged.
So, as a matter of principle, social spending can be increased without increasing macroeconomic profit. But that is NOT MMT policy. MMT social policy, i.e. deficit-spending/money-creation is designed to increase macroeconomic profit. Clearly, MMT's social policy is a fraud.
In fact, things are politically worse. The constant mockery of the simple-minded balanced-budget folks obscures the fact that the main argument against credit-financed government spending came from the philosopher Kant. Kant realized that there is a rather obvious connection between deficit-spending/growth of government debt and war. Therefore, in his essay Zum Ewigen Frieden. Ein philosophischer Entwurf = Perpetual Peace: A Philosophical Sketch under #4 Kant ruled out deficit-spending: “National debts shall not be contracted with a view to the external friction of states”.
Needless to emphasize war/military spending has always been the main driver of public debt: “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by ‘political economy’ a ‘branch of the science of the statesman or legislator’, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt through the conquest of her colonial Empire.” (Halévy)
So, the classical balanced-budget hawks were NOT social sadists hell-bent on torturing the poor in the name of austerity. Kant’s prohibition of deficit spending was clearly aimed a the warmongers.
Whether you are aware of it or not does not matter: as promoters of MMT you are pushing the agenda of the oligarchy in general and of the war-mongers among them in particular. MMT is NOT a scientifically valid economy theory but a political bluff package. The philosopher Tom Hickey as MMT's chief ideologue is a living example of how degenerated and corrupt philosophy has become since Kant.
***
REPLY to Andrew Anderson on Aug 7You say: “Yet some fiat creation is needed to keep up with population growth since SOME risk-free savings are legitimate as needed liquidity and initial capital formation. The question then is how fiat shall be created in a way that does not deny citizens equal protection under the law …”
Yes, indeed. The correct way for the central bank to inject fiat money into the economy is by financing a growing wage bill. The incorrect way is the counterfeit-money printer's way.#1, #2
#1 The MMT-Yawner: Government is not a household
#2 MMT is criminal economics
***
Wikimedia AXEC147
June 25, 2018
It has been said before but economists still don’t get it
Comment on Nick Rowe on ‘Hydraulic Monetarism’
Blog-Reference and Blog-Reference
Nick Rowe concludes: “I’ve said all this before (and it’s all in Yeager and Clower and others). But maybe I’ve said it clearer this time.”
It has been said before: microfounded economics from utility maximization to supply-demand-equilibrium is false for 150+ years but one fraction of economists do not grasp it (= Orthodoxy) and the other fraction has never come forward with a superior alternative (= Heterodoxy). The theory of money circles in the endless loop of repetition ― except for MMT.
MMT has made the valid point that orthodox monetary theory is stuck with ridiculous barter stories and entirely misses the reality of fiat money. Fiat money does not circulate but is permanently created and destroyed. So, there is no fixed stock of money, to begin with. Let us call this lethal blunder of Orthodoxy the Moneybag Fallacy.
The Moneybag Fallacy was rectified by Wicksell and his giro system but for some reason, the news never illuminated the mental darkness of the Quantity Theory folks.
In the monetary economy, there is no direct barter, i.e. part of the stock of good 1 against part of the stock of good 2, but indirect barter, i.e. flow of labor time against the flow of goods. Money is created by wage payments and destroyed by consumption expenditures. In the most elementary case C=Yw, that is, consumption expenditures are equal to wage income, that is, money is zero at the beginning of the period under consideration, is then created and destroyed through the transactions between the business and the household sector, and is zero at the end of the period. NO moneybag there! No circulation there! NO hydraulics there!
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 (ii)
The household sector’s stock at the end of period t is given as the discrete numerical integral Mt=∑ΔM+M0 with M0=0.
Both the commonplace Quantity Theory and Hydraulic Monetarism is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Money and time
Related 'MMT: Richard Murphy’s battle-for-money hoax' and 'Nick Rowe’s soapbubbling about money' and 'Money: from silly stories to the true theory' and 'Rectification and generalization of MMT' and 'MMT sucks'.
You said in the intro: “If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals.”
To compare money with land is as gaga as it gets. MMTers don’t get tired of shouting from every rooftop that money is produced out of nothing at almost no cost. As a matter of principle, the economy NEVER runs out of transaction money if the central bank understands what their primary task is.#1, #2
The apparatus of supply-demand-equilibrium is inapplicable to fiat money. To speak of a money “supply” is the Moneybag Fallacy all over again.
If every household “wants to increase their stock of money” they reduce their consumption expenditures. In this case, C is less than Yw and the deposits of the household sector (= money) increase and the overdrafts of the business sector increase also because the business sector makes a loss and both sides of the central bank’s balance sheet are always equal.
The same holds for a gold-coin economy. If the business sector pays the workers in gold coins and they fully spend their income, i.e. C=Yw, then the coins return to the business sector. If the households save, i.e. C less than Yw, then the household sector’s stock of coins increases until the end of the period under consideration and the business sector’s stock decreases. The business sector makes a macroeconomic loss and this triggers a recession.
In the elementary production-consumption economy, nobody can stop the households from increasing their stocks of money as long as they receive a wage income. The form of money, fiat money or gold coins, is irrelevant.
The household sector’s stock of money develops according to the discrete numerical integral Mt=∑ΔM+M0, and the business sector’s stock is the exact mirror image except for the initial stock which, however, is zero in a fiat money system.#3
Economists never got the relationship between macroeconomic flows, differences of flows, change of stocks, and stocks straight.
#1 The creation and value of money and near-monies
#2 MMT: Richard Murphy’s battle-for-money hoax
#3 Reconstructing the Quantity Theory
REPLY to Benjamin Cole, louis, Majromax, Jeremy Fox, Frank Restly, Roger Sparks on Jun 27
The history of money from the cowrie shell to bullion to coins to notes and to the credit card shows a clear tendency of progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. In the monetary economy of the digital age, the ultimate data carrier is the server at the central bank.
The pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. Your idiocy consists of getting caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: Money = Information. There is no ambiguity about money. Money is deposits at the central bank. Bank deposits are near money, not money.#2 And all other historical forms have to be treated as surrogates/substitutes/prefigurations of the real thing.
The theory of money is macro. Some people have realized this: “However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis.” (Fontana)
So, you are way behind the curve. The theory of money has to be built upon macrofoundations and not upon silly microeconomic barter or casino stories. The analytical framework is given by the ‘monetary theory of production’. (Keynes)
The remark “I have seen casino chips used for cash in Las Vegas” is not a contribution to the theory of money but proof that the representative economist has no idea about how the monetary economy works and how money functions. It is a wonder of Nature that a dead brain does not impair the faculty of blathering in the econblogosphere.
#1 Money: from silly stories to the true theory
#2 Basics of monetary theory: the two monies
You say: “Simplistic stripped down models can aid in understanding ― it all depends on your audience.”
Because economics is a science the primary audience is the scientific community. The scientific community never had any problems with stripped down models but with FALSE models.
The story of how Zeus threw his thunderbolt at Typhon is NOT a stripped down model of how electricity works but a false model. The same holds for all barter stories. The defining characteristic of the economy is that labor time is exchanged for IOUs/money and money is exchanged for goods. The subject matter of economics is NOT barter or barter with a money-good but the ‘monetary theory of production’ (Keynes).
So, the most simplistic stripped down model in economics has to be a macro model. The ultimate methodological blunder of economics is microfoundations.
The scientific failure of economics is due to economists clinging to microfoundations. A scientist needs to read the microeconomic axioms#1 only once and knows for sure that they are proto-scientific garbage. And methodology tells us that if the axiomatic foundations are false the whole analytical superstructure is false.
Not to see that monetary theory has to be macrofounded is the disqualifying scientific blunder of Nick Rowe. It is not the only one.#3
#1 “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 Buddha on the microeconomic men in the dark
#3 Nick Rowe’s soapbubbling about money
► Is Nick Rowe stupid or corrupt or both?
► I is never equal S and even Nick Rowe will eventually grasp it
► Cryptoeconomics ― the best of Nick Rowe’s spam folder
► Getting out of IS-LM = Getting out of despair
► Nick Rowe: Bury me at the end of coal-pit
► Macro poultry entrails reading
► Worthless Canadian model bricolage
► The Humpty Dumpty methodology
You say: “Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.”
You confound historical storytelling with scientific theory. A historical account of the various forms of money is NO substitute for the theory of money, just as the history of the burning of Rome, London, San Francisco etcetera is no substitute for the theory of thermodynamics.
The theory of money has to be embedded in a consistent macroeconomic framework or in what Keynes called the ‘monetary theory of production’.#1, #2
The subject matter of economics is how the actual monetary economy works and NOT historical storytelling.#3
#1 The ultimate ― analytical ― origin of money
#2 How money emerges out of nothing ― the functional account
#3 It has been said before but economists still don’t get it
Blog-Reference and Blog-Reference
Nick Rowe concludes: “I’ve said all this before (and it’s all in Yeager and Clower and others). But maybe I’ve said it clearer this time.”
It has been said before: microfounded economics from utility maximization to supply-demand-equilibrium is false for 150+ years but one fraction of economists do not grasp it (= Orthodoxy) and the other fraction has never come forward with a superior alternative (= Heterodoxy). The theory of money circles in the endless loop of repetition ― except for MMT.
MMT has made the valid point that orthodox monetary theory is stuck with ridiculous barter stories and entirely misses the reality of fiat money. Fiat money does not circulate but is permanently created and destroyed. So, there is no fixed stock of money, to begin with. Let us call this lethal blunder of Orthodoxy the Moneybag Fallacy.
The Moneybag Fallacy was rectified by Wicksell and his giro system but for some reason, the news never illuminated the mental darkness of the Quantity Theory folks.
In the monetary economy, there is no direct barter, i.e. part of the stock of good 1 against part of the stock of good 2, but indirect barter, i.e. flow of labor time against the flow of goods. Money is created by wage payments and destroyed by consumption expenditures. In the most elementary case C=Yw, that is, consumption expenditures are equal to wage income, that is, money is zero at the beginning of the period under consideration, is then created and destroyed through the transactions between the business and the household sector, and is zero at the end of the period. NO moneybag there! No circulation there! NO hydraulics there!
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 Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
- In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
- In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.#1
In case (ii)
- the household sector ends up with a stock of money = deposits at the central bank and the business sector ends up with overdrafts,
- the change of the household sector’s stock is given by ΔM=Yw−C,
- the economy falls into recession.
The household sector’s stock at the end of period t is given as the discrete numerical integral Mt=∑ΔM+M0 with M0=0.
Both the commonplace Quantity Theory and Hydraulic Monetarism is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Money and time
Related 'MMT: Richard Murphy’s battle-for-money hoax' and 'Nick Rowe’s soapbubbling about money' and 'Money: from silly stories to the true theory' and 'Rectification and generalization of MMT' and 'MMT sucks'.
***
REPLY to Nick Rowe on Jun 26You said in the intro: “If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals.”
To compare money with land is as gaga as it gets. MMTers don’t get tired of shouting from every rooftop that money is produced out of nothing at almost no cost. As a matter of principle, the economy NEVER runs out of transaction money if the central bank understands what their primary task is.#1, #2
The apparatus of supply-demand-equilibrium is inapplicable to fiat money. To speak of a money “supply” is the Moneybag Fallacy all over again.
If every household “wants to increase their stock of money” they reduce their consumption expenditures. In this case, C is less than Yw and the deposits of the household sector (= money) increase and the overdrafts of the business sector increase also because the business sector makes a loss and both sides of the central bank’s balance sheet are always equal.
The same holds for a gold-coin economy. If the business sector pays the workers in gold coins and they fully spend their income, i.e. C=Yw, then the coins return to the business sector. If the households save, i.e. C less than Yw, then the household sector’s stock of coins increases until the end of the period under consideration and the business sector’s stock decreases. The business sector makes a macroeconomic loss and this triggers a recession.
In the elementary production-consumption economy, nobody can stop the households from increasing their stocks of money as long as they receive a wage income. The form of money, fiat money or gold coins, is irrelevant.
The household sector’s stock of money develops according to the discrete numerical integral Mt=∑ΔM+M0, and the business sector’s stock is the exact mirror image except for the initial stock which, however, is zero in a fiat money system.#3
Economists never got the relationship between macroeconomic flows, differences of flows, change of stocks, and stocks straight.
#1 The creation and value of money and near-monies
#2 MMT: Richard Murphy’s battle-for-money hoax
#3 Reconstructing the Quantity Theory
***
The history of money from the cowrie shell to bullion to coins to notes and to the credit card shows a clear tendency of progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. In the monetary economy of the digital age, the ultimate data carrier is the server at the central bank.
The pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. Your idiocy consists of getting caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: Money = Information. There is no ambiguity about money. Money is deposits at the central bank. Bank deposits are near money, not money.#2 And all other historical forms have to be treated as surrogates/substitutes/prefigurations of the real thing.
The theory of money is macro. Some people have realized this: “However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis.” (Fontana)
So, you are way behind the curve. The theory of money has to be built upon macrofoundations and not upon silly microeconomic barter or casino stories. The analytical framework is given by the ‘monetary theory of production’. (Keynes)
The remark “I have seen casino chips used for cash in Las Vegas” is not a contribution to the theory of money but proof that the representative economist has no idea about how the monetary economy works and how money functions. It is a wonder of Nature that a dead brain does not impair the faculty of blathering in the econblogosphere.
#1 Money: from silly stories to the true theory
#2 Basics of monetary theory: the two monies
***
REPLY to Frank Restly on Jun 28You say: “Simplistic stripped down models can aid in understanding ― it all depends on your audience.”
Because economics is a science the primary audience is the scientific community. The scientific community never had any problems with stripped down models but with FALSE models.
The story of how Zeus threw his thunderbolt at Typhon is NOT a stripped down model of how electricity works but a false model. The same holds for all barter stories. The defining characteristic of the economy is that labor time is exchanged for IOUs/money and money is exchanged for goods. The subject matter of economics is NOT barter or barter with a money-good but the ‘monetary theory of production’ (Keynes).
So, the most simplistic stripped down model in economics has to be a macro model. The ultimate methodological blunder of economics is microfoundations.
The scientific failure of economics is due to economists clinging to microfoundations. A scientist needs to read the microeconomic axioms#1 only once and knows for sure that they are proto-scientific garbage. And methodology tells us that if the axiomatic foundations are false the whole analytical superstructure is false.
Not to see that monetary theory has to be macrofounded is the disqualifying scientific blunder of Nick Rowe. It is not the only one.#3
#1 “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 Buddha on the microeconomic men in the dark
#3 Nick Rowe’s soapbubbling about money
► Is Nick Rowe stupid or corrupt or both?
► I is never equal S and even Nick Rowe will eventually grasp it
► Cryptoeconomics ― the best of Nick Rowe’s spam folder
► Getting out of IS-LM = Getting out of despair
► Nick Rowe: Bury me at the end of coal-pit
► Macro poultry entrails reading
► Worthless Canadian model bricolage
► The Humpty Dumpty methodology
***
REPLY to Jacques René Giguère on Jul 4You say: “Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.”
You confound historical storytelling with scientific theory. A historical account of the various forms of money is NO substitute for the theory of money, just as the history of the burning of Rome, London, San Francisco etcetera is no substitute for the theory of thermodynamics.
The theory of money has to be embedded in a consistent macroeconomic framework or in what Keynes called the ‘monetary theory of production’.#1, #2
The subject matter of economics is how the actual monetary economy works and NOT historical storytelling.#3
#1 The ultimate ― analytical ― origin of money
#2 How money emerges out of nothing ― the functional account
#3 It has been said before but economists still don’t get it
June 19, 2018
The Fisher Effect ― another piece of nincompoop-economics
Comment on David Glasner on ‘Keynes and the Fisher Equation’
Blog-Reference
Roughly speaking, the Fisher Equation is about the relationship between nominal and real interest rates under inflation and the Fisher Effect is about the effects of changes in expected inflation on the nominal interest rates.#1
In the following, it will be demonstrated that the Fisher Effect is due to a design flaw of the monetary economy. Neither Fisher nor Keynes has realized this because they never understood how the economic system works.#2
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). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
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.
Deposit money 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.
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 on Wikimedia.#3
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money 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=kYw, with k 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.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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.
When the government is added, the Profit Law reads Qm≡(G−T)−Sm. Legend: G government expenditures, T taxes.
In the initial period G, T, Sm are all zero. Hence macroeconomic profit Qm, too, is zero.
In period 1, there is a government sector deficit but it is exactly equal to the household sector saving. Hence Qm is again zero. The government’s debt consists of overdrafts at the central bank Ω. The household sector’s savings consist of deposits at the central bank Φ. Both sides of the central bank’s balance sheet are equal.
Now, the interest rate on deposits is zero and the interest rate on government debt is r. The rate r is set such that it covers exactly the central bank’s wage bill, i.e. rΩ=WL* (2).#4, #5
Under these simplified conditions, one has for the price of the consumption good P=W/R and for the rate of interest r=(W/Ω)L* (3).
In period 2, the wage rate W is doubled. All real variables remain unchanged. According to (1) the price P doubles. According to (2) either (a) the nominal rate of interest r doubles and the nominal debt Ω remains constant, or (b), the nominal rate of interest remains constant and the nominal debt doubles.
Needless to emphasize that (2b) is the correct solution. The institutional setting, though, is such that the nominal value of the debt does NOT move in lockstep with inflation.
In the correct institutional setting for the monetary economy, the nominal rate of interest does NOT move with inflation but nominal debt does. So, there is NO such thing as a Fisher Effect, the nominal rate r remains constant. And because of this, inflation expectations have NO effect on the nominal interest rate.
In well-behaved inflation, the nominal interest rate r remains constant, the real interest rate r'=r/P falls and the nominal debt increases Ω'=ΩP such that nominal interest payments rΩ' increase and real interest payments r'Ω' remain constant.
Egmont Kakarot-Handtke
#1 Wikipedia Fisher Equation
#2 Macroeconomics ― dead since Keynes
#3 Wikimedia, Idealized transaction pattern
#4 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#5 The Emergence of Profit and Interest in the Monetary Circuit
Blog-Reference
Roughly speaking, the Fisher Equation is about the relationship between nominal and real interest rates under inflation and the Fisher Effect is about the effects of changes in expected inflation on the nominal interest rates.#1
In the following, it will be demonstrated that the Fisher Effect is due to a design flaw of the monetary economy. Neither Fisher nor Keynes has realized this because they never understood how the economic system works.#2
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). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
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.
Deposit money 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.
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 on Wikimedia.#3
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money 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=kYw, with k 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.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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.
When the government is added, the Profit Law reads Qm≡(G−T)−Sm. Legend: G government expenditures, T taxes.
In the initial period G, T, Sm are all zero. Hence macroeconomic profit Qm, too, is zero.
In period 1, there is a government sector deficit but it is exactly equal to the household sector saving. Hence Qm is again zero. The government’s debt consists of overdrafts at the central bank Ω. The household sector’s savings consist of deposits at the central bank Φ. Both sides of the central bank’s balance sheet are equal.
Now, the interest rate on deposits is zero and the interest rate on government debt is r. The rate r is set such that it covers exactly the central bank’s wage bill, i.e. rΩ=WL* (2).#4, #5
Under these simplified conditions, one has for the price of the consumption good P=W/R and for the rate of interest r=(W/Ω)L* (3).
In period 2, the wage rate W is doubled. All real variables remain unchanged. According to (1) the price P doubles. According to (2) either (a) the nominal rate of interest r doubles and the nominal debt Ω remains constant, or (b), the nominal rate of interest remains constant and the nominal debt doubles.
Needless to emphasize that (2b) is the correct solution. The institutional setting, though, is such that the nominal value of the debt does NOT move in lockstep with inflation.
In the correct institutional setting for the monetary economy, the nominal rate of interest does NOT move with inflation but nominal debt does. So, there is NO such thing as a Fisher Effect, the nominal rate r remains constant. And because of this, inflation expectations have NO effect on the nominal interest rate.
In well-behaved inflation, the nominal interest rate r remains constant, the real interest rate r'=r/P falls and the nominal debt increases Ω'=ΩP such that nominal interest payments rΩ' increase and real interest payments r'Ω' remain constant.
Egmont Kakarot-Handtke
#1 Wikipedia Fisher Equation
#2 Macroeconomics ― dead since Keynes
#3 Wikimedia, Idealized transaction pattern
#4 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#5 The Emergence of Profit and Interest in the Monetary Circuit
June 13, 2018
Nick Rowe’s soap bubbling about money
Comment on Nick Rowe on ‘The Parable of the Fruit Trees’
Blog-Reference
“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.
What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long-defunct barter parable proves that he has no idea how the economy works.
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). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
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.
Deposit money 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.
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 on Wikimedia.#1
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money 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. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”
The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.
As long as the central bank finances the wage bill Yw=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.
Egmont Kakarot-Handtke
#1 Wikimedia AXEC98 Idealized transaction pattern
Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.
Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”
The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.
The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow, and so on. Money is neither a stock, nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera. As a matter of principle, money cannot be scarce, only the physical data carrier can become scarce.
Money starts as a medium of transaction as shown in the previous post and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e. do not fully spend their period income, that is, if consumption expenditures C are less than wage income Yw. In this case, the household sector’s deposits at the central bank increase, and money morphs from a pure transaction medium to a store of value.#1
Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barters apples for bananas.
In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Yw. This has some obvious consequences for the business sector.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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 simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.
Now, give Nick Rowe a banana, and send him back into the barter woods.
#1 Money and time
In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1
It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household- and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.
To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Yw=WL1+WL2 and total employment is L=L1+L2.
In the initial period, the respective prices are equal to unit wage costs, i.e. P1=W/R1 and P2=W/R2. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e. C=Yw, so there is neither saving nor dissaving.
The distribution of total consumption expenditures C=C1+C2 between the two products determines the production of the respective quantities and the respective labor inputs L1 and L2. It holds C=C1+C2=W(L1+L2)=WL=Yw.
So, if the household sector wants more of product 1 it spends more on it and less on product 2, such that C1 goes up and C2 goes down and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and less in firm 2, such that L1 goes up and L2 goes down and total employment L and total income Yw remain unchanged.
The relative price, i.e. the exchange relation between the two products remains unchanged, i.e. P1/P2=R2/R1.
So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Yw is now greater zero. In this case, the business sector makes a loss and the economy goes into recession.
#1 The irreparable unreality of all ‘real’ models
The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.
In the monetary economy, agent 1 does not produce product 1 and barters directly with agent 2 who produces product 2.
In the monetary economy, agent 1 works in firm 1 which produces product 1 and gets the wage income Yw1 which is paid with a transfer of deposits at the central bank.
Analogous for agent 2.
Agent 1 then spends part of his income on product 2. Analogous for agent 2 who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.
Indirect barter presupposes the existence of money which is used (i) to pay the wage bill, and (ii), to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.
Changes in preferences lead to changes in output and production and the allocation of labor between the two firms. Total spending and total employment and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.
Put simply, if agents want more of product 1 and less of product 2 more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.
Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.
Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money and change in the composition of output are mixed. Analytically, though, they have to be strictly kept apart.
You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”
Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.
At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced and money is produced (or ‘created out of nothing’) by the central bank/banking system. The economic analysis starts at zero. And this holds also for the theory of money.
You say: “Simultaneous is a relative when money moves faster than fruit.”
The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.
The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant for the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.
Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to logical error; the misuse of language that produces invalid conclusions.”*
Nick Rowe and Matthew Young have not gotten the point that in the monetary economy barter is indirect and that therefore the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.
* Colin Rogers, Review of Political Economy
You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”
Not at all! The real problem is that economists have after 200+ years still no clue how the price- and profit mechanism works.
To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g. product, labor) deal with flows.
If part of the output is not consumed in the same period then there remains a stock of durable goods = real assets, e.g. houses. This is how the secondary markets come into existence.
The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop-economics.
#1 Primary and Secondary Markets
Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”
There is science, and it is binary true/false with NOTHING in between. Truth is well-defined for 2300+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”
In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication.#1, #2, #3
This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)
From Nick Rowe’s Parable of the Fruit Trees nothing can be learned about how the price- and profit mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.
Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)
One will not find one single scientist in the swamp.#4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.
Egmont Kakarot-Handtke
#1 It is better to be precisely right than roughly wrong
#2 “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions.” (Blinder)
#3 “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”
#4 Getting out of the economics swamp
Blog-Reference
“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.
What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long-defunct barter parable proves that he has no idea how the economy works.
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). This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.
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.
Deposit money 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.
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 on Wikimedia.#1
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money 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. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”
The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.
As long as the central bank finances the wage bill Yw=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.
Egmont Kakarot-Handtke
#1 Wikimedia AXEC98 Idealized transaction pattern
Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.
***
REPLY to Nick Rowe on Jun 14Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”
The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.
The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow, and so on. Money is neither a stock, nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera. As a matter of principle, money cannot be scarce, only the physical data carrier can become scarce.
Money starts as a medium of transaction as shown in the previous post and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e. do not fully spend their period income, that is, if consumption expenditures C are less than wage income Yw. In this case, the household sector’s deposits at the central bank increase, and money morphs from a pure transaction medium to a store of value.#1
Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barters apples for bananas.
In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Yw. This has some obvious consequences for the business sector.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, 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 simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.
Now, give Nick Rowe a banana, and send him back into the barter woods.
#1 Money and time
***
REPLY to Nick Rowe and other commentators on Jun 15In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1
It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household- and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.
To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Yw=WL1+WL2 and total employment is L=L1+L2.
In the initial period, the respective prices are equal to unit wage costs, i.e. P1=W/R1 and P2=W/R2. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e. C=Yw, so there is neither saving nor dissaving.
The distribution of total consumption expenditures C=C1+C2 between the two products determines the production of the respective quantities and the respective labor inputs L1 and L2. It holds C=C1+C2=W(L1+L2)=WL=Yw.
So, if the household sector wants more of product 1 it spends more on it and less on product 2, such that C1 goes up and C2 goes down and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and less in firm 2, such that L1 goes up and L2 goes down and total employment L and total income Yw remain unchanged.
The relative price, i.e. the exchange relation between the two products remains unchanged, i.e. P1/P2=R2/R1.
So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Yw is now greater zero. In this case, the business sector makes a loss and the economy goes into recession.
#1 The irreparable unreality of all ‘real’ models
***
REPLY to Nick Rowe on Jun 16The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.
In the monetary economy, agent 1 does not produce product 1 and barters directly with agent 2 who produces product 2.
In the monetary economy, agent 1 works in firm 1 which produces product 1 and gets the wage income Yw1 which is paid with a transfer of deposits at the central bank.
Analogous for agent 2.
Agent 1 then spends part of his income on product 2. Analogous for agent 2 who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.
Indirect barter presupposes the existence of money which is used (i) to pay the wage bill, and (ii), to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.
Changes in preferences lead to changes in output and production and the allocation of labor between the two firms. Total spending and total employment and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.
Put simply, if agents want more of product 1 and less of product 2 more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.
Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.
Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money and change in the composition of output are mixed. Analytically, though, they have to be strictly kept apart.
***
REPLY to Henry Rech on Jun 16You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”
Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.
At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced and money is produced (or ‘created out of nothing’) by the central bank/banking system. The economic analysis starts at zero. And this holds also for the theory of money.
***
REPLY to Matthew Young on Jun 18You say: “Simultaneous is a relative when money moves faster than fruit.”
The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.
The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant for the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.
Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to logical error; the misuse of language that produces invalid conclusions.”*
Nick Rowe and Matthew Young have not gotten the point that in the monetary economy barter is indirect and that therefore the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.
* Colin Rogers, Review of Political Economy
***
REPLY to Nick Edmonds on Jun 19You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”
Not at all! The real problem is that economists have after 200+ years still no clue how the price- and profit mechanism works.
To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g. product, labor) deal with flows.
If part of the output is not consumed in the same period then there remains a stock of durable goods = real assets, e.g. houses. This is how the secondary markets come into existence.
The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop-economics.
#1 Primary and Secondary Markets
***
REPLY to Nick Rowe on Jun 20Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”
There is science, and it is binary true/false with NOTHING in between. Truth is well-defined for 2300+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”
In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication.#1, #2, #3
This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)
From Nick Rowe’s Parable of the Fruit Trees nothing can be learned about how the price- and profit mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.
Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)
One will not find one single scientist in the swamp.#4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.
Egmont Kakarot-Handtke
#1 It is better to be precisely right than roughly wrong
#2 “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions.” (Blinder)
#3 “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”
#4 Getting out of the economics swamp
Subscribe to:
Posts (Atom)