“Marx explained the basic contradiction over 150 years ago. Competition compels each capitalist to raise productivity and cheapen commodities because doing so increases relative surplus-value and gives them an advantage over competitors.” (Dohaciel Ygzgzot)
— AXEC (@EgmontHandtke) August 17, 2026
This is the problem… pic.twitter.com/pRePIrVMRd
Showing posts with label Productivity. Show all posts
Showing posts with label Productivity. Show all posts
August 17, 2026
Occasional X: How it works (DIII)
August 7, 2026
Occasional X: How it works (D)
“Capitalism is very good at producing wealth. What it is not particularly good at is making sure that wealth, productive capacity, and human needs actually line up. That was one of the lessons Keynes took from the Great Depression. …The conventional answer was that markets would… pic.twitter.com/LrAe3wZ6Fv
— AXEC (@EgmontHandtke) August 7, 2026
July 29, 2026
Occasional X: How it works (CDXCV)
“Two economists published a mathematical proof that AI will destroy the economy. It’s called 'The AI Layoff Trap' and it exposes a devastating economic contradiction that every CEO can see coming, and none of them can stop.” (How to Prompt)
— AXEC (@EgmontHandtke) July 29, 2026
Actually, this is the old problem of a… pic.twitter.com/LpVeB5NCXJ
July 19, 2026
Occasional X: Clueless economists / Science (CCCLX)
“In both ecosystem and economy, survival rewards efficiency. Inefficiency is punished by extinction.” (Michael Rothschild)
— AXEC (@EgmontHandtke) July 19, 2026
Wrong analogy.
The U.S. economy is known to run on profit. Macroeconomic profit is given by the axiomatically correct Profit Law / Balances Equation…
June 9, 2026
Occasional X: Clueless economists / Science (CCCXL)
“The standard of living of the common man is higher in those countries which have the greatest number of wealthy entrepreneurs.” (Ludwig von Mises)
— AXEC (@EgmontHandtke) June 9, 2026
Ludwig von Mises never understood profit and, by consequence, how the economic system works.
First of all, it is important to…
“The richness of America Is provided by NATURAL RESOURCES Like oil.” (Lawrence Widman)
— AXEC (@EgmontHandtke) June 10, 2026
The richness of America consists of valued natural resources, valued capital goods, and financial assets. The source of the latter is private/public deficit-spending, which materializes as…
January 24, 2026
Occasional X: Clueless economists / Productivity (I)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) January 24, 2026
“However, standard labour productivity aggregates wages, profits, rents, and interest into its numerator while normalising solely by labour input. ” (James Young)
Because wages are flows and macroeconomic profit is a difference of flows, “wages,… pic.twitter.com/9VTSfzlh7V
January 21, 2026
Occasional X: The futile attempt to recycle Marginalism (III)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) January 21, 2026
“A simple but underappreciated point: While unions may improve the material conditions of some workers on the margins, they will never sustainably push wages over workers’ marginal products.” (Chris Freiman)
There is the average real wage rate and… pic.twitter.com/get8q7uFU9
December 21, 2025
Occasional X: How it works (CDXXVII)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) December 21, 2025
“Logical inconsistency: your model assumes real wage = productivity via market-clearing prices, then concludes no surplus exists.” (Dohaciel Ygzgzot)
The appendix shows the relationship between real wages W/P and productivity R under the condition… pic.twitter.com/5nl4qIYM2b
November 9, 2025
Occasional X: Clueless economists / Real Wage (IV)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) November 9, 2025
According to the axiomatically correct macroeconomic Law of Supply and Demand, the real wage W/P in the elementary production-consumption economy ⇓ moves with the productivity R and declines with deficit-spending/money-creation i.e., ρE>1. The… pic.twitter.com/W3ygHudoOr
Related: 'How it works (CDXX)'
November 6, 2025
Occasional X: Clueless economists / Profit (CX)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) November 6, 2025
“Why is it so difficult to understand that economic freedom drives innovation, growth and prosperity?” (Michael Arouet)
Why is it so difficult for economists to understand that productivity drives the profit of a single firm but not the total profit…
September 1, 2025
Occasional X: Clueless economists / Real Wage (III)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) September 1, 2025
According to the axiomatically correct macroeconomic Law of Supply and Demand, the real wage W/P in the elementary production-consumption economy ⇓ moves with the productivity R and declines with deficit-spending/money-creation i.e. ρE>1. The… pic.twitter.com/iJ4w76cO3A
January 5, 2025
Occasional X: The futile attempt to recycle Milton Friedman (XXXI)
#Economics#FailedFakeScience
— E.K-H (@AXECorg) January 5, 2025
“No one knows how to make a pencil, as Friedman explains.” (Connor Boyack)
The history of economic thought is the history of scientific failure. The major approaches (Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives) are…
March 16, 2024
Occasional Xs: How Solow messed up growth theory and why economists don't get it right to this day (III)
#Economics#FailedFakeScience
— E.K-H (@AXECorg) March 16, 2024
The history of economic thought is the history of scientific failure. The major approaches are mutually contradictory & axiomatically false & materially/formally inconsistent & ALL got #Profit wrong. When the foundational concepts of the subject…
March 10, 2023
Occasional Tweets: Bring yourself up to speed ― New Econ 101 (I)
#BringYourselfUpToSpeed
— E.K-H (@AXECorg) March 10, 2023
The macroeconomic #LawOfSupplyAndDemand and the #ProfitLaw tell one exactly how #Price P & #Profit Qm move as a function of #WageRate W, Productivity R & #DeficitSpendingMoneyCreation ρE. pic.twitter.com/9c9Ecy6ngN
October 31, 2020
Reminder on inflation
Comment on Bill Mitchell on ‘Inflation is not necessarily due to excessive spending’*
The most elementary macroeconomic price formula states P=ρEW/R. ρE>1 represents private/public deficit-spending/money-creation and this implies that a period deficit produces a ONE-OFF price hike and NOT inflation.
In order to get inflation going, the wage increases have to be constantly above the productivity increases. In fact, the exact opposite happened.#1 The price formula tells one that in this case, deflation will result.
The crucial point is that the quantity of money is NOT among the price determinants. The price formula implicitly refutes the commonplace Quantity Theory.#2
Egmont Kakarot-Handtke
#1 Chart, Twitter, Economic Policy Institute: The gap
August 27, 2020
Price theory — more than beating the dead horse again and again
Comment on Blair Fix on ‘Supply and demand deconstructed’
Blog-Reference and Blog-Reference
Blair Fix summarizes “… Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.”
Mainstream economics, though, does not need another deconstruction. #1, #2, #3 Mainstreamers have admitted failure long ago. “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)
Clearly, everybody knows by now for sure that supply-demand-equilibrium is proto-scientific garbage. Back in 1954, Schumpeter found it still necessary to diffuse doubts about the scientific status of the supply-demand-equilibrium approach “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”
So, the right thing to do is to bury and forget the “Totem of the Micro”: “If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.” #4
With this, though, everything remains in the old economics-is-a-social-science paradigm. The behavioral assumption of price-taking is replaced by the assumption of price-setting. To remain in the psycho-sociological sphere is the lethal blunder of the power approach because economics is a systems science. #5
Here are the basics of the macrofoundations approach. 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 as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This is the most elementary case; i.e., when the economy gets more complex, the price equation becomes longer.*
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e., the real wage is always equal to the productivity, no matter how the wage rate W is set or how long the individual or aggregate working time L is. Full employment is possible; the workers always get the whole product O. The workers' living standard depends ultimately on productivity.
The logical next steps are (i) to skip the conditions of market-clearing and budget-balancing and to allow for price-setting, (ii) to differentiate the business sector into multiple firms and markets, and to determine the price structure. #6
Egmont Kakarot-Handtke
#1 There is NO such thing as supply-demand-equilibrium
#2 How to Get Rid of Supply-Demand-Equilibrium
#3 The Law of Supply and Demand: Here It Is Finally
#4 This echoes Macht und ökonomisches Gesetz (Power and Economic Law), Schriften des Vereins für Socialpolitik, 1972.
#5 Your economics is refuted on all counts: here is the real thing
#6 See Ch. 3 Market interdependence in Sovereign Economics
Blog-Reference and Blog-Reference
Blair Fix summarizes “… Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.”
Mainstream economics, though, does not need another deconstruction. #1, #2, #3 Mainstreamers have admitted failure long ago. “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)
Clearly, everybody knows by now for sure that supply-demand-equilibrium is proto-scientific garbage. Back in 1954, Schumpeter found it still necessary to diffuse doubts about the scientific status of the supply-demand-equilibrium approach “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”
So, the right thing to do is to bury and forget the “Totem of the Micro”: “If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.” #4
With this, though, everything remains in the old economics-is-a-social-science paradigm. The behavioral assumption of price-taking is replaced by the assumption of price-setting. To remain in the psycho-sociological sphere is the lethal blunder of the power approach because economics is a systems science. #5
Here are the basics of the macrofoundations approach. 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 as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This is the most elementary case; i.e., when the economy gets more complex, the price equation becomes longer.*
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e., the real wage is always equal to the productivity, no matter how the wage rate W is set or how long the individual or aggregate working time L is. Full employment is possible; the workers always get the whole product O. The workers' living standard depends ultimately on productivity.
The logical next steps are (i) to skip the conditions of market-clearing and budget-balancing and to allow for price-setting, (ii) to differentiate the business sector into multiple firms and markets, and to determine the price structure. #6
Egmont Kakarot-Handtke
#1 There is NO such thing as supply-demand-equilibrium
#2 How to Get Rid of Supply-Demand-Equilibrium
#3 The Law of Supply and Demand: Here It Is Finally
#4 This echoes Macht und ökonomisches Gesetz (Power and Economic Law), Schriften des Vereins für Socialpolitik, 1972.
#5 Your economics is refuted on all counts: here is the real thing
#6 See Ch. 3 Market interdependence in Sovereign Economics
Related 'Economists never understood how the price mechanism works' and '10 steps to leave cargo cult economics behind for good' and 'Primary and Secondary Markets' and 'Hayek and other informationally retarded proto-economists' and 'How to overcome the manifest silliness of Econ 101 and save the economy' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'Essentials of Constructive Heterodoxy: The Market' and 'Understanding Profit and the Markets: The Canonical Model' and 'Major Defects of the Market Economy' and 'How to finally hammer down the nails in the coffin of Monty Python economics' and 'Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true' and 'Econ 101: Economists flunk the intelligence test at the first hurdle' and 'The monstrous utility-supply-demand-equilibrium failure' and 'To this day, economists have produced NOT ONE textbook that satisfies scientific standards' and 'Ch. 9, Price mechanism vs quantity mechanism in Sovereign Economics, BoD'.
“Totem of the Micro” has been coined by Axel Leijonhufvud.
* E.g. AXEC64
February 13, 2019
Basics of Value Theory
Comment on Peter Cooper on ‘Developments in Value Theory’
Blog-Reference and Blog-Reference
Value and Profit Theory are false since Ricardo and Marx. #1, #2
In order to see where Value Theory fails, 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. Eq. (1) is the macroeconomic Law of Supply and Demand.
Monetary profit/loss of the business sector is defined as Q≡C−Yw (3), and monetary saving/dissaving of the household sector is defined as S≡Yw−C (4). It always holds Q+S=0, or Q≡−S (5), 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. Under the initial condition of budget-balancing C=Yw, total monetary profit is zero. Eq. (5) is the most elementary version of the macroeconomic Profit Law.
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 pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label of Graphic. #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 supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw (6), with k determined by the transaction pattern.
If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of a transaction medium. NO capitalist with a sack of gold coins is needed to advance the wage bill.
In sum, (i) money is a generalized IOU, (ii) money is created and destroyed by the transactions between the household and the business sector, (iii) the value of money is given by (2) W/P=R, i.e. is equal to the productivity, (iv) the workers get the whole product, (v) profit is zero.
Because there is only labor input in the elementary production-consumption economy, eq. (2) represents the essence of the Labour Theory of Value.
Eq. (2) can be generalized for two different products, and then the Law of Value says P1/P2=R2/R1, i.e., the price relation is inverse to the productivity relation, that is, the whole price structure is objectively determined by the productivities, if, for a start, the wage rate is equal in all lines of production. Note that macroeconomic profit is zero because of budget balancing, i.e., C=Yw. Macroeconomic profit only appears if C>Yw, and this has NOTHING AT ALL to do with capitalists or value creation.
A well-defined monetary market economy is different from the woolly idea of capitalism. Profit has NOTHING to do with surplus value or exploitation but with deficit-spending/ dissaving of the household sector. Profit cannot be attributed to a factor. This is the fundamental methodological defect of classical and neoclassical Distribution Theories.
Egmont Kakarot-Handtke
#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Profit for Marxists
#3 Graphic AXEC98 Idealized transaction pattern
Blog-Reference and Blog-Reference
Value and Profit Theory are false since Ricardo and Marx. #1, #2
In order to see where Value Theory fails, 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. Eq. (1) is the macroeconomic Law of Supply and Demand.
Monetary profit/loss of the business sector is defined as Q≡C−Yw (3), and monetary saving/dissaving of the household sector is defined as S≡Yw−C (4). It always holds Q+S=0, or Q≡−S (5), 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. Under the initial condition of budget-balancing C=Yw, total monetary profit is zero. Eq. (5) is the most elementary version of the macroeconomic Profit Law.
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 pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label of Graphic. #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 supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw (6), with k determined by the transaction pattern.
If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of a transaction medium. NO capitalist with a sack of gold coins is needed to advance the wage bill.
In sum, (i) money is a generalized IOU, (ii) money is created and destroyed by the transactions between the household and the business sector, (iii) the value of money is given by (2) W/P=R, i.e. is equal to the productivity, (iv) the workers get the whole product, (v) profit is zero.
Because there is only labor input in the elementary production-consumption economy, eq. (2) represents the essence of the Labour Theory of Value.
Eq. (2) can be generalized for two different products, and then the Law of Value says P1/P2=R2/R1, i.e., the price relation is inverse to the productivity relation, that is, the whole price structure is objectively determined by the productivities, if, for a start, the wage rate is equal in all lines of production. Note that macroeconomic profit is zero because of budget balancing, i.e., C=Yw. Macroeconomic profit only appears if C>Yw, and this has NOTHING AT ALL to do with capitalists or value creation.
A well-defined monetary market economy is different from the woolly idea of capitalism. Profit has NOTHING to do with surplus value or exploitation but with deficit-spending/ dissaving of the household sector. Profit cannot be attributed to a factor. This is the fundamental methodological defect of classical and neoclassical Distribution Theories.
Egmont Kakarot-Handtke
#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Profit for Marxists
#3 Graphic AXEC98 Idealized transaction pattern
Related 'Value — the Bermuda Triangle for economic theories' and 'The Pure Logic of Value, Profit, Interest' and 'The Value of Water and Diamonds: Back to Square One' and 'The Logic of Value and the Value of Logic' and 'The Logical Interface Between Objective Macrofoundations and Subjective Valuations'.
***
Graphic AXEC89d Circuit Law of Value
August 16, 2018
How to get rid of inflation and deflation
Comment on Brian Romanchuk on ‘Why Is A Positive Inflation Rate A Good Thing?’
Blog-Reference and Blog-Reference
Brian Romanchuk takes the question “Why is inflation above 0% considered a good thing?” as a starting point for a psychological/sociological study of what different people/groups think about how inflation/deflation affects them.
His answer is the usual vacuous ‘It depends’: “I could try to discuss the economic theory questions associated with price stability. My view is ambivalent.… As a result, I would argue that the economic theory is a red herring: what matters is political economy.”
Needless to stress that this is not the answer of a scientist: “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)
Brian Romanchuk, though, is not a scientist but a blathering agenda-pusher. He has NO idea how the monetary economy works. Time to remind him of some economic basics and of some basics of scientific methodology as well.
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.
In the most elementary case, 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.
In the elementary production-consumption economy, the price P performs a random walk, which in turn depends on the random changes of productivity R and wage rate W. Note that the price movements do not depend on the random changes of employment or on whether the economy is at full employment or not. Equation (1) implies W/P=R (2), i.e., the real wage W/P is always equal to the productivity R.
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.#1 As long as C=Yw, macroeconomic profit is zero.
As a matter of principle, the elementary production-consumption economy is reproducible for an indefinite time. It is important to note that there is no such thing as an equilibrium or price stability, or full employment.
Now it is easy to see that price stability, that is, a rate of inflation/deflation of zero, can be established with a simple institutional rule: change of wage rate = change of productivity. In equation (1), this stabilizes the price P forever at the given level. No inflation, no deflation, no random price movements.
So, if the Legitimate Sovereign decides to implement absolute price stability and asks the economist how to achieve this goal, the economist has a clear-cut answer. It reads W'=R' with ' indicating the rate of change. No wish-wash here, no ambiguity, no senseless blather.
Of course, things become more complex in the investment economy, and when the price becomes the independent variable and employment becomes the dependent variable. These issues have been dealt with elsewhere. #2 The bottom line is that to set the inflation target at 2 percent is plain economic idiocy.
Egmont Kakarot-Handtke
#1 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#2 See cross-references Employment
REPLY to Brian Romanchuk on Aug 19 and Blog-Reference on Aug 21
You say: “There is an extremely long line of academic arguments that suggest the determination of what is ‘good’ is a question of philosophy/ethics/religious belief.”
True, and this is why economists should stop blathering about philosophical, ethical, and religious issues. Science is about true/false and NOT about good/bad. #1 Economics has to define itself as a systems science.
The elementary version of the correct (objective, systemic, behavior-free, macrofounded #2) Employment Law is shown under the label Graphic. #3
Blog-Reference and Blog-Reference
Brian Romanchuk takes the question “Why is inflation above 0% considered a good thing?” as a starting point for a psychological/sociological study of what different people/groups think about how inflation/deflation affects them.
His answer is the usual vacuous ‘It depends’: “I could try to discuss the economic theory questions associated with price stability. My view is ambivalent.… As a result, I would argue that the economic theory is a red herring: what matters is political economy.”
Needless to stress that this is not the answer of a scientist: “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)
Brian Romanchuk, though, is not a scientist but a blathering agenda-pusher. He has NO idea how the monetary economy works. Time to remind him of some economic basics and of some basics of scientific methodology as well.
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.
In the most elementary case, 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.
In the elementary production-consumption economy, the price P performs a random walk, which in turn depends on the random changes of productivity R and wage rate W. Note that the price movements do not depend on the random changes of employment or on whether the economy is at full employment or not. Equation (1) implies W/P=R (2), i.e., the real wage W/P is always equal to the productivity R.
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.#1 As long as C=Yw, macroeconomic profit is zero.
As a matter of principle, the elementary production-consumption economy is reproducible for an indefinite time. It is important to note that there is no such thing as an equilibrium or price stability, or full employment.
Now it is easy to see that price stability, that is, a rate of inflation/deflation of zero, can be established with a simple institutional rule: change of wage rate = change of productivity. In equation (1), this stabilizes the price P forever at the given level. No inflation, no deflation, no random price movements.
So, if the Legitimate Sovereign decides to implement absolute price stability and asks the economist how to achieve this goal, the economist has a clear-cut answer. It reads W'=R' with ' indicating the rate of change. No wish-wash here, no ambiguity, no senseless blather.
Of course, things become more complex in the investment economy, and when the price becomes the independent variable and employment becomes the dependent variable. These issues have been dealt with elsewhere. #2 The bottom line is that to set the inflation target at 2 percent is plain economic idiocy.
Egmont Kakarot-Handtke
#1 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#2 See cross-references Employment
***
You say: “There is an extremely long line of academic arguments that suggest the determination of what is ‘good’ is a question of philosophy/ethics/religious belief.”
True, and this is why economists should stop blathering about philosophical, ethical, and religious issues. Science is about true/false and NOT about good/bad. #1 Economics has to define itself as a systems science.
The elementary version of the correct (objective, systemic, behavior-free, macrofounded #2) Employment Law is shown under the label Graphic. #3
From this equation follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade.
Items (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρF, as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R.
Roughly speaking, the Legitimate Sovereign has two policy parameters: ρE and ρF. Now, ρF, in turn, is composed of W/PR. It is pure dilettantism to set the rate of price increase at 2% without taking the other variables into consideration. What has to be set is NOT one isolated variable but the policy parameter ρF as a whole. A smart policy to reduce unemployment and to eventually arrive at full employment would be to set P'=0 and W' >R' with ' indicating the rate of change. If, for example, P' is set at 2% and W'=R' unemployment INCREASES.
This brings us back to the initial question: “Why is inflation above 0% considered a good thing?”
The answer is because economics is a failed science, and economists do not know how the monetary economy works. False theory leads to false policy guidance. With their defective employment theory, economists bear the intellectual responsibility for the social devastation of mass unemployment. #4 Therefore, it is NOT good for society to take these incompetent blatherers seriously. #5
#1 Beware of the moralizing economist
#2 The macrofoundations approach starts with three systemic 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. For a start it holds X=O.
#3 Graphic AXEC62 Employment Law
#4 For details of the big picture, see cross-references Employment
#5 As Napoleon said: don’t listen to economists
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade.
Items (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρF, as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R.
Roughly speaking, the Legitimate Sovereign has two policy parameters: ρE and ρF. Now, ρF, in turn, is composed of W/PR. It is pure dilettantism to set the rate of price increase at 2% without taking the other variables into consideration. What has to be set is NOT one isolated variable but the policy parameter ρF as a whole. A smart policy to reduce unemployment and to eventually arrive at full employment would be to set P'=0 and W' >R' with ' indicating the rate of change. If, for example, P' is set at 2% and W'=R' unemployment INCREASES.
This brings us back to the initial question: “Why is inflation above 0% considered a good thing?”
The answer is because economics is a failed science, and economists do not know how the monetary economy works. False theory leads to false policy guidance. With their defective employment theory, economists bear the intellectual responsibility for the social devastation of mass unemployment. #4 Therefore, it is NOT good for society to take these incompetent blatherers seriously. #5
#1 Beware of the moralizing economist
#2 The macrofoundations approach starts with three systemic 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. For a start it holds X=O.
#3 Graphic AXEC62 Employment Law
#4 For details of the big picture, see cross-references Employment
#5 As Napoleon said: don’t listen to economists
March 2, 2018
Economies are culturally different but economic laws are universal
Comment on Tom Hickey on ‘Ellen Brown ― Funding Infrastructure: Why China Is Running Circles Around America’
Blog-Reference
The economic laws for the monetary economy are the SAME under capitalism and communism or anything in between, just as the laws of aerodynamics are the same for a bird or a plane, whether one flies to the South Sea or to Antarctica.
Of course, the cultural superstructure of different economies is different. So, universal economic laws and national culture together produce concrete historical outcomes for different economies. Analytically, though, both things have to be kept apart. Economics deals with objective-systemic laws of the monetary economy and not with the sociology or history of an individual country. This is analogous to physics, where the Law of Gravity is the same for different countries, for different cultures, and for people with different worldviews.
The crucial point for the economist to understand is that economics deals neither primarily nor secondarily with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/evolution etcetera. It is high time that economists take their sticky fingers out of these pies. #1
The Employment Law and the Profit Law are the same for China, the USA, and Germany. #2 The macroeconomic profit in an economy is the same whether firms are run by owner-appointed managers or state-appointed managers, and it is given by Qm≡Yd+(I−Sm)+(G−T)+(X−M). #3
Obviously, the philosophy of society/state/politics is different in different national economies. In China, the underlying state ethics is Confucian, in Germany, it is Prussian, and in the USA, it is Utilitarian. The former two have a strong social component that manifests itself in economic institutions like banking or old-age assurance.
Different overall profitabilities in different countries are NOT due to cultural differences, or the ownership order, or the proficiency of workers, or the greediness of managers, but uniquely and exclusively to the macroeconomic Profit Law. Put bluntly, if ‘capitalist’ American firms appear on average to be more profitable than ‘communist’ Russian firms, this is because public and private deficit spending in the USA is a bit over the top. The mirror image of corporate/private financial wealth is the public debt of the US government. In other words, overall profit Qm in the USA is for the greater part state-determined.
Therefore, in a systemic comparison, it is NOT the case that the US economic order is superior to the Chinese economic order or vice versa. The fact is that ALL monetary economies are identical with regard to the underlying systemic economic laws. The differences are in the social philosophies. But philosophy is NOT an issue for economists. All the more so, because economists have not yet understood the foundational concept of their subject matter, i.e., profit. How can they understand anything else?
Egmont Kakarot-Handtke
#1 Economics: Poor philosophy, poor psychology, poor science
#2 Full employment: thinking like the macro-boss
#3 For details of the big picture, see cross-references Profit
Blog-Reference
The economic laws for the monetary economy are the SAME under capitalism and communism or anything in between, just as the laws of aerodynamics are the same for a bird or a plane, whether one flies to the South Sea or to Antarctica.
Of course, the cultural superstructure of different economies is different. So, universal economic laws and national culture together produce concrete historical outcomes for different economies. Analytically, though, both things have to be kept apart. Economics deals with objective-systemic laws of the monetary economy and not with the sociology or history of an individual country. This is analogous to physics, where the Law of Gravity is the same for different countries, for different cultures, and for people with different worldviews.
The crucial point for the economist to understand is that economics deals neither primarily nor secondarily with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/evolution etcetera. It is high time that economists take their sticky fingers out of these pies. #1
The Employment Law and the Profit Law are the same for China, the USA, and Germany. #2 The macroeconomic profit in an economy is the same whether firms are run by owner-appointed managers or state-appointed managers, and it is given by Qm≡Yd+(I−Sm)+(G−T)+(X−M). #3
Obviously, the philosophy of society/state/politics is different in different national economies. In China, the underlying state ethics is Confucian, in Germany, it is Prussian, and in the USA, it is Utilitarian. The former two have a strong social component that manifests itself in economic institutions like banking or old-age assurance.
Different overall profitabilities in different countries are NOT due to cultural differences, or the ownership order, or the proficiency of workers, or the greediness of managers, but uniquely and exclusively to the macroeconomic Profit Law. Put bluntly, if ‘capitalist’ American firms appear on average to be more profitable than ‘communist’ Russian firms, this is because public and private deficit spending in the USA is a bit over the top. The mirror image of corporate/private financial wealth is the public debt of the US government. In other words, overall profit Qm in the USA is for the greater part state-determined.
Therefore, in a systemic comparison, it is NOT the case that the US economic order is superior to the Chinese economic order or vice versa. The fact is that ALL monetary economies are identical with regard to the underlying systemic economic laws. The differences are in the social philosophies. But philosophy is NOT an issue for economists. All the more so, because economists have not yet understood the foundational concept of their subject matter, i.e., profit. How can they understand anything else?
Egmont Kakarot-Handtke
#1 Economics: Poor philosophy, poor psychology, poor science
#2 Full employment: thinking like the macro-boss
#3 For details of the big picture, see cross-references Profit
Related: 'Economists understand neither Capitalism nor Socialism' and 'No exploitation, no classes' and 'Confounding sociology and economics' and 'Stock prices, profit, and other self-fulfilling idiocies' and 'PsySoc — the scourge of economics' and 'How to get out of the Econ 101 PsySoc woods'.
***
Twitter/X Jan 20, 2026 Corruption, integrity, culture, and the State
December 29, 2017
The creation and value of money and near-monies
Comment on Clint Ballinger on ‘Of Bitcoins and balance sheets: the real lesson from Bitcoin’
Blog-Reference
Clint Ballinger argues: “The national government creates the numeraire for the system (the 'Dollar' in the US, the 'Pound' in the UK, etc.) and, in addition to spending directly into the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public, but in fact, arises from two separate but linked balance sheet expansions.
But why do the tokens from either of these balance sheet expansions have and maintain value?
The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.
The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously ― by the obligation to repay bank loans.
Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.”
The claim that the value of money depends ultimately on the taxing power of the state is, of course, plain MMT nonsense.
Time to finally settle the theory of money. Because economics is a failed science, it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.
As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e., the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1
The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
The real value of money is ultimately given by productivity. From (1) follows W/P=R, i.e., real wage = productivity. The value of money has NOTHING AT ALL to do with the taxing power of the state. In the production-consumption economy with budget balancing and market clearing, the wage income receivers always get the whole output O=RL.
Monetary profit for the economy as a whole is defined as Qm≡C−Ywand monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, 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.
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. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2. #2
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money if the central bank does a good job.
The transaction equation reads M=κYw=κPX=κPRL in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable.
Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side (step 1). This deposit is then transferred to the household sector as wage payment (step 2) and returns in the form of consumption expenditures (step 3). #3
Now, commercial banks are introduced. They can create and destroy ‘money’ technically exactly in the same way as the central bank, except for the fact that it is bank money and not central bank money. The crucial condition for the functioning of the two-monies system is that the business sector and household sector accept bank money as practically identical to central bank money.
To be sure, in the strict sense, bank deposits are NOT money; only central bank deposits are money. This becomes clear as soon as the households/firms try to exchange huge amounts of bank money for central bank money. This is known as a bank run. In this case, the central bank has to step in and help the banks out with the one and only genuine money. The best way to prevent bank runs from ever happening is the unconditional guarantee of the central bank to exchange bank money anytime and in any amount into central bank money.
So, the private sector = banks can create near-money that works under the appropriate institutional conditions just as central bank money. The real value of near money is the same as central bank money. Acceptance and the real value of money and near-money do NOT depend on the state’s taxing power.
Problems arise if money is not brought into circulation in the right way. Roughly speaking, as long as the central bank or the private banks or whoever else finances the wage bill Yw, and the wage rate W moves exactly with the productivity, the price P remains according to (1) absolutely constant. The real value of money/near money rises and falls ultimately with productivity.
However, if the money is brought into circulation at the demand side, such that the household sector takes up credit and spends it on consumption goods, things are radically different. The market-clearing price rises, and this reduces the real value of wage income. The output is now redistributed between income spenders and credit spenders, i.e. P1=(C+Ccr)/O > P=C/O with C=Yw and O=X. #4
Secondly, the business sector now makes a profit, i.e., Qm=Ccr. It holds that the household sector’s deficit (dissaving) is equal to the business sector’s surplus (profit). If the money is brought into circulation by the government’s deficit spending it holds Public Deficit = Private Profit. Hence, MMTers as champions of state money creation and deficit-spending are ultimately ― knowingly or unknowingly does not matter ― agenda-pushers for the one-percenters. #5
With regard to Bitcoin, it follows that it is not even remote money, like a traveler’s check, for example, because the issuer does not guarantee to exchange it back at any time one-to-one into bank money or central bank money. The value of Bitcoin depends solely on the expectation that another private person will eventually exchange it for money or near-money or a financial or real asset. #6
Egmont Kakarot-Handtke
#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 Basics of monetary theory: the two monies
#4 MMT, money creation, stealth taxation, and redistribution
#5 MMT is ALWAYS a bad deal for the 99-percenters
#6 Primary and Secondary Markets
Related 'The ultimate ― analytical ― origin of money'.
Blog-Reference
Clint Ballinger argues: “The national government creates the numeraire for the system (the 'Dollar' in the US, the 'Pound' in the UK, etc.) and, in addition to spending directly into the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public, but in fact, arises from two separate but linked balance sheet expansions.
But why do the tokens from either of these balance sheet expansions have and maintain value?
The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.
The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously ― by the obligation to repay bank loans.
Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.”
The claim that the value of money depends ultimately on the taxing power of the state is, of course, plain MMT nonsense.
Time to finally settle the theory of money. Because economics is a failed science, it has to be reconstructed from scratch. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped.
As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e., the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1
The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
The real value of money is ultimately given by productivity. From (1) follows W/P=R, i.e., real wage = productivity. The value of money has NOTHING AT ALL to do with the taxing power of the state. In the production-consumption economy with budget balancing and market clearing, the wage income receivers always get the whole output O=RL.
Monetary profit for the economy as a whole is defined as Qm≡C−Ywand monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, 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.
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. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2. #2
The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money if the central bank does a good job.
The transaction equation reads M=κYw=κPX=κPRL in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable.
Money comes into existence on the balance sheet of the central bank as soon as the central bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side (step 1). This deposit is then transferred to the household sector as wage payment (step 2) and returns in the form of consumption expenditures (step 3). #3
Now, commercial banks are introduced. They can create and destroy ‘money’ technically exactly in the same way as the central bank, except for the fact that it is bank money and not central bank money. The crucial condition for the functioning of the two-monies system is that the business sector and household sector accept bank money as practically identical to central bank money.
To be sure, in the strict sense, bank deposits are NOT money; only central bank deposits are money. This becomes clear as soon as the households/firms try to exchange huge amounts of bank money for central bank money. This is known as a bank run. In this case, the central bank has to step in and help the banks out with the one and only genuine money. The best way to prevent bank runs from ever happening is the unconditional guarantee of the central bank to exchange bank money anytime and in any amount into central bank money.
So, the private sector = banks can create near-money that works under the appropriate institutional conditions just as central bank money. The real value of near money is the same as central bank money. Acceptance and the real value of money and near-money do NOT depend on the state’s taxing power.
Problems arise if money is not brought into circulation in the right way. Roughly speaking, as long as the central bank or the private banks or whoever else finances the wage bill Yw, and the wage rate W moves exactly with the productivity, the price P remains according to (1) absolutely constant. The real value of money/near money rises and falls ultimately with productivity.
However, if the money is brought into circulation at the demand side, such that the household sector takes up credit and spends it on consumption goods, things are radically different. The market-clearing price rises, and this reduces the real value of wage income. The output is now redistributed between income spenders and credit spenders, i.e. P1=(C+Ccr)/O > P=C/O with C=Yw and O=X. #4
Secondly, the business sector now makes a profit, i.e., Qm=Ccr. It holds that the household sector’s deficit (dissaving) is equal to the business sector’s surplus (profit). If the money is brought into circulation by the government’s deficit spending it holds Public Deficit = Private Profit. Hence, MMTers as champions of state money creation and deficit-spending are ultimately ― knowingly or unknowingly does not matter ― agenda-pushers for the one-percenters. #5
With regard to Bitcoin, it follows that it is not even remote money, like a traveler’s check, for example, because the issuer does not guarantee to exchange it back at any time one-to-one into bank money or central bank money. The value of Bitcoin depends solely on the expectation that another private person will eventually exchange it for money or near-money or a financial or real asset. #6
Egmont Kakarot-Handtke
#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 Basics of monetary theory: the two monies
#4 MMT, money creation, stealth taxation, and redistribution
#5 MMT is ALWAYS a bad deal for the 99-percenters
#6 Primary and Secondary Markets
Related 'The ultimate ― analytical ― origin of money'.
For more details about money, see AXECquery.
In the political realm, there is rhetoric, storytelling, and obfuscation. In the scientific realm, there is axiomatization, consistency/proof, and clarity.
In the political realm, Humpty Dumpty rules: “‘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’.” #1
In the scientific realm, Aristotle rules: “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.”
Economists never got above the level of proto-scientific storytelling and political agenda pushing. #2
Money is clearly defined and measurable with the precision of two decimal places. Money (liability side of the central bank’s balance sheet) is different from bank money, near-money, remote-money, pseudo-money, quasi-money, counterfeit money, crypto money, clay tablets, bullion, IOU, etcetera.
Needless to emphasize that the representative economist in general, and the MMTer in particular, have until this very day NO clear idea of the basic concepts of his subject matter, e.g. profit, income, money, and so on. But he has a lot to blather about democracy, the mob, and liberalism.
#1 Humpty Dumpty is back again
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
***
REPLY to Matt Franko, Tom Hickey Dec 30In the political realm, there is rhetoric, storytelling, and obfuscation. In the scientific realm, there is axiomatization, consistency/proof, and clarity.
In the political realm, Humpty Dumpty rules: “‘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’.” #1
In the scientific realm, Aristotle rules: “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.”
Economists never got above the level of proto-scientific storytelling and political agenda pushing. #2
Money is clearly defined and measurable with the precision of two decimal places. Money (liability side of the central bank’s balance sheet) is different from bank money, near-money, remote-money, pseudo-money, quasi-money, counterfeit money, crypto money, clay tablets, bullion, IOU, etcetera.
Needless to emphasize that the representative economist in general, and the MMTer in particular, have until this very day NO clear idea of the basic concepts of his subject matter, e.g. profit, income, money, and so on. But he has a lot to blather about democracy, the mob, and liberalism.
#1 Humpty Dumpty is back again
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
Twitter Jan 28, 2022 #CryptoIsCrime
Twitter Nov 11, 2022
Twitter Nov 18, 2022
Twitter Nov 19, 2022 Media promotion of crypto and FTX
Twitter Nov 22, 2022
Subscribe to:
Posts (Atom)