Occasional Xs: Economists are too stupid for macro accounting (VIII)

 

#Economics#AllYouNeedToKnow

“But without the government deficit the businesses and households would not enjoy the surplus to save and spend. Thus “national debt” is really the “national savings”. (Quarterly Balances quoted by Malcolm Reavell)

There is no such thing as the… pic.twitter.com/ovgRFA1I5l

— AXEC (@EgmontHandtke) May 26, 2025

Related 'Down with idiocy!' 

Occasional Xs: Since Keynes' I=S, economists get saving and profit wrong (II)

 

#Economics#AllYouNeedToKnow

There is a grave error in Richard Wagner's attached statement on retirement saving.

It is NOT the case that saving governs investment or that investment governs saving or that both are equal by definition. Both are independent and they together… pic.twitter.com/euV9jsq8Nn

— AXEC (@EgmontHandtke) March 3, 2025

Occasional Xs: How it works (XXXVI)

 

#HowItWorks

The macroeconomic 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd ↓ implies #DeficitSpendingHouseholdSector = #ProfitBusinessSector. This works fine for the #Economy until the households reach the #CreditLimit. Then things go into reverse, i.e. #Profit turns into #Loss. pic.twitter.com/jsR4i8Z8YT

— E.K-H (@AXECorg) August 31, 2023

Occasional Tweets: For 200+ yrs, dumb economists do not get the elementary relationships between saving, profit, distributed profit, and retained profit right

 

The 2-sector #ProfitLaw Qm≡I−Sm+Yd says that lower saving of the household sector Sm means higher #Profit Qm for the business sector. Or, taking distributed profit Yd into account, lower #Saving means higher #RetainedProfit Qret≡Qm−Yd. Companies NEVER do any “saving for you”. pic.twitter.com/A1hWpt2laS

— E.K-H (@AXECorg) February 28, 2023

Occasional Tweets: Since Keynes' I=S, economists get saving and profit wrong (I)

 

The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. So, #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy. #WeThePeople owes the #PublicDebt and #Oligarchy owns the #FinancialAssets.⇒https://t.co/ZbUnNmFNso

— E.K-H (@AXECorg) January 24, 2023

For more about saving, see AXECquery.

***

AXEC172a

Occasional Tweets: What is "late-stage capitalism" exactly?

 

#Economics

The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. Thus, #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy. Growing #PublicDebt is the life elixir of #LateStageCapitalism. In the earlier days, it was the (I−S) component. pic.twitter.com/CnnSdjFTYg

— E.K-H (@AXECorg) October 16, 2022

Occasional Tweets: How economists messed up economics

 

The definitions of the foundational concepts of #Economics ― #Profit, #Income, #Saving ― are inconsistent, i.e. provably false. Because of this, the whole of economics is proto-scientific garbage.

The GDP-death-blow for the economics professionhttps://t.co/QJycQUh0Uj

— E.K-H (@AXECorg) May 30, 2022

For details of the big picture see cross-references Axiomatization and cross-references Methodology and cross-references Failed/Fake Scientists.

Occasional Tweets: The making of billionaires

 

#Deficits drive #Profit. The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. So, #PrivateFinancialWealth grows in lockstep with #PublicDebt which becomes the interest #CashCow for the #Oligarchy. Saving from wage income does NOT make billionaires. pic.twitter.com/9qWsFwhM5c

— E.K-H (@AXECorg) October 8, 2021

MMTers: too stupid for simple math

Comment on Peter Cooper on “Politicians Who Want Us to Live Beyond Our Means”#1

Blog-References

Peter Cooper asserts: “Here is a simple accounting relationship. It is an identity, true by definition: Government Balance + Domestic Private Sector Balance + Foreign Balance = 0.

This identity composes a nation’s economy into three broad sectors. The government sector spends and taxes. The domestic private sector spends (households consume, businesses invest) and receives income. The foreign sector receives payments from and makes payments to domestic residents.

A sector is in surplus (its financial balance is positive) when its total spending is less than its income or revenue. Conversely, a sector is in deficit (its balance is negative) when its total spending exceeds its income or revenue. The accounting identity shows that the balances of the three sectors must sum to zero. If one sector maintains a surplus, at least one of the other sectors must be in deficit.”

Matt Franko echoes: “‘Here is a simple accounting relationship. It is an identity, true by definition: Government Balance + Domestic Private Sector Balance + Foreign Balance = 0’ if it was that ‘simple!’ then everybody would understand it …”.

Good point. MMTers definitely do NOT understand it. Neither do the rest of the basket of deplorables who have completed Econ 101 with an academic degree.

Eric Tymoigne, for example, asserts#2: “First, regarding the identity itself, for a domestic economy, we have, in terms of economic flows: GFB + PDFB + RWFB ≡ 0.

With PDFB, the private domestic financial balance, RWFB, the financial balance of the Rest of the World, and GFB, the government financial balance. This identity holds all the time, in any domestic economy (in a world economy, RWFB disappears). For economic analysis, it is insightful to arrange this identity differently in function of the type of monetary regime. In a country that is monetarily sovereign, the federal government has full financial flexibility. By monetary sovereignty, one means that there is a stable and operative federal/national government that is the monopoly supplier of the currency used as ultimate means of payment in the domestic economy, and that the domestic currency is not tied to any asset (like gold) or foreign currency.” and “This means that, for a monetarily sovereign country, the most insightful way to arrange the national accounting identity is: −GFB ≡ PDFB + RWFB or −GFB ≡ NGFB.

Where NGFB is the non-government financial balance (the sum of the financial balance of the private domestic sector and the Rest of the World). This way of arranging the identity shows well that the government sector (through its federal branch) is the ultimate provider/holder of domestic currency: government fiscal deficit (surplus) is always equal to non-government financial surplus (deficit).”

All this is provably false.#3-#8 

To begin with, the number of sectors is four: the household sector, the business sector, the government sector, and the Rest of the World. Accordingly, the axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0. Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes.

The sectoral balances equation reduces to −S≡Q (i.e., Q+S=0) when the economy is reduced to the household and business sector. And it reduces to (G−T)≡Q when the economy is reduced to the government and business sector, that is, Public Deficit = Private Profit.

Note that neither Peter Copper nor Eric Tymoigne ever tells one anything about macroeconomic profit Q, which is the balance of the business sector. One would think that this balance plays a central role in any description of the monetary economy. Obviously, it does NOT, and this tells one something important about economics and economists: economics is failed/fake science, and economists are either stupid or corrupt or both.

Egmont Kakarot-Handtke


#1 heteconomist
#2 New Economic Perspectives, Another Take on the Financial Balances
#3 The sectoral balances obfuscation: stupidity or corruption?
#4 Wikipedia and the promotion of economists’ idiotism (I)
#5 Wikipedia and the promotion of economists’ idiotism (II)
#6 Rectification of MMT macro accounting
#7 Economists cannot do the simple math of profit — better keep them out of politics
#8 Truth by definition? The Profit Theory has been axiomatically false for 200+ years

Related 'Deficit cheerleaders ― the Oligarchy’s useful idiots' and 'Wikipedia, economics, scientific knowledge or political agenda pushing?'

For more about sectoral balances, see AXECquery.

***

REPLY to Matt Franko on Feb 16

You say: “‘that is Public Deficit = Private Profit.’ Egmont the libertarians will N_E_V_E_R accept that... they just will not....”

Economics is a science according to its self-definition since the founding fathers. Science runs on the criterion true/false, with true/false defined by material/formal consistency and NOTHING else. In science, it is a matter of indifference to what libertarians think or accept, or do not accept. Libertarians are political agenda pushers and NOT scientists. The opinions of anti-scientists/politicians/trolls are irrelevant in science. Science is about knowledge, and politics is about opinions. Opinions are worthless, and politicians are known to be utterly stupid creatures.

Money does NOT originally come into the economy by government deficit-spending. Imagine that the balances of the government and the household sector are zero for a start, that is, all sectoral balances are zero. Does this mean that no money comes into the economy? NO! It is the Central Bank that issues the transaction money, i.e., finances the wage bill Yw with C=Yw and G=T and Q=0.#1-#5

Scientists listen to what the math says and NOT to what political agenda pushers say. And the math says that the MMT sectoral balances equation is false. MMT is refuted on all counts.


#1 The ultimate ― analytical ― origin of money
#2 How money emerges out of nothing ― the functional account
#3 Basics of monetary theory: the two monies
#4 The right and the wrong way to bring money into the economy
#5 Criminals and the monetary order

***

AXEC118d: The false and the true macroeconomic relationship between sectoral balances

***

PDF-Version

Both Austrianism and MMT are proto-scientific garbage

Comment on Robert Murphy on ‘The Upside-Down World of MMT’*

Blog-Reference and Blog-Reference

For his refutation of MMT, Robert Murphy takes the MMT balances equation as the analytical starting point.

“That is the three balances have to sum to zero. The sectoral balances derived are:
• The private domestic balance (I−S)
• The Budget Deficit (G−T)
• The Current Account balance (X−M).
A simplification is to add (I−S)+(X−M) and call it the non-government sector. Then you get the basic result that the government balance equals exactly $-for-$ … the non-government balance (the sum of the private domestic and external balances). This is also a basic rule derived from the national accounts and has to apply at all times.”

“So … we derive this equation: G−T=S−I. That is, the amount of government spending minus total tax revenue, is necessarily equal to private saving minus private investment. The MMTers might succinctly express this relationship in words: Government Budget Deficit = Net Private Saving.”

After this first demonstration of his scientific incompetence, Robert Murphy goes on: “This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. Let’s look again at the equation causing so much confusion: G−T=S−I. As a free-market economist, I don’t need to run from this tautology. I can use it to underscore the familiar ‘crowding out’ critique of government deficit spending.”

No, the fact of the matter is that the so-called “macro-accounting tautologies” are provably false because economists are too stupid for the elementary mathematics that underlies macroeconomic accounting.#1

To make a long story short, the correct macroeconomic relations are given as follows:#2
(1) Q≡−S in the elementary production-consumption economy,
(2) Q≡I−S in the elementary investment economy,
(3) Q≡Yd+I−S in the investment economy with profit distribution,
(4) Q≡Yd+(I−S)+(G−T)+(X−M) in the general case with government in an open economy.
Legend: Q profit, S saving, I investment, Yd distributed profit, G government expenditure, T taxes, X/M foreign trade.

The simplification of (4) yields Q=(I−S)+(G−T) (i) and this compares to Robert Murphy’s (G−T)=(S−I) resp. 0=(I−S)+(G−T) (ii).

The upshot is that (ii) implies that macroeconomic profit Q is zero. And this is plain analytical idiocy because a zero-profit economy does NOT exist. All this proves that Robert Murphy does not understand how the market economy works. The word profit does not appear once in his post. Austrianism is the failed attempt of explaining the market economy without ever mentioning the foundational economic concept profit which is objectively given with the precision of two decimal places.

Robert Murphy’s “Government Budget Deficit = Net Private Saving” has to be corrected to “Public Deficit = Private Profit”. And this correct formula tells everyone that MMT is a political fraud.#3

Robert Murphy, of course, does not realize anything. Austrians, in general, are not very smart. Because of this, Austrianism has never been anything else than vacuous proto-scientific blather.

Egmont Kakarot-Handtke


* Mises Institute
#1 Wikipedia and the promotion of economists’ idiotism
#2 Rectification of MMT macro accounting
#3 Stephanie Kelton’s legendary Plain-Sight-Ink-Trick

***

REPLY to Bob Roddis on Jan 27

“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)

Austrians are a political sect. Hayek’s Road to Serfdom is a political pamphlet with zero scientific content. What comes in the cloak of economic theory is thinly veiled agenda-pushing.

The foundational tenet ― markets never fail if left alone ― has no empirical content. It is only good for blaming any crisis on some random interventionist. The very characteristic of Austrians is circular reasoning. Circular reasoning is irrefutable and Austrians advertise this as strength ignoring the well-known methodological fact that a theory that is non-refutable is not scientific.

The foundational tenet of Austrianism has been refuted. The market system is inherently unstable because the relationship of wage rate and employment constitutes a positive feedback loop. When the foundational premise is false all the rest is scientifically worthless.

Robert Murphy’s discussion of the MMT sectoral balances equation proves that he does not understand elementary algebra and never realizes that the equation represents a zero-profit economy.

Austrians are simply too stupid for science. From von Mises onward to Hayek to Robert Murphy to Bob Roddis they are active as useful idiots in the political Circus Maximus.

***

REPLY to Bob Roddis on Jan 27

You ask rhetorically: “Investment causes savings. Right. What do have to invest if you haven’t saved it?”

The relation between saving and investment is not well understood for 200+ years. This is disqualifying for the whole profession of academic economists.

Above, Robert Murphy tries to “explain the importance of saving and investment in a barter economy” and concludes “This is an admittedly simple story, but it gets across the basic concepts of income, consumption, saving, investment, and economic growth.”

No, not at all. Real models have always been garbage. A barter economy is a NONENTITY. The subject matter of economics is, as Keynes put it, the “monetary theory of production”. Starting with the right foot, however, Keynes messed up macroeconomics and ended up with I=S.

I=S is provably false. Keynesianism is refuted.#1

The correct relationship is given in the most elementary case as Q≡I−S, Legend: Q business sector’s monetary profit, I business sector’s investment expenditures, S household sector’s monetary saving. All variables are measurable with the precision of two decimal places.

The equation tells one that the household sector’s saving and the business sector’s investment are independent and that their difference determines profit/loss of the business sector as a whole.

In a fiat money system, saving S ends up as deposits at the central bank (if private banks are taken out of the picture for a moment). Investment I is financed by the central bank through credit creation and ends up as long-term debt on the asset side of the central bank’s balance sheet. Profit Q ends up as deposits on the liability side. Needless to emphasize that the central bank’s balance is balanced. However, the term structure of both sides is not congruent. The liability side of the central bank, i.e. the household’s and business sector’s deposits, constitutes money.

The households can, in a second step, either keep their deposits or buy the business sector’s stocks/bonds on issuance. This destroys money and shortens the central bank’s balance sheet.

Both, the Austrian idea that saving is the precondition of investment and the Keynesian idea that investment creates saving via the income multiplier is nonsense. In a fiat money system, saving S and investment I are independent. There is no causality, no equality, no equilibrium. This is what Q=I−S tells those who can read a simple macroeconomic equation.


#1 Cross-references Refutation of I=S

***

REPLY to Bob Roddis on Jan 27

Robert Murphy writes: “To explain the importance of saving and investment in a barter economy, I walk through a simple numerical example where Crusoe can gather ten coconuts per day with his bare hands.”

I respond: “A barter economy is a NONENTITY.”

You respond: “Actually, David Graeber, of all people, helped to improve and clarify the basic story because there was never a barter economy.”

So, we agree that Robert Murphy’s story about saving and investment is as silly as can be.

The real economy is NOT the ‘real’ barter economy but the monetary economy.#1 The economy constitutes itself through the interaction of real and nominal variables.

This interaction 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, the price is given by P=W/R. This is the macroeconomic Law of Supply and Demand.

Profit for the economy as a whole is defined as Q≡C−Yw and saving as S≡Yw−C. It always holds Q≡−S, i.e. the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving. Under the initial condition of budget balancing, profit is zero.

So, the counterpart of household sector’s saving is business sector’s loss AND NOT INVESTMENT! Get it Austrians, we are living in a monetary economy and saving is NOT some non-consumed coconuts but money in the bank.

Austrianism is dead since about 1900. Now, rest in peace Bob Roddis and the Mises Institute.


#1 The irreparable unreality of all ‘real’ models

Related 'Settling the Theory of Saving' and 'Squaring the Investment Cycle'.

***

Switch to ‘Jennifer Morgan and Sharan Burrow — Tackling The Twin Challenges Of Climate Change And Inequality’

***

REPLY to Bob Roddis on Jan 29

There is political agenda pushing and there is science. Economics as science tries to figure out how the monetary economy works. Austrian economics is proto-scientific garbage and a smokescreen for agenda pushing which comes under the euphemistic heading of Libertarianism.

Clearly, Austrians violate the principle of separation of politics and science since von Mises.

Your discussion of defensive or aggressive violence has no economic content. Worse, it misses the point. Compared to open violence, continuous low-intensity aggression/violence is currently the greater problem.

The upshot is, that this type of almost imperceptible violence is built right into the price system. And this brings us back to the heart of economics.

Contrary to Hayek, the major function of the price mechanism is NOT information processing and signaling but imperceptible redistribution. What is advertised as optimal functioning of an anonymous and apparently non-violent market system is, in fact, an impenetrable mechanism of continuous low-intensity redistribution.#1

To paint the market system as a superior information processor instead of a merciless slow-motion executor is one of the greatest deceptions of Austrianism.


#1 Pareto-efficiency, Hayek’s marvel, and the invisible executor

Why is 0!=1? And why is I≠S? And why economics teaching is rotten

Comment on Lars Syll on ‘Why is 0!=1?’

Blog-Reference

The failed economics teacher Lars Syll indulges in self-promotion: “The single most important factor behind successful education ― from kindergarten to university ― is, and has always been — having a good teacher!”

True, but the situation in economics is this: textbooks and teaching are provably false from microeconomic supply-demand equilibrium to macroeconomic I=S.#1

Here is what good teaching looks like.

Keynes started macroeconomics with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

This proposition is false. Where is the mistake?

The first thing to do is always to clearly state the premises. The elementary production-consumption economy is defined by a set of macroeconomic axioms.

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household sector and the business sector which, in turn, consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditures C is equal to price P times quantity bought/sold X.

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 saving of the household sector S≡Yw−C is zero and the profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases. Accordingly, the market-clearing price as the dependent variable is given by P=W/R.
In case (ii) saving S is positive and the business sector makes a loss, i.e. Q is negative. The market-clearing price P is less than W/R.
In case (iii) saving S is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Q is positive. The market-clearing price P is greater than W/R.

It always holds Q≡−S, in other words, the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving.

And that’s it. The mistake in Keynes’ argument lies in the premise income = value of output. The fact is that the value of output C=PX can be less than wage income Yw. The balance of the two flows C−Yw is called loss. Loss as the difference of flows is different from the flow wage income. Loss is NOT income.

Analogous in the opposite case, i.e. C>Yw and Q>0. Profit is NOT income either.

In the elementary investment economy, it holds Q≡I−S. Simple algebra and a look at reality tell one that saving is NEVER equal to investment. However, economics teachers explain to their students 80+ years after Keynes why I=S.#2 And every student generation swallows it with a straight face.

Something is rotten with economics teaching.

Egmont Kakarot-Handtke


#1 The father of modern economics and his imbecile kids
#2 #DrainTheScientificSwamp

Related 'Trust in economics as a science?' and 'Fact of life: your econ prof is scientifically incompetent' and 'Textbooks and the mental cloning of dumb economists' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'Economics: 200+ years of scientific incompetence and fraud'. For details of the big picture see cross-references Econ 101/Old Curriculum/New Curriculum.

Economics should never be a substitute for thinking

Comment on Lars Syll on ‘Econometrics: The Keynes―Tinbergen controversy’

Blog-Reference and Blog-Reference

Lars Syll’s fatal blunder consists of maintaining that economics is a social science while, in fact, it is a systems science.#1 And while there is, of course, no such things as a behavioral law there are systemic laws.

Walrasian economics is based on behavioral axioms.#2 Because these axioms are provably false the whole theoretical superstructure of mainstream economics is false. Therefore, it comes as no surprise that econometrics does not yield valid results. This, though, does not support the conclusion that the statistical methods/tools of econometrics are worthless but confirms the long-known fact that economic theory in all variants from Walrasianism, Keynesianism, Marxianism, to Austrianism is worthless.

Economists did not figure out the systemic laws to this day. In fact, they are too stupid for the elementary mathematics that underlies macroeconomics.

Keynes’ scientific incompetence can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

Keynes got macroeconomic profit wrong: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Let this sink in: the economist Keynes NEVER understood the foundational concept of his subject matter. Because profit is ill-defined the complete theoretical superstructure of Keynesianism is false. Keynesian policy guidance NEVER had valid scientific foundations.

The elementary version of the axiomatically correct macroeconomic Profit Law, which is measurable with the precision of two decimal places, reads Q_m≡I−S_m with Q_m as monetary profit and S_m as monetary saving. And this means that since Keynes/Hicks ALL I=S/IS-LM models are false.#3 Macroeconomics is proto-scientific garbage. Microeconomics is even worse.

Lars Syll summarizes Keynes’ critique of Tinbergen’s econometrics in great detail. Keynes argues: “The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y).”

This, of course, is pure idiocy because goodness is a NONENTITY just like utility or equilibrium. The example proves that Keynes had no idea of what economics is all about. He never understood the foundational concept of profit and he was obviously too stupid for the elementary mathematics that underlies macroeconomics.

Trivially true: “Econometric modelling should never be a substitute for thinking.” and, because there is, to begin with, no substitute for thinking,  this applies also to Keynesianism. Nobody, except cargo cult scientists, can take seriously what Keynes has said about probability or econometrics or, for that matter, about profit or employment theory.#4

After 80+ years of storytelling/blather, Keynesians, Post-Keynesians, Anti-Keynesians, New Keynesians, MMTers, heterodox and pluralist retards, Lars Syll and the rest of stupid/ corrupt political agenda pushers together with all their peer-reviewed articles/textbooks/blog-posts have finally to be flushed down the scientific toilet.

Egmont Kakarot-Handtke


#1 Economics is NOT a social science
#2 Where economics went wrong
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#4 Go! ― test the Profit and Employment Law

***

LINKS on Lars Syll's  'P-values are no substitute for thinking' on Nov 26

#DrainTheScientificSwamp

Scientists do NOT manipulate research with P-value only the stupid/corrupt agenda pushers of orthodox and heterodox economics.

► Stop beating mainstream economics ― it is long dead
► The stupidity of Heterodoxy is the life insurance of Orthodoxy
► How Heterodoxy became the venue for science’s scum
► Lars Syll, fake scientist

Wikipedia and the promotion of economists’ idiotism (II)

Comment on Wikipedia’s ‘Accounting identity’#1

Own post, no external Blog-Reference

“In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true.” and “The term accounting identity may be used to distinguish between propositions that are theories (which may or may not be true, or relationships that may or may not always hold) and statements that are by definition true.”

The first point to notice is that there is NO such thing as “true by definition”.#2 Truth has to be established by proof. Scientific truth is well-defined by material and formal consistency: “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)

The second point is that the term “accounting identity” shows that economists do not understand elementary mathematics that underlies accounting.

The third point is that identities that are incompatible are declared “true by definition”. Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”.

Economists have obviously a serious problem with methodology. More specifically, they suffer badly from the Humpty Dumpty Fallacy which is expressed in these familiar slogans:

• “You can define anything you want but as a sage once said ‘A rose by any other name will smell as sweet!’” (Davidson)
• “For, on principle, we may call things what we please.” (Schumpeter)
• “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)
• “‘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’.”

The point is that a single definition is indeed arbitrary but one NEVER has only one definition. So, one has to make sure that the set of definitions that refer to one subject matter is internally consistent.

From methodology, it is known that “The often-heard rule that concepts are to be defined before they are used in a discussion is much too simple-minded pre-Hilbertian. The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) The fact of the matter is that the foundational concepts of economic are ill-defined. And this is why economics never rose above the proto-scientific level.

For compelling methodological reasons, economics has to be built upon objective-systemic macrofoundations.#3, #4, #5

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. For a start, the elementary production-consumption economy is given by three macroeconomic axioms.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L.
(A2) O=RL output O is equal to productivity R times working hours L.
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

From the macroeconomic axioms follow models by specification. The Ur-Model is given by two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).

It always holds Qm≡−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

The point to notice is that a definition is a one-way relation. The new term “monetary profit Qm” (= definiendum) is derived from the terms already given by the axioms, i.e. C and Yw (= definiens).

From the definition (≡) of the balance of the business sector Qm≡C−Yw, follows that to write down the identity Qm+Yw=C is INADMISSIBLE. So, one is NOT permitted to say that “total income” is the “sum of profits and wages” and that “total income” is equal to household sector spending C or that Income = Value of Output (Keynes). Economists, though, do not get it to this day.#6, #7

What should be quite clear is that profit Qm is a balance, i.e. a difference of flows, and wage income is a flow from the business to the household sector. So profit is NOT a sub-category of total income but a balance. A balance can either be positive or negative while a flow like wage income is always greater than zero.

So, Qm+Yw=C is NOT a balance identity that is “true by definition” but plain methodological garbage. From Qm≡−Sm, in turn, follows immediately that the Keynesian accounting identity I=S and the MMT balances equation (I−S)+(G−T)+(X−M)=0 are methodological garbage by logical implication.

What holds for the flows of the Profit-and-Loss-Account holds also for Wikipedia’s “most basic identity in accounting”, that is, Assets=Liabilities+Equity. The correct definition for the Asset-and-Liability-Account of the business sector is the one-way relation Equity≡Assets−Liabilities.

The economic Ur-Model above tells us two important things: (i) under the condition of market-clearing X=O and budget-balancing C=Yw, macroeconomic profit is zero and independent of employment, productivity, wage rate, etcetera, and (ii), because of Qm≡−Sm macroeconomic profit comes in the most elementary case from dissaving, i.e. the growth of household sector debt.#8

From the fact that the foundational concepts of economics ― profit and income ― are ill-defined follows (i) that the Wikipedia entry “Accounting identity” is proto-scientific garbage, and (ii), that all Wikipedia entries which directly or indirectly depend on the definition of profit/income are proto-scientific garbage by logical implication.#9, #10

Egmont Kakarot-Handtke


#1 Wikipedia Accounting identity
#2 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#3 For details of the big picture see cross-references Axiomatization
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#5 Wikimedia AXEC137 Macrofoundations
#6 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#7 For details of the big picture see cross-references Profit
#8 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#9 Wikipedia and the promotion of economists’ idiotism (I)
#10 Hooray! The formalization issue is finally settled

Related 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Economics: 200+ years of scientific incompetence and fraud' and 'Economists: just too stupid for counting' and 'Keynes and the logical brilliance of Bedlam' and 'Yes, economists are really that stupid' and 'Keynes ― the poster boy for the weakness of the economist’s mind' and 'MMT and the canonical macroeconomic model'.

***

Wikimedia AXEC143d

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

MMT is idiocy and fraud

Comment on Steve Roth/Asymptosis on ‘Wealth and the National Accounts: Response to Matthew Klein’

Blog-Reference and Blog-Reference

Randall Wray says about the foundations of MMT: “In this blog we are going to begin to build the necessary foundation to understand modern money. Please bear with us. It may not be obvious, yet, why this is important. But you cannot possibly understand the debate about the government’s budget (and critique the deficit hysteria that has gripped our nation across the political spectrum from right to left) without understanding basic macro accounting. So, be patient and pay attention. No higher math or knowledge of intricate accounting rules will be required. This is simple, basic, stuff. It is a branch of logic. But it is extremely simple logic.”

This is true, of course, the point is that economists in general and MMTers, in particular, do not even get the extremely simple logic of accounting right. In other words, MMTers are just as incompetent as the representative economist.#1

There is no need to plow through the heap of MMT verbiage about income/profit/saving/ wealth. The elementary points MMTers do not get is (i) that business sector profit/loss is the mirror image of household sector dissaving/saving, and (ii), that profit is NOT a flow like wage income but a difference of flows, hence the simple operation 'add profit and wage income' is a methodological blunder called Humpty Dumpty Fallacy.*

MMT policy advice is patently false because MMT theory is false, more specifically, MMTers do not know how the price- and profit mechanism works. They do not know the difference between profit and income, between profit and distributed profit, between monetary profit Q_m and nonmonetary profit Q_n, and between monetary saving S_m and nonmonetary saving S_n.#2 Monetary profit emerges in the production-consumption economy, nonmonetary profit/saving stems from the revaluation of real and financial assets/ liabilities.

In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w) and two definitions (monetary profit/loss Q_m≡C−Y_w, monetary saving/dissaving S_m≡Y_w−C).#3

It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, 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. This Law refutes the MMT profit theory. So, the whole of MMT is scientifically dead already at this point.

Money is needed by the business sector to pay the workers who receive the wage income Y_w per period (econ-speak for wages + salaries). The workers/employees spend C per period. Given the two conditions, the market-clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.

As collateral, this macroeconomic Law kills the commonplace Quantity Theory because the “Quantity of Money” is NOT among the price determinants. The average stock of transaction money follows as M=κY_w, 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. The economy never runs out of money.

Starting from the elementary production-consumption economy, complexity is then successively increased.To make matters short, the axiomatically correct relationships are given here without further explanation. It holds, with Q_m monetary profit/loss, S_m monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Y_d distributed profit:

(i) Q_m≡−S_m in the elementary production-consumption economy,
(ii) Q_m≡I−S_m in the elementary investment economy,
(iii) Q_m≡(G−T)+(I−S_m) in the investment economy with government deficit/surplus,
(iv) Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) in the open economy with distributed profit.

From (i)/(ii) follows immediately that saving and investment are NEVER equal and that ALL I=S/IS-LM models are false since Keynes/Hicks and that ALL After-Keynesians are stupid.#4

From (iii) follows that ― given business sector investment I and household sector monetary saving S_m ― Public Deficit = Private Profit.

It never follows the MMT tripartite balances equation (I−S)+(G−T)+(X−M)=0. Because this foundational equation is provably false the whole of MMT is worthless.

Right policy depends on true theory. MMT is proto-scientific garbage because it NEVER got the foundational concepts of economics right. Politically, MMT is a fraud because it claims to benefit the ninety-nine-percenters but, in fact, benefits the one-percenters.

Egmont Kakarot-Handtke


#1 For an ― masochists only ― overview see
The Basics of Macro Accounting
Deficits are here to stay … get used to it
JKH on the recent MMR/MMT Debates
Where MMT Gets Its Accounting Wrong — And Right
Wealth and the National Accounts: Response to Matthew Klein
Savings ― Explaining the Humpty Dumpty word
The Upside-Down World of MMT
#2 For the full-spectrum refutation of MMT see cross-references MMT
#3 True macrofoundations: The reset of economics
#4 For details see cross-references Refutation of I=S

Related 'Why economists don’t know what profit is' and 'Why economists know nothing' and 'Note on saving and investment' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'Primary and Secondary Markets'. For details of the big picture see cross-references Accounting.

*

Profit, income, and the Humpty Dumpty Fallacy

Comment on Timothy Taylor/Conversable Economist on ‘Behind the Declining Labor Share of Income’

Blog-Reference

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO idea what the pivot of their subject matter is.#1

Because profit is ill-defined, income/distribution is ill-defined, and this is due to the Humpty Dumpty Fallacy ― one of the worst idiocies of economics.

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumer goods industry, i.e. Q_c≡C−Y_wc, and the investment goods industry, i.e. Q_i≡I−Y_wi, that is, Q≡(C−Y_wc)+(I−Y_wi) or Q≡C+I−Y_w (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Y_w.

Now, Humpty Dumpty introduces a redundant‡ definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Y_w  and now (i) is rewritten
(b) Q+Y_w ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit invisible.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic Profit Law is given as Q≡Y_d+(I−S)+(G−T)+(X−M) [1], Legend: Q macroeconomic profit, Y_d distributed profit, I investment expenditure, S household sector saving, G government expenditures, T taxes, X exports, M imports. For the world economy as a whole, it holds X, M=0.

The nominal labor "share" λ is defined as the quotient of wage income Y_w and the sum of wage income and profit, that is, λ≡Y_w/(Q+Y_w) with Q given by [1] above. To recall, Ψ≡Q+Y_w is redundant/inadmissible, hence profit is NOT a "share" of "total income Ψ".

The fact is that neither market power nor capital intensity nor information technology nor union weakness can ultimately account for a falling nominal labor "share" λ. The main drivers of increasing macroeconomic profit Q have been in the past decades the increased deficit spending of the household- and the government sector. The other factors can only account for the distribution of profit Q between firms but NOT for the total amount.#2, #3

Traditional distribution theory is scientifically worthless because the foundational economic concepts of profit, income, and saving are ill-defined.* Worse, because profit is ill-defined/ poorly understood the whole of economics is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 For details of the big picture see cross-references Profit and cross-references Refutation of I=S.

‡ See Occam's razor in Wikipedia

*  Wikimedia AXEC129d

Wikimedia AXEC128b

Is Nick Rowe stupid or corrupt or both?

Comment on Nick Rowe on ‘Profits = Investment − Saving’

Blog-Reference and Blog-Reference on Jan 26 and Blog-Reference

“Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (Cooper) Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics.

The foundational methodological error/mistake/blunder of economics is that the pivotal concepts — profit and income — are ill-defined and not at all understood. This explains why economics is a failed science or what Feynman called a cargo cult science. Actually, economics is at the stage of medieval physics before the pivotal concept of energy was properly defined and understood.

The proof of the utter scientific incompetence of economists is given with the fact that the profit theory is false since Adam Smith.#1, #2, #3

Keynes started macroeconomics with false premises and ended with false conclusions “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)#4

That Keynes was too stupid for the elementary mathematics of macro accounting was proven by Allais.#5

According to well-established scientific standards, profit theory, Keynesian economics, and all I=S/IS-LM models are definitively refuted. However, economists NEVER lived up to any standards “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941)

Nick Rowe stands firmly in this corrupt methodological tradition “If households own the firms, we can say that firms’ assets are owned by households, and firms’ profits are included in households’ income. And if we do that, then we are back at the standard definitions where Expenditure = Income, and Investment = Saving, must always be true. … There’s a number of different ways we could add things up. Which is the best way? It depends.”#6

This is the classical argument since Alice’s and Humpty Dumpty’s memorable methodological dialogue “‘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’.”

Science, of course, is different “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Science is defined by material and formal consistency and this is known for 2300+ years ― except among economists “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.” (Aristotle)

Keynes’ premise Income = Value of Output is axiomatically false and because of this, the whole analytical superstructure of Keynesianism up to MMT is scientifically worthless. Worse, with MMT the toxic combination of stupidity and corruption has reached a new quality and has unnoticed mutated into ordinary political fraud.#7

Since Keynes, macroeconomics is proto-scientific garbage but Nick Rowe and his Trump University colleagues have not realized it.#8

Egmont Kakarot-Handtke


#1 The profit theory is false since Adam Smith
#2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)
#3 “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski, 1986)
#4 I is never equal S and even Nick Rowe will eventually grasp it
#5 How Keynes got macro wrong and Allais got it right
#6 No accountant worth his salt adds wage income (= flow) and profit (= balance of the flows consumption expenditures and wage income) together. Only brain-dead economists do this. For more details about Flow-Balance Consistency see cross-references Accounting.
#7 Down with idiocy!
#8 Rethinking macro

Immediately preceding I is never equal S and even Nick Rowe will eventually grasp it. For details of the big picture see also cross-references MMT.

***

REPLY to Nick Rowe on Jan 26 and Blog-Reference MNE

You say it depends, and this a not so smart answer from the handbook of lame excuses.#1 Science is about proof, so here is the unassailable proof of Nick Rowe’s incompetence.

1. Premises

The elementary production-consumption economy is given by three macroeconomic axioms: (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditures C is equal to price P times quantity bought/sold X.#2

2. Logical implications

In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Y_w, (ii) C is less than Y_w, (iii) C is greater than Y_w.
• In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. The product market is cleared, i.e. X=O in all three cases. For a start, the market-clearing price as the dependent variable is given by P=C/X=W/R.
• In case (ii) monetary saving S_m is positive and the business sector makes a loss, i.e. Q_m is negative. The market-clearing price P is less than W/R.
• In case (iii) monetary saving S_m is negative and the business sector makes a profit, i.e. Q_m is positive.

It always holds Q_m≡−S_m, in other words, the business sector’s loss is equal to the household sector’s saving. In still other words, saving is NOT equal to investment (because there is NO investment in the elementary production-consumption economy) but saving is equal to loss. There is NO such thing as an IS-curve but there is an SL-line = Saving/Loss-line which runs with minus 45 degrees through the origin.#3

3. Conclusion

Simple algebra tells everybody that saving is NEVER equal to investment and that, by consequence, there is NO such thing as an IS-curve. All IS-LM models are a priori false. Nick Rowe’s model is wackadoodle.

4. Generalization

The axiomatically correct Profit Law says for the general case Q_m≡Y_d+I−S_m+(G−T)+(X−M). Legend: Q_m monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving, G government expenditures, T taxes, X exports, M imports. Again, there is NO such thing as an equality/identity/equilibrium of investment and saving. Both variables are entirely independent.#4


#1 Failed economics: The losers’ long list of lame excuses
#2 For more details see Economics for Economists
#3 See on Wikimedia
#4 For details of the big picture see cross-references Refutation of I=S

***

REPLY to Benoit Essiambre on Jan 26 and Blog-Reference MNE

You say “MMTers *insist* in the I=S identity.”

The MMT balances equation reads (I−S)+(G−T)+(X−M)=0. This boils down to I=S if the government balance and the foreign trade balance is set to zero. The MMT balances equation is provably false.#1

The axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Q_m−Y_d)=0. The correct equation contains profit Q_m and distributed profit Y_d while these pivotal economic magnitudes are MISSING in the MMT equation.

Conclusion: Keynes’ I=S was false because Keynes NEVER understood what profit is which is the defining mental defect of the representative economist. The Post Keynesians realized nothing.#2 The MMTers, too, realized nothing and built their whole approach upon the false macroeconomic balances equation. Because of this, the whole analytical superstructure of MMT is proto-scientific garbage. MMT policy lacks sound scientific foundations and is nothing more than ordinary political fraud.

Reply to Economuse

You say “Qre=I−S arises because of EKH’s narrow definition of income. Change the definition to the usually accepted definition and the usual Keynesian identity reappears. This is easily demonstrated.”

Yes, indeed. The point is, though, that what you call “narrow definition of income” is the correct definition and what you call the “usually accepted definition” is provably false. Here is the proof.

It holds
(i) Q_m≡−S_m in the elementary production-consumption economy,
(ii) Q_m≡I−S_m in the elementary investment economy,
(iii) Q_m≡Y_d+I−S_m in the investment economy with profit distribution.

Let us now take equation (ii) and play the Humpty Dumpty shell game.

We introduce a new definition by saying that profit may be called “saving of the business sector” and that this “saving” can be added up with saving of the household sector to “total saving” Σ thus
(a) Σ≡Q_m+S_m and now (ii) is rewritten
(b) Q_m+S_m=I and then, hey presto,
(c) Σ≡I that is, “total saving” is “by definition” identical to investment or in the usual sloppy parlance saving equals investment.

Let us call this the Humpty Dumpty Fallacy. It is at the bottom of all IS-LM models. Note that “total saving” Σ is different from household sector saving S_m and that this crucial difference simply gets lost in the brain-dead slogan “saving equals investment”.

The methodological blunder consists of the introduction of the redundant definition (a).

The parallel blunder consists of the introduction of the redundant definition of “total income” as the sum of wage income and profits, i.e. Ψ≡Y_w+Q_m. Note in particular that here a flow Y_w and a difference of flows Q_m is added together which is a plain Flow-Balance Inconsistency.#3 The 1st macroeconomic axiom says household sector income Y is the sum of wage income (= flow) and distributed profit income (= flow), i.e. Y=Y_w+Y_d.

Needless to emphasize that economists never feel any irritations about logical inconsistencies, just the opposite, this is the air that they breathe from their student days to the grave. And this is why economics is a failed science.

Conclusion: All of economics is proto-scientific garbage because the foundational concepts of profit and income are ill-defined since Adam Smith.


#1 For the full-spectrum refutation of MMT see cross-references MMT.
#2 Why Post Keynesianism Is Not Yet a Science
#3 A tale of three accountants

***

REPLY to Henry Rech on Jan 27 and Blog-Reference MNE

You say “EKH defines household income: Household Income = Wage Income + Distributed Firm Profits => Y=Y_w+Y_d. However, conventional Keynesian macro defines total economy income: Total Eco. Income = Wages Income + Dist Firm Profs + Retained Firm Profs.” Then you rearrange the equations and conclude: “That is, removing the definitional impediments EKH imposes, EKH’s equations reduce to the Keynesian relationship of equality between investment and savings.”

In fact, I have proven this:
(i) Loss/profit is equal to saving/dissaving in the elementary case of a production-consumption economy, i.e. Q_m≡−S_m (1), and equal to the difference between investment and saving, i.e. Q_m≡I−S_m (2), in the case of an investment economy without profit distribution. Conclusion: household sector saving is NEVER equal to business sector investment.

(ii) Keynes’ slogan saving-equals-investment is axiomatically false and is definitively refuted. By implication, the whole General Theory is refuted.

(iii) It is, however, quite easy to regress to Keynes’ false formula by introducing redundant definitions. So, by introducing the definition of “total saving” Σ, thus that Σ≡Q_m+S_m, equation (2) turns to Σ≡I that is, “total saving” is “by definition” identical to investment. This, of course, is a methodologically inadmissible semantic shell game.

(iv) The same shell game is performed with the introduction of the redundant definition of “total income” as the sum of wage income and profits, i.e. Ψ≡Y_w+Q_m. This definition is methodologically inadmissible because a flow Y_w and a difference of flows Q_m are added together which is a  Flow-Balance Inconsistency (which is just as bad as a stock-flow inconsistency).

So, yes, Keynes’ slogan saving-equals-investment can at any time be reestablished by applying the Humpty Dumpty Fallacy. The students of economics simply swallow and parrot every crap as the history of economic thought shows.#1 History shows also that heterodox profit theory has not been one iota better and falls flat as an alternative.#2

In order to end the 200+ years old predominance of utter incompetence in economics, it is necessary to get rid of the whole bunch of blatherers, shell-game artists, morons, and agenda pushers. Those who still parrot saving-equals-investment and those who present I=S/IS-LM models on their blogs or in the New York Times and those who peer-review and publish this proto-scientific garbage have to go first.


#1 For details of the big picture see cross-references Refutation of I=S
#2 Heterodoxy, too, is proto-scientific garbage

***

REPLY to Henry Rech on Jan 28 and Blog-Reference MNE

I said “Conclusion: household sector saving is NEVER equal to business sector investment.”

You say: “OK, however, the Keynesian formulation specifies total investment, not just household investment.”

Keynes said “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”

There is NO such thing as household investment. The household sector either saves (consumption is less than income) or dissaves (consumption is greater than income) in the elementary cases under discussion and NOTHING else.

"Keynes always believed that ‘a little clear thinking’ or ’more lucidity’ could solve almost any problem." (Moggridge, 1976, p. 39)


Immediately following Cryptoeconomics ― the best of Nick Rowe’s spam folder.
Immediately preceding I is never equal S and even Nick Rowe will eventually grasp it.