Links on Simon Wren-Lewis on ‘Bill Mitchell’s fantasy about Labour’s fiscal rule’
Blog-Reference (Link) and Blog-Reference (Link) on Jun 19
The discussion between Simon Wren-Lewis and Bill Mitchell suffers from the obvious fact that both lack the true macroeconomic theory.
■ Economic policy and the skirmishes of failed/fake scientists
■ Are economics professors really that incompetent? Yes!
■ The retirement of a fake scientist and real agenda pusher
■ Economics as a cover for agenda pushing
■ Thinking about economic policy for future PM Corbyn
■ Deficit-spending, public debt, and macroeconomic profit/loss
■ Oxford economics — still at the proto-scientific level
■ Where economics went wrong (II)
■ Legitimacy lost
■ The biggest scientific mistake of the last centuries, and it has much to do with academic economists
■ The economist as useful political idiot
■ The demise of phony experts: macroeconomics is provably false
■ Why is economics a total scientific failure?
■ Macroeconomics: self-delusion and empty promises
■ Economics has arrived at the bottom of the proto-scientific shithole
■ How MMT fools the ninety-nine-percenters
■ Political economics: Who hijacks British Labour?
■ Deficits matter for distribution
■ From false microfoundations to true macrofoundations (II)
■ Time to retire political economists
■ Microfoundations R.I.P.
■ Mr. Corbyn and the perils of political economics
■ Selling public debt with Ricardo’s tear gland rhetoric
■ Some fatal flaws of MMT
■ The economist as amateur journalist
■ Proof of the inherent instability of the market economy
■ Gov-Deficits do NOT cause inflation
■ Why is MMT so false?
■ Economics: the emancipation of science from politics
■ A bitter pill for political economists
■ The myth of economics knowledge
■ Attention: there are THREE types of inflation
■ Economic bungee jumping without cord
■ Consensus, buddy consensus, scientific consensus, or what?
■ Austerity and the total disconnect between economic policy and science
■ Media-fake-farce-fraud-storytelling-macro
■ Redefining economics
■ Economists ― medics or barber-surgeons?
■ Austerity and the idiocy of political economists
■ The non-existence of economics
■ Endtime for soapbox economists
■ NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
■ NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
■ Delusions of useful idiots
■ Economics ― worse than fake
►For the full-spectrum refutation of MMT see cross-references MMT
Egmont Kakarot-Handtke
Showing posts with label zMMM. Show all posts
Showing posts with label zMMM. Show all posts
July 31, 2017
Economists: too stupid for counting
Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’
Blog-Reference and Blog-Reference
The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward algebra of accounting.
Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market-clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.
Nobody could be more down-to-earth and historically accurate than Mr. B and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) Graphic AXEC94 National accounts, elementary production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, i.e., every single transaction in the period under consideration, accurately.
At the end of the second period, they meet again and compare their numbers. This time they have:
(b) Graphic AXEC95 National accounts, consumption expenditures greater than wage income, C > Yw.
The accountants are again pleased that their respective numbers are exactly equal, but this time their accounts show balances.
Says Mr. B, I call my balance profit or loss, as the case may be. More specifically, I define monetary profit as Qm≡C−Yw.
Well, says Mrs. H, I call my balance saving or dissaving, as the case may be. More specifically, I define monetary saving as Sm≡Yw−C.
Then they calculate their respective balances and find out, to nobody’s surprise, that Qm≡−Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real-world transaction.
The next day, the two accountants hand their numbers = Figure (b), over to the economist. Says the economist, hmm, for my purposes, I have to rearrange the accounts, after all, profit has to be treated as the income of capital, analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) Graphic AXEC97 National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:
The economist now says to himself, obviously, Gross Domestic Income GDI is ‘equal’ to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C−Yw, ergo GDI≡C. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures and investment expenditures, i.e., GDP≡C+I. Then we have GDI≡GDP by definition, more precisely, by FALSE definition. This ― Gross Domestic Income is ‘equal’ to Gross Domestic Product ― is the so-called fundamental macroeconomic accounting identity, the supposedly unassailable quantitative/empirical bedrock of economics.
The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e., the household sector’s increase of debt. Income is a flow, and profit is a balance of flows, and to lump the two together is sheer stupidity.
From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? Because Keynes did not come to grips with profit: “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.) #1
Because economists ― Keynes, Keynesians, Post-Keynesians, Anti-Keynesians, and all the rest ― cannot even do the elementary mathematics of accounting, the profit theory is false since Adam Smith. #2 This means: because economists are too stupid for simple math, all of economics is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Economists do not solve problems; they are the problem
#2 For more details, see cross-references Accounting and cross-references Profit and cross-references Incompetence and cross-references Math/Mathiness.
Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses #1 like these:
• “In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”
• “Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.” #2
• “What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)
• “Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)
All this sounds plausible, but it demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a systems science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history, etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined. #3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other people’s motives and behavior, but cannot tell for 200+ years what profit is.
#1 Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 Graphic AXEC 25 The Economics God Equation
Blog-Reference and Blog-Reference
The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward algebra of accounting.
Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market-clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.
Nobody could be more down-to-earth and historically accurate than Mr. B and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) Graphic AXEC94 National accounts, elementary production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
At the end of the second period, they meet again and compare their numbers. This time they have:
(b) Graphic AXEC95 National accounts, consumption expenditures greater than wage income, C > Yw.
The accountants are again pleased that their respective numbers are exactly equal, but this time their accounts show balances.
Says Mr. B, I call my balance profit or loss, as the case may be. More specifically, I define monetary profit as Qm≡C−Yw.
Well, says Mrs. H, I call my balance saving or dissaving, as the case may be. More specifically, I define monetary saving as Sm≡Yw−C.
Then they calculate their respective balances and find out, to nobody’s surprise, that Qm≡−Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real-world transaction.
The next day, the two accountants hand their numbers = Figure (b), over to the economist. Says the economist, hmm, for my purposes, I have to rearrange the accounts, after all, profit has to be treated as the income of capital, analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) Graphic AXEC97 National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:
The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e., the household sector’s increase of debt. Income is a flow, and profit is a balance of flows, and to lump the two together is sheer stupidity.
From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? Because Keynes did not come to grips with profit: “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.) #1
Because economists ― Keynes, Keynesians, Post-Keynesians, Anti-Keynesians, and all the rest ― cannot even do the elementary mathematics of accounting, the profit theory is false since Adam Smith. #2 This means: because economists are too stupid for simple math, all of economics is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Economists do not solve problems; they are the problem
#2 For more details, see cross-references Accounting and cross-references Profit and cross-references Incompetence and cross-references Math/Mathiness.
***
REPLY to Neil Wilson on Jul 31Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses #1 like these:
• “In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”
• “Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.” #2
• “What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)
• “Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)
All this sounds plausible, but it demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a systems science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history, etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined. #3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other people’s motives and behavior, but cannot tell for 200+ years what profit is.
#1 Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 Graphic AXEC 25 The Economics God Equation
 |
| The Economics God Equation ® |
July 27, 2017
Why economists have not been effective in economics
Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’
Blog-Reference and Blog-Reference and Blog-Reference on Jul 31
Mathematics has not been effective in economics because economics is a cargo cult science. Feynman defined it as follows: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
What is missing among economists is a proper understanding of what science is all about. Aristotle gave a working definition 2300+ years ago: “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 apparently followed this methodology. Walrasian economics is axiomatized, the hardcore premises are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. And this is why economics is a cargo cult science. Economists do all the things scientists are supposed to do but it does not work.
Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this, the Walrasian axioms are methodological madness, to begin with.
Economics suffers from the fact that the subject matter is ill-defined. Economists think that they are doing economics while they bungle amateurishly in sociology and psychology. What economists overlook is that their subject matter is the structure and behavior of the economic system and that all questions about Human Nature/motives/behavior/action are NOT their business.
The task of economics is to figure out how the economy works. Economics is a systems science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1
What we have at the moment are Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are provably false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism. Let this sink in: the profit theory is false since Adam Smith. Instead of having clarified their foundational concepts of profit and income, economists have wasted their time fooling around with NONENTITIES.
Economics needs a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations. Economics is NOT a social science but a systems science. A system can be objectively and precisely defined. This is the very condition for the application of mathematics.
When the premises are not correctly defined mathematics cannot work its magic and as collateral damage econometrics becomes a senseless exercise.#3 When utility maximization is put into the premises no testable proposition ever results. Scientifically incompetent economists do not understand this elementary methodological fact for 150+ years. And this is why mathematics has not been effective in economics.
Egmont Kakarot-Handtke
#1 New Economic Thinking: the 10 crucial points
#2 Profit theory in less than 5 minutes
#3 Morons on math
For details of the big picture see cross-references Math/Mathiness.
Immediately following Economists: just too stupid for counting.
Blog-Reference and Blog-Reference and Blog-Reference on Jul 31
Mathematics has not been effective in economics because economics is a cargo cult science. Feynman defined it as follows: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
What is missing among economists is a proper understanding of what science is all about. Aristotle gave a working definition 2300+ years ago: “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 apparently followed this methodology. Walrasian economics is axiomatized, the hardcore premises are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. And this is why economics is a cargo cult science. Economists do all the things scientists are supposed to do but it does not work.
Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this, the Walrasian axioms are methodological madness, to begin with.
Economics suffers from the fact that the subject matter is ill-defined. Economists think that they are doing economics while they bungle amateurishly in sociology and psychology. What economists overlook is that their subject matter is the structure and behavior of the economic system and that all questions about Human Nature/motives/behavior/action are NOT their business.
The task of economics is to figure out how the economy works. Economics is a systems science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1
What we have at the moment are Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are provably false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism. Let this sink in: the profit theory is false since Adam Smith. Instead of having clarified their foundational concepts of profit and income, economists have wasted their time fooling around with NONENTITIES.
Economics needs a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations. Economics is NOT a social science but a systems science. A system can be objectively and precisely defined. This is the very condition for the application of mathematics.
When the premises are not correctly defined mathematics cannot work its magic and as collateral damage econometrics becomes a senseless exercise.#3 When utility maximization is put into the premises no testable proposition ever results. Scientifically incompetent economists do not understand this elementary methodological fact for 150+ years. And this is why mathematics has not been effective in economics.
Egmont Kakarot-Handtke
#1 New Economic Thinking: the 10 crucial points
#2 Profit theory in less than 5 minutes
#3 Morons on math
For details of the big picture see cross-references Math/Mathiness.
Immediately following Economists: just too stupid for counting.
October 31, 2016
The final implosion of MMT
Comment on Senexx on ‘Budget surpluses are not national saving’
Blog-Reference
Senexx writes: “As a matter of accounting between the government and non-government sectors, a government budget deficit adds net financial assets ... available to the private sector and a budget surplus has the opposite effect.” and “While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity — the government deficit (surplus) equals the non-government surplus (deficit).” #1
Accounting is an elementary form of mathematics. The curious fact is that economists get it habitually wrong, and the MMTers are no exception.
The fatal accounting error/mistake is obfuscated by the fact that government and non-government are juxtaposed. Thus, the crucial differentiation between the business sector and the household sector gets lost. This, in turn, has the effect that the most important magnitude of economics — profit — also gets lost. In order to see this, one has to go back to the most elementary configuration, that is, the pure consumption economy, which consists only of the household and business sector. #2
In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
In case (i), the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero.
In case (ii), monetary saving Sm is positive, and the business sector makes a loss, i.e. Qm is negative.
In case (iii), monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.
It always holds (a) Qm≡−Sm, in other words, at the heart of national income accounting 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. It follows directly from the profit definition Qm≡C−Yw and the definition of household sector saving Sm≡Yw−C. #3
When the government is added, then it holds under the condition of zero saving of the household sector Qm≡G−T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus. As always, the sector balances add up to zero, i.e. (b) Qm+Sm+(T−G)=0, and THIS is the correct accounting identity. It says that budget deficits (Cg greater T) and household sector dissaving (−Sm) are the two sources of overall monetary profit in a closed economy.
The defective accounting equations of the MMT approach are replaced by the correct accounting equations (a) and (b). With this, the whole analytical superstructure of MMT implodes.
Egmont Kakarot-Handtke
#1 Budget surpluses are not national saving
#2 The tiny little problem with economics
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
Related 'Modern Moronomic Theory' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Economists’ perennial trouble with accounting' and 'Where MMT got macro wrong' and 'Q: How are you going to pay for it? MMT: By stealth taxation!'. For the full-spectrum refutation of MMT, see cross-references MMT.
Bob
You ask ‘What is the profit theory?’ For the comprehensive answer, see The profit theory is false since Adam Smith.
This means in concrete terms: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.
It should be obvious: who cannot tell what profit is, has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
The profit theory is the pivot of all of economics, and it has been false for more than 200 years. As every economist knows from the Palgrave, “A satisfactory theory of profits is still elusive.” (Desai, 2008)
Accordingly, the rectification of profit theory affects not only MMT but the four major approaches: Walrasianism, Keynesianism, Marxianism, and Austrianism. #1
Ralph Musgrave
You say, “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”
Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides confirmation.
Matt Franko
Profit distribution has been dealt with in the paper mentioned above (see Eq. 1) and elsewhere. #2
#1 For details of the big picture, see cross-references Profit/Distribution
#2 See working papers on SSRN
I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations; there has only been confused and irrelevant blah blah.
Bob
You are parroting Econ 101 micro stuff. Take notice that the micro definition is subject to the Fallacy of Composition, and it tells nothing about the overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Matt Franko
Stick to the well-defined proof and refute it if you can. All else comes later.
Brian Romanchuk
Which part of Qm≡−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).
Matthew Franko
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.
MRW
Take notice that Keynes has been refuted. See How Keynes got macro wrong and Allais got it right
Take also notice that Davidson has been refuted. See Why Post Keynesianism Is Not Yet a Science
Take notice that Samuelson has been refuted. See Samuelson or Who is the smartest smartie?
Economists got profit wrong, and because of this, economics is a failed science. MMT is no exception.
You say: “The epicentre of this confusion is the identity: I = S”
That is correct. The I=S mess can be traced back to Keynes and has its ultimate cause in Keynes’s scientific incompetence: “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., 2010, p. 12)
MMT shares the profit blunder with Keynes. For details of the big picture, see cross-references Refutation of I=S.
No fun, only ignorance
Comment on Brian Romanchuk on ‘Fun With Accounting Identities’
You quote my derivation of the elementary accounting equation and conclude: “The root of the problem is that he has confused cash flow for profits. In a two-sector economy, if one sector has a financial surplus, the other sector has to have a corresponding deficit, since the sum of financial flows has to equal zero. ... However, a financial flow is not the same thing as profits. For an economy divided between a household sector and a business sector ... there are two main cash flows out of businesses that are not expenses, and which create a wedge between cash flow and profits. 1. Dividend payments ... 2. Capital expenditures.”
If you had followed the references that back up my argument, you would have realized:
(i) That I do NOT confuse cash flows with profits. In fact, there are two types of profit in the axiom set, viz., monetary Qm and nonmonetary Qn (2011a).
(ii) That dividends are in the axiom set (2014).
(iii) That investment expenditures and depreciation have been dealt with elsewhere (2011b).
In case you sincerely want to get out from behind the curve, study the working papers on SSRN.
References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Jamie summarized her post: “Nevertheless, the lack of clarity on the definitions in these identities gives an outsider the impression of an entire profession lost in a confusion of its own making.” This is not only an impression but an incontrovertible fact (2013).
Economists are scientifically incompetent blatherers. Their very first error is to think that they are free to define whatever pleases them. This is the Humpty Dumpty delusion. #1 The first thing to understand in science is that foundational concepts have to be consistently defined.
It is a remarkable fact that physicists have defined their foundational concepts, mass, force, energy, velocity, acceleration, etc., very carefully (see Newton’s axioms), and economists can to this day not even tell the difference between the measurable variables profit and income. Does it come as a surprise that economists have not figured out how the monetary economy works and that they have not achieved anything of scientific value in the past 200 years? In methodological terms, the failure of economics is ultimately caused by inconsistent axiomatic foundations. This applies to Walrasianism, Keynesianism, Marxianism, Austrianism, and, of course, MMT.
The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
The current state of economics is that national accounting is provably false (2012), and that economic theory is axiomatically defective, and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.
References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
#1 Humpty Dumpty is back again
Matt Franko
For the proper handling of profit, distributed profit, and retained profit, see (2015a).
André
Accounting and economic theory are like hands and gloves. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
It is a big mistake to play accounting against theory/model. At a deeper level, they have a common formal core. For the basic model, see (2015b).
Calgacus
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”
You are behind the curve, see From Orthodoxy to Heterodoxy to Metadoxy.
Bob
You are parroting a widely-held misunderstanding about predictions. See Science does NOT predict the future.
Brian Romanchuk
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details, see my comment on your blog.
Tom Hickey
The Wikipedia definition is micro; we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C−Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macroeconomics, one arrives at microeconomics by successive DIFFERENTIATION. Differentiation is top-down, and aggregation is bottom-up. The methodologically correct way is to start with macrofoundations and then differentiate. Because of this, the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable, as hard as any variable in physics. It is only economists’ brains that are mushy.
References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
You say: “I believe he’s got stocks and flows horribly confused.”
It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows, and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and the stock of money.
The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the precision of two decimal places. The big problem in economics is not semantics but scientific incompetence, see Feeble minds, shaky assumptions, and the inevitable failure of economics.
References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Referring to the elementary macro profit definition Qm=C−Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provably false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism, and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.
References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.
This said, the elementary Profit Law Graphic AXEC08 indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy eventually breaks down, see (2014).
References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
You say, “Also, it is not clear how your variables (Qm, C, and Yw) relate to national accounting.” Simply follow the references, see (2012).
You also say, “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).
Finally, “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blog post. This is why references are given. If you follow the references, you will find, for example, ‘Clueless about money and profit’, and when you enter money in the search field, you will find much, much more. #1
Do not tell me I assume something away when you are too stupid to look things up.
References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
#1 Google gives you 8300 hits for [“Egmont Kakarot-Handtke” money]
It is pretty obvious that you do not understand the difference between science and a sitcom. This sad fate you share with 99 per cent of people who call themselves economists.
When the ancient Greeks invented science more than 2300 years ago, they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling, and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “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, 1994).
That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.
And this brings us back to the core issue of this thread. The core issue consists of the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false, all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical, and eco-friendly.
The representative economist has not realized the essential point of the scientific method, and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years, economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms, and economic policy advice is not different from reading poultry entrails.
As Popper said, science is conjecture and refutation. MMT has been logically refuted; MMT is outside of science. End of the sitcom.
It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus set a good example.
You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”
This is a widespread misunderstanding among economists. #1 And the confusion is busily kept alive by political economists. Therefore, it is important, first of all, to keep in mind that there is political economics (= agenda-pushing) and theoretical economics (= science).
Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis, 1982, p. 698] #2
In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong; there is only materially/formally true/false.
Vague blather, untestable wish-wash, inconclusive either-or, and storytelling have always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby save their jobs has always been the apex of the smartness of scientifically incompetent political economists.
So, there are the hard rocks of true and false, and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, and Austrians. #3
It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.
Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen)
All this is known for 2300+ years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “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 are either too stupid to understand this, or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value for more than 200 years. MMT is no exception.
Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted, and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampie.
In sum: There ARE absolute universal criteria of scientific truth, and they tell you that MMT is false.
#1 Humpty Dumpty is back again
#2 Marshall and the Cambridge school of plain economic gibberish
#3 Economic recommendations out of the swamp between true and false
You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”
Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.
Accounting is elementary mathematics, and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.
In the elementary production-consumption economy, #1 three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i), wage income is assumed to be Yw=100 monetary units (e.g. trillion dollars, euros, yen, etc.) and consumption expenditures are assumed to be C=100 monetary units per year. Then, the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero.
In case (ii), wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=−10. The whole output is sold, i.e. O=X, and the market-clearing price P is now lower than in case (i).
In case (iii), wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=−10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market-clearing price P is now higher than in case (i).
It always holds (a) Qm≡−Sm, in other words, at the heart of national income accounting 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 PROFIT LAW for the economy as a WHOLE.
When the government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T−G)=0 or Qm≡−Sm+(G−T) or Qm+Sm=(G−T), that is, the red ink of the government sector (G−T) corresponds to the black ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note that in the last few years, total household sector saving has been negative (−Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm≡−Sm+(G−T), that is, both deficit spenders are on the right side of the accounting equation.
Let us assume for a moment that household sector saving is zero, Sm=0, then it is pretty obvious that the government sector’s deficit (G−T) is equal to the business sector’s monetary profit Qm, in other words, the government’s red ink is the business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all time. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do not think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this unintended effect is due to the fact that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of national accounting. #2
#1 The correct macrofoundations are given with three systemic equations: (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.
#2 For more details, see
► Accounting basics
► A new episode of one of the worst blunders of economics
► Macrofoundations, too, are defective
► Economists’ perennial trouble with accounting
► End of confusion
► Accounting for dummies
You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”
Take notice that Kalecki is wrong. See the paper What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example.
You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent-seeking behavior (as explored by Michael Hudson, for example).”
Take notice that the concept of rent is false. See the paper When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism.
You quote me “These equations prove that the formal foundations of MMT are inconsistent,” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”
False. I refer in my posts to the formal foundations that have been presented at many places and that are COMMON knowledge. Either you do not follow the references, or you are not familiar with the MMT accounting equations.
For proof, see my post on Bill Mitchell’s blog titled ‘Modern Moronomic Theory’
It reads:
“The fundamental flaw of your argument is to take national accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).
Already, your first equation GDP=C+I+G+(X−M) is logically defective and as a consequence the rest of your argument. This holds in particular for (I−S)+(G−T)+(X−M)=0, which boils down for the most elementary case to Keynes' I=S (Keynes, 1973, p. 63).
...
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.
Because your profit theory is false, your monetary theory, too, is false (2015, Sec. 7).”
One more time: The formal foundations of MMT are defective, and because of this, the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fullwiler, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.
Related 'Economists cannot do the simple math of profit — better keep them out of politics'
You complained: “What ‘formal foundations of MMT’? You just use the phrase.”
You can also find the formal foundations on Wikipedia. See my comment: Wikipedia and the promotion of economists’ idiotism.
Blog-Reference
Senexx writes: “As a matter of accounting between the government and non-government sectors, a government budget deficit adds net financial assets ... available to the private sector and a budget surplus has the opposite effect.” and “While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity — the government deficit (surplus) equals the non-government surplus (deficit).” #1
Accounting is an elementary form of mathematics. The curious fact is that economists get it habitually wrong, and the MMTers are no exception.
The fatal accounting error/mistake is obfuscated by the fact that government and non-government are juxtaposed. Thus, the crucial differentiation between the business sector and the household sector gets lost. This, in turn, has the effect that the most important magnitude of economics — profit — also gets lost. In order to see this, one has to go back to the most elementary configuration, that is, the pure consumption economy, which consists only of the household and business sector. #2
In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
In case (i), the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero.
In case (ii), monetary saving Sm is positive, and the business sector makes a loss, i.e. Qm is negative.
In case (iii), monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.
It always holds (a) Qm≡−Sm, in other words, at the heart of national income accounting 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. It follows directly from the profit definition Qm≡C−Yw and the definition of household sector saving Sm≡Yw−C. #3
When the government is added, then it holds under the condition of zero saving of the household sector Qm≡G−T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus. As always, the sector balances add up to zero, i.e. (b) Qm+Sm+(T−G)=0, and THIS is the correct accounting identity. It says that budget deficits (Cg greater T) and household sector dissaving (−Sm) are the two sources of overall monetary profit in a closed economy.
The defective accounting equations of the MMT approach are replaced by the correct accounting equations (a) and (b). With this, the whole analytical superstructure of MMT implodes.
Egmont Kakarot-Handtke
#1 Budget surpluses are not national saving
#2 The tiny little problem with economics
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
Related 'Modern Moronomic Theory' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Economists’ perennial trouble with accounting' and 'Where MMT got macro wrong' and 'Q: How are you going to pay for it? MMT: By stealth taxation!'. For the full-spectrum refutation of MMT, see cross-references MMT.
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REPLIES on Nov 1Bob
You ask ‘What is the profit theory?’ For the comprehensive answer, see The profit theory is false since Adam Smith.
This means in concrete terms: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.
It should be obvious: who cannot tell what profit is, has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
The profit theory is the pivot of all of economics, and it has been false for more than 200 years. As every economist knows from the Palgrave, “A satisfactory theory of profits is still elusive.” (Desai, 2008)
Accordingly, the rectification of profit theory affects not only MMT but the four major approaches: Walrasianism, Keynesianism, Marxianism, and Austrianism. #1
Ralph Musgrave
You say, “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”
Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides confirmation.
Matt Franko
Profit distribution has been dealt with in the paper mentioned above (see Eq. 1) and elsewhere. #2
#1 For details of the big picture, see cross-references Profit/Distribution
#2 See working papers on SSRN
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REPLIES on Nov 2I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations; there has only been confused and irrelevant blah blah.
Bob
You are parroting Econ 101 micro stuff. Take notice that the micro definition is subject to the Fallacy of Composition, and it tells nothing about the overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Matt Franko
Stick to the well-defined proof and refute it if you can. All else comes later.
Brian Romanchuk
Which part of Qm≡−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).
Matthew Franko
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.
MRW
Take notice that Keynes has been refuted. See How Keynes got macro wrong and Allais got it right
Take also notice that Davidson has been refuted. See Why Post Keynesianism Is Not Yet a Science
Take notice that Samuelson has been refuted. See Samuelson or Who is the smartest smartie?
Economists got profit wrong, and because of this, economics is a failed science. MMT is no exception.
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COMMENT on Jamie on Nov 2You say: “The epicentre of this confusion is the identity: I = S”
That is correct. The I=S mess can be traced back to Keynes and has its ultimate cause in Keynes’s scientific incompetence: “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., 2010, p. 12)
MMT shares the profit blunder with Keynes. For details of the big picture, see cross-references Refutation of I=S.
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COMMENT on Nov 2No fun, only ignorance
Comment on Brian Romanchuk on ‘Fun With Accounting Identities’
You quote my derivation of the elementary accounting equation and conclude: “The root of the problem is that he has confused cash flow for profits. In a two-sector economy, if one sector has a financial surplus, the other sector has to have a corresponding deficit, since the sum of financial flows has to equal zero. ... However, a financial flow is not the same thing as profits. For an economy divided between a household sector and a business sector ... there are two main cash flows out of businesses that are not expenses, and which create a wedge between cash flow and profits. 1. Dividend payments ... 2. Capital expenditures.”
If you had followed the references that back up my argument, you would have realized:
(i) That I do NOT confuse cash flows with profits. In fact, there are two types of profit in the axiom set, viz., monetary Qm and nonmonetary Qn (2011a).
(ii) That dividends are in the axiom set (2014).
(iii) That investment expenditures and depreciation have been dealt with elsewhere (2011b).
In case you sincerely want to get out from behind the curve, study the working papers on SSRN.
References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
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REPLY to Brian Romanchuk on Nov 2Jamie summarized her post: “Nevertheless, the lack of clarity on the definitions in these identities gives an outsider the impression of an entire profession lost in a confusion of its own making.” This is not only an impression but an incontrovertible fact (2013).
Economists are scientifically incompetent blatherers. Their very first error is to think that they are free to define whatever pleases them. This is the Humpty Dumpty delusion. #1 The first thing to understand in science is that foundational concepts have to be consistently defined.
It is a remarkable fact that physicists have defined their foundational concepts, mass, force, energy, velocity, acceleration, etc., very carefully (see Newton’s axioms), and economists can to this day not even tell the difference between the measurable variables profit and income. Does it come as a surprise that economists have not figured out how the monetary economy works and that they have not achieved anything of scientific value in the past 200 years? In methodological terms, the failure of economics is ultimately caused by inconsistent axiomatic foundations. This applies to Walrasianism, Keynesianism, Marxianism, Austrianism, and, of course, MMT.
The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
The current state of economics is that national accounting is provably false (2012), and that economic theory is axiomatically defective, and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.
References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
#1 Humpty Dumpty is back again
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REPLIES on Nov 2Matt Franko
For the proper handling of profit, distributed profit, and retained profit, see (2015a).
André
Accounting and economic theory are like hands and gloves. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
It is a big mistake to play accounting against theory/model. At a deeper level, they have a common formal core. For the basic model, see (2015b).
Calgacus
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”
You are behind the curve, see From Orthodoxy to Heterodoxy to Metadoxy.
Bob
You are parroting a widely-held misunderstanding about predictions. See Science does NOT predict the future.
Brian Romanchuk
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details, see my comment on your blog.
Tom Hickey
The Wikipedia definition is micro; we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C−Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macroeconomics, one arrives at microeconomics by successive DIFFERENTIATION. Differentiation is top-down, and aggregation is bottom-up. The methodologically correct way is to start with macrofoundations and then differentiate. Because of this, the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable, as hard as any variable in physics. It is only economists’ brains that are mushy.
References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
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REPLY to Adam1, Ignacio on Nov 2You say: “I believe he’s got stocks and flows horribly confused.”
It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows, and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and the stock of money.
The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the precision of two decimal places. The big problem in economics is not semantics but scientific incompetence, see Feeble minds, shaky assumptions, and the inevitable failure of economics.
References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
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REPLY to Tom Hickey on Nov 2Referring to the elementary macro profit definition Qm=C−Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provably false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism, and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.
References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
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REPLY to Bob on Nov 2The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.
This said, the elementary Profit Law Graphic AXEC08 indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy eventually breaks down, see (2014).
References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
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REPLY to André on Nov 2You say, “Also, it is not clear how your variables (Qm, C, and Yw) relate to national accounting.” Simply follow the references, see (2012).
You also say, “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).
Finally, “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blog post. This is why references are given. If you follow the references, you will find, for example, ‘Clueless about money and profit’, and when you enter money in the search field, you will find much, much more. #1
Do not tell me I assume something away when you are too stupid to look things up.
References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
#1 Google gives you 8300 hits for [“Egmont Kakarot-Handtke” money]
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REPLY to Calgacus on Nov 3It is pretty obvious that you do not understand the difference between science and a sitcom. This sad fate you share with 99 per cent of people who call themselves economists.
When the ancient Greeks invented science more than 2300 years ago, they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling, and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “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, 1994).
That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.
And this brings us back to the core issue of this thread. The core issue consists of the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false, all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical, and eco-friendly.
The representative economist has not realized the essential point of the scientific method, and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years, economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms, and economic policy advice is not different from reading poultry entrails.
As Popper said, science is conjecture and refutation. MMT has been logically refuted; MMT is outside of science. End of the sitcom.
It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus set a good example.
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REPLY to Tom Hickey on Nov 4You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”
This is a widespread misunderstanding among economists. #1 And the confusion is busily kept alive by political economists. Therefore, it is important, first of all, to keep in mind that there is political economics (= agenda-pushing) and theoretical economics (= science).
Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis, 1982, p. 698] #2
In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong; there is only materially/formally true/false.
Vague blather, untestable wish-wash, inconclusive either-or, and storytelling have always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby save their jobs has always been the apex of the smartness of scientifically incompetent political economists.
So, there are the hard rocks of true and false, and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, and Austrians. #3
It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.
Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen)
All this is known for 2300+ years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “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 are either too stupid to understand this, or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value for more than 200 years. MMT is no exception.
Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted, and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampie.
In sum: There ARE absolute universal criteria of scientific truth, and they tell you that MMT is false.
#1 Humpty Dumpty is back again
#2 Marshall and the Cambridge school of plain economic gibberish
#3 Economic recommendations out of the swamp between true and false
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REPLY to MRW on Nov 6You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”
Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.
Accounting is elementary mathematics, and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.
In the elementary production-consumption economy, #1 three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i), wage income is assumed to be Yw=100 monetary units (e.g. trillion dollars, euros, yen, etc.) and consumption expenditures are assumed to be C=100 monetary units per year. Then, the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero.
In case (ii), wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=−10. The whole output is sold, i.e. O=X, and the market-clearing price P is now lower than in case (i).
In case (iii), wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=−10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market-clearing price P is now higher than in case (i).
It always holds (a) Qm≡−Sm, in other words, at the heart of national income accounting 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 PROFIT LAW for the economy as a WHOLE.
When the government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T−G)=0 or Qm≡−Sm+(G−T) or Qm+Sm=(G−T), that is, the red ink of the government sector (G−T) corresponds to the black ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note that in the last few years, total household sector saving has been negative (−Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm≡−Sm+(G−T), that is, both deficit spenders are on the right side of the accounting equation.
Let us assume for a moment that household sector saving is zero, Sm=0, then it is pretty obvious that the government sector’s deficit (G−T) is equal to the business sector’s monetary profit Qm, in other words, the government’s red ink is the business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all time. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do not think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this unintended effect is due to the fact that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of national accounting. #2
#1 The correct macrofoundations are given with three systemic equations: (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.
#2 For more details, see
► Accounting basics
► A new episode of one of the worst blunders of economics
► Macrofoundations, too, are defective
► Economists’ perennial trouble with accounting
► End of confusion
► Accounting for dummies
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REPLY to Tom Hickey on Nov 6You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”
Take notice that Kalecki is wrong. See the paper What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example.
You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent-seeking behavior (as explored by Michael Hudson, for example).”
Take notice that the concept of rent is false. See the paper When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism.
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REPLY to Calgacus on Nov 9You quote me “These equations prove that the formal foundations of MMT are inconsistent,” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”
False. I refer in my posts to the formal foundations that have been presented at many places and that are COMMON knowledge. Either you do not follow the references, or you are not familiar with the MMT accounting equations.
For proof, see my post on Bill Mitchell’s blog titled ‘Modern Moronomic Theory’
It reads:
“The fundamental flaw of your argument is to take national accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).
Already, your first equation GDP=C+I+G+(X−M) is logically defective and as a consequence the rest of your argument. This holds in particular for (I−S)+(G−T)+(X−M)=0, which boils down for the most elementary case to Keynes' I=S (Keynes, 1973, p. 63).
...
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.
Because your profit theory is false, your monetary theory, too, is false (2015, Sec. 7).”
One more time: The formal foundations of MMT are defective, and because of this, the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fullwiler, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.
Related 'Economists cannot do the simple math of profit — better keep them out of politics'
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REPLY to Calgacus on Nov 20You complained: “What ‘formal foundations of MMT’? You just use the phrase.”
You can also find the formal foundations on Wikipedia. See my comment: Wikipedia and the promotion of economists’ idiotism.
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Graphic AXEC143d
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