How Heterodoxy got lost in the methodological woods

Comment on Lars Syll on ‘What kind of realist am I?’

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Lars Syll advertises his realist methodology: “Perhaps the most important contribution a researcher can make is reveal what this reality that is the object of science actually looks like.”

Translated into economics, this means in concrete terms that the most important contribution an economist can make is to reveal how the actual economy works. This contribution takes the form of the true theory with truth well-defined as material and formal consistency.

Sometimes it is necessary to reflect on methodology, but only as a stepping stone on the way to the true economic theory. The economist who thinks he is in the possession of a superior methodology is supposed ― NOT to run around and give good methodological advice but ― to directly apply it and show the results. As J. S. Mill put it: “Doubtless, the most effectual mode of showing how the sciences of Ethics and Politics [and Economics] may be constructed, would be to construct them.”

Lars Syll rightly criticizes the methodology of Orthodoxy, which comes under the umbrella heading of methodological individualism, always implying that his realist methodology is superior, yet he has never produced a solid piece of economic theory. He has not even realized that Keynesianism, his prototype of a superior approach, is logically defective. #1

The repetitive blunder of Heterodoxy consists in getting stuck with methodology: “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell)

Heterodoxy in general and Lars Syll, in particular, talk much about how ‘the science of economics may be constructed’ but never get started.

The crucial step on the way to the true theory is to move from the naive description of reality to abstraction: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (J. S. Mill)

Needless to emphasize that abstraction can go badly wrong. Starting with the realistic description ‘the earth stands still and the sun goes up’, Ptolemy constructed the geocentric theory. With this, Ptolemy committed the Fallacy of Insufficient Abstraction. The later paradigm shift from geocentrism to Heliocentrism delivered the best-known example for successful abstraction: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo)

The realists never got the point: “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don’t theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” This is how realists became the laughing stock of science, and the whole filibuster about realism/unrealism became pointless.

There are TWO pitfalls in the process of abstraction: (i) that the unknown ‘essential’ aspects of reality are unintentionally abstracted away, i.e., that reality gets lost, and (ii) that the ‘inessential’ aspects of reality are not abstracted away, i.e., that the analysis remains on the commonsensical surface. Accordingly, we have (i) the Fallacy of Lethal Abstraction, and (ii) the Fallacy of Insufficient Abstraction. Orthodox economics suffers from (i), heterodox economics from (ii). And this is why economics is a failed science and why economists never came to grips with reality.

Lars Syll’s realist methodology is good for criticism but worthless for the axiomatic reconstruction of economics and therefore prevents the necessary Paradigm Shift, i.e., genuine scientific progress.

The common blunder of Orthodoxy and Heterodoxy consists of defining economics as a social science. While it is quite obvious that human behavior plays an important role in how the economy develops, this is NOT the subject matter of economics but of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory, etcetera. Economics has to focus on the systemic aspect of the economy. That means economics is NOT a social science but a systems science. Put differently, the focus of the theory of flight is NOT on why crew and passengers are on a plane, what their ulterior motives are, how they behave, and whether they are happy or not. The focus is on what makes the plane fly, i.e., the laws of aerodynamics, thermodynamics, and so on. The theory of flight abstracts from the concrete human beings and leaves all Human Nature issues to social scientists, that is, to people who will NEVER get a plane off the ground.

Lars Syll argues: “The overarching flaw with methodological individualism and rational choice theory is basically that they reduce social explanations to purportedly individual characteristics. But many of the characteristics and actions of the individual originate in and are made possible only through society and its relations.”

This is a true example of the Fallacy of Insufficient Abstraction. The overarching blunder of BOTH orthodox and heterodox economists is that they dabble in psychology and sociology, which is NOT their proper business, and have until this day NOT figured out how the price and profit mechanism works. Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives are proto-scientific garbage, and the realist Lars Syll stands clueless right in the middle of it. #2

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Economics: 200+ years of scientific incompetence and fraud

For details of the big picture, see cross-references Heterodoxy and cross-references Paradigm Shift.

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Twitter/X Nov 14, 2025 The meaning of Compression and Abstraction is methodologically roughly the same

Lacking the Midas touch of science

Comment on Lars Syll on 'Real world filters and economic models'

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The characteristic capability of science ― to turn whatever it might touch into knowledge ― obviously has eluded economics. Currently, economists do not understand how the economy works. And there is no real difference between Orthodoxy and Heterodoxy despite much discussion on secondary points. The differences between the schools only demonstrate that there are many ways to get it wrong.

J. S. Mill excused economics in the inescapable benchmark comparison with physics as a separate and inexact science. Indeed, when one compares the respective starting points — Newton and Smith — and the actual state of the fields, then one is driven to the conclusion that in the course of time, economics has fallen behind even further.

Economics has always taken its inspiration from the real sciences. This includes methodology and theory design (Mirowski, 1995). It did not escape economists that the simplicity argument played a great role in physics: “... in my opinion, there is the correct path and, moreover, that it is in our power to find it. Our experience up to date justifies us in feeling sure that in Nature is actualized the ideal of mathematical simplicity.” (Einstein, 1934, p. 167)

As untalented plagiarists, economists used this argument and abused it for the justification of their cargo cult science.

This is the correct way of simplification, abstraction, and idealization: “The Principia begins with an idealized world, a simple mental construct, a 'system' of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct — for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space.” (Cohen, 1994, p. 77)

Standard economics, too, starts with an idealized world, but then it does not move nearer and nearer to the world of experiment and observation, but in the opposite direction in order to rationalize an unsuccessful initial idealization. Thus, idealization, which is indispensable, becomes counterproductive. There is only a thin line between fruitful abstraction and barren absurdity. To assume that the moon is a mass point is unrealistic but fruitful, to assume that it is made of green cheese is unrealistic but nothing else. Most assumptions of conventional microeconomics fall into the green cheese category. The fundamental methodological blunder of economists is the Fallacy of Insufficient Abstraction.

While science turns the garbage of ignorance into the gold of knowledge, economics merely turns common sense garbage into rigorous garbage. Newton's most important methodological message was: hypotheses non fingo. Economists have done the opposite with much alacrity but little success.

Now, what is the fundamental error that unites Orthodoxy and Heterodoxy? It is psychologism: “Psychologism is the view that in any explanation (individualist or otherwise) the only exogenous givens other than natural constraints allowed are those representing psychological states of either individuals or groups.” (Boland, 1992, pp. 147-148)

To paraphrase H. L. Mencken: Psychologism is commonsensical, convincing, and wrong.

“The notion that microeconomics is a branch of applied mathematics does economists more credit than several possible alternative explanations for its empirical weakness. ... It isolates the limitations of the theory in a factual supposition about the determinants of human behavior, one that economists share with all of us. But the supposition we all share is false, and so economics rests on a purely contingent, though nevertheless central, mistaken belief ....” (Rosenberg, 1992, p. 247)

As a matter of fact, no way leads from psychologism of any sort to the understanding of how the actual economy works. The solution does not consist of replacing the 'unrealistic' homo oeconomicus with the 'realistic' homo socialis. The solution consists of replacing behavioral axioms with objective structural/ systemic axioms.

It is as simple as that: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)

The scientific method is well-defined: “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) Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing.

There is only one scientific method. And, in its present state, economics is not a separate/inexact science but a failed/fake science.

Egmont Kakarot-Handtke


References
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, 55–90. Cambridge: Cambridge University Press.
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.

Related 'Economics and the Fallacy of Insufficient Abstraction' and 'Failed economics: The losers’ long list of lame excuses'. For details of the big picture, see cross-references Failed/Fake Scientists and cross-references Methodology and cross-references Paradigm Shift.

For more about the Fallacy of Insufficient Abstraction, see AXECquery.

Economics and the Fallacy of Insufficient Abstraction

Comment on Sandwichman on ‘'If There Is Any Such Thing': Why read Hoxie on theory?’

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What is the core problem of economics? Bagehot made it clear back in 1885: “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ ― that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark ― sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.”

This, though, was not news because J. S. Mill already reported in 1874 about the two classes of inquirers.

“It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.”

Bottom line: There are two types of economists, the upwarders and downwarders. This distinction overlaps with the distinction between induction and deduction, which in turn overlaps with the distinction between practitioners and theoreticians.

The core problem of economics is that neither upwarders nor downwarders were particularly successful. After 200+ years, economics is still at the proto-scientific level.

Methodologically, unionists are upwarders: “Unionists are not theorists; unionism is an eminently practical thing.” (Hoxie). “Theory and trade unionism are almost contradictory terms.” (Arnos) As a result, unionists have no true theory of how the economy works and how the aggregate labor and product markets interact. In other words, union policy never had sound scientific foundations but always remained glued to the phenomenological surface. Unionists did not realize what Marx already clearly saw: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.”

Because they have always been glued to the immediately practical of the here and now, unionists have never figured out what profit is. #1 As collateral damage, they got stuck at the naive concept of exploitation and never arrived at the concept of crossover exploitation. #2

The fact is that the myopic upwarders, i.e., ‘these people who live and move among the facts’, i.e., labor and business, never arrived at a consistent profit and employment theory. But, and this is one of the worst scientific scandals in human history, neither did Walrasians, Keynesians, Marxians, nor Austrians. #3

Both the upwarders and downwarders fell victim to the Fallacy of Insufficient Abstraction and failed to explain how the actual economy and the labor market work. Time to throw Hoxi’s and Marshall’s and Walras’ and Keynes’ employment theories on the big heap of proto-scientific garbage. #4

Egmont Kakarot-Handtke


#1 Profit for Marxists
#2 The thing with profit and exploitation
#3 Unemployment ― the fatal consequence of economists’ scientific incompetence and Have data, lack theory
#4 For the correct approach, see The role of labor and business in a well-organized society

Related 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Economic bungee jumping without cord'. For details of the big picture, see cross-references Employment.

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ADDENDUM to Sandwichman on Jun 26

It is a characteristic trait of economics that problems are never solved but endlessly recycled. This explains why economics made no progress since Adam Smith: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower).

Economics is a bit like Nietzsche’s Éternel Retour de la pensée la plus lourde. Among the best-known examples are capital theory, I=S, Lump of Labor Theory, Say’s Law, and Profit Theory. These are monuments of the scientific incompetence of economists.

Your recycling of these issues is a waste of time. Obviously, it escaped your attention that the correct profit and employment theory is available on EconoSpeak and elsewhere. For analytical entry points, see:
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society
Essentials of Constructive Heterodoxy: Say's Law
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

MMT: miscommunication, mistakes, misdirection

Comment on T Sabri Öncü’s ‘Miscommunicated Monetary Theory’

Blog-Reference

The problem of MMT is NOT that it is miscommunicated but that it is positively false, i.e., a materially/formally inconsistent theory.

For the full-spectrum refutation, see cross-references MMT.

MMT is promoted/communicated by the very nice people of Warren Mosler’s sales team, who, as a matter of fact, are as incompetent as can be. MMT has NO scientific merits whatsoever; it is just brain-dead political sloganeering.

Egmont Kakarot-Handtke

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Graphic AXEC131

Related 'MMT: Academic snake oil for the people'

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COMMENT on Tom Hickey on Feb 11

You say “’Money’ can serve as a higher order abstraction rather than only a metaphor or figure of speech. The use of higher-order abstraction is a serious problem in econ owing to ‘terminological inexactitude.’ Many so-called experts cannot deconstruct this level of abstraction properly, but the MMT economists have regarding ‘money’.”

You claim that MMT is particularly good at higher-order abstraction. Warren Mosler, though, told us just the opposite, viz. that the strong point of MMT is superior operational knowledge “So, how am I uniquely qualified to be promoting these proposals? My confidence comes from 40 years’ experience in the financial and economic realm. I would venture that I’m perhaps the only person who can answer the question: ‘How are you going to pay for it?’ My book takes on this issue and encourages the return of economics study to the operational realities of our monetary system.” #1

The fact is that MMT suffers from schizophrenia and the Fallacy of Insufficient Abstraction. The operational details of money creation/destruction can be gleaned from the PR brochures of the FED or any other central bank. Monetary theory, on the other hand, abstracts from the operational details and gives a functional account of money as a part of what Keynes called the “monetary theory of production.” In other words, the theory of money has to be developed in the space of a GENERAL macroeconomic framework.

MMT applies the Keynesian framework. Unfortunately, MMTers have not realized that Keynes is the poster boy for the Fallacy of Insufficient Abstraction. Keynes messed macro up. #2 MMT is based on the Keynesian balances equation, which is provably false. As a consequence, the whole analytical superstructure of MMT is false, i.e. scientifically worthless. Correct operational descriptions cannot compensate for mistakes of higher-order abstraction.

The problem of MMT is NOT that its operational descriptions are false or miscommunicated but (i) that it is based on false macroeconomic premises, and (ii) that it suffers from debilitating ‘terminological inexactitude’ with regard to the foundational concepts of profit, income, sectoral balances, etc. #3, #4


#1 Seven Deadly Innocent Frauds of Economic Policy, p. 12
#2 How Keynes got macro wrong and Allais got it right
#3 See, for example, Bill Mitchell
#4 See, for example, Stephanie Kelton

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COMMENT on Tom Hickey on Feb 11

You are lost in irrelevant operational details. For the axiomatically correct approach, see Fixing the loanable funds blunder.

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REPLY to Calgacus on Feb 11

You claim, “As I have said, before, I don’t think you understand MMT ― you are focusing on irrelevant operational & other details and mistakenly call them ‘foundations’ and dismissing and ignoring the genuine foundations.
‘MMT is based on the Keynesian balances equation’
No. It. Isn’t.”

Yes, it is.

(i) Go to the head of this blog, look up the section Links, click Modern Monetary Theory-Wikipedia, go to the section Vertical Transactions, read “Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity: G−T=S−I−NX where G is government spending, T is taxes, S is savings, I is investment, and NX is net exports.”

(ii) Go to Google Images. Look intensively at this picture, focus first on the sectoral balances formula, then take notice of the MMT actors.

Conclusion: The sectoral balances equation is tattooed on the forehead of every MMTer. It is provably false. Because of this, the rest of MMT is false. For a pertinent example, see again AXEC131.

There is NO miscommunication of MMT. The whole is genuine proto-scientific garbage.

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REPLY to Six on Feb 12

You say, “The sectoral balances equation is not provably false and is not tattooed on anyone’s forehead.”

Warren Mosler, a founder of MMT, says, “Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”

This “accounting fact” is no fact at all because you and the founding fathers/mothers of MMT and the rest of the MMT crowd are too stupid for the elementary mathematics of macroeconomic accounting.

You claim that what is presented on Wikipedia and all over the econblogosphere by the spokespersons of MMT is actually not MMT, but you cannot tell what the foundational propositions of MMT are.

Note that proposing better healthcare, education, full employment, etc is NOT economics but politics and that the insight that the state can pay for everything by printing/creating money is NOT exactly new “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt through the conquest of her colonial Empire.” (Halévy)

The only thing that is new with MMT is to justify deficit spending, which had worked so fine for centuries in the military realm, for the social realm, and to conceal the accounting fact that Public Deficit = Private Profit, no matter what the printed money is spent on.

The mission of MMT is to lobotomize the general public (Debt Does Not Matter) by promising social goodies. MMT is NOT economics and NOT a scientifically valid theory but a marketing relaunch of the age-old policy of stealth taxation/profit-boosting. #1, #2


#1 Keynes, Lerner, MMT, Trump and exploding profit
#2 MMT, money creation, stealth taxation, and redistribution

Related 'Economics: a comedy of errors full of intrigue and aberration'.

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REPLY to Six on Feb 12

You say “’the accounting fact that Public Deficit = Private Profit ...’ This is not some great new revelation, by the way. I studied it in the 80s and it was old news at the time.”

I wonder why you have not told this Warren Mosler, Stephanie Kelton, Bill Mitchell, Tom Hickey, Calgacus, and the rest. They still suffer from the hallucination that Public Deficit = Saving of the private/non-government sector: “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.” (Mosler) #1

It seems that the old news of the 80s has not yet reached the MMTers. These dull folks are 40+ years behind the curve.


#1 See also Mitchell AXEC131.

MMT: Time to say goodbye

Comment on Clint Ballinger on ‘Tim Worstall ― The End Game Of Modern Monetary Theory’

Blog-Reference

The case against MMT is settled. MMT does NOT satisfy the scientific criteria of material and formal consistency. It is faulty macroeconomics and, as a consequence, bad politics.

The macroeconomic Profit Law reads Qm≡Yd+(I−Sm)+(G−T)+(X−M) and has been derived from consistent macrofoundations a.k.a. axioms. The Law is testable with the precision of two decimal places. With regard to the government’s budget, the Profit Law boils down to Public Deficit = Private Profit. This piece of pure economic analysis translates into the scientific insight that the MMT sectoral balances equation is false and into the political insight that MMT’s policy of deficit-spending/money-creation is nothing but a free lunch for the Oligarchy. In other words, that “progressive” MMT policy is a political fraud.

Conclusion: Because MMT is provably false and its proponents are either stupid or corrupt or both, MMT has to be expelled from science/academia. Its proper habitat is the political swamp.

More is not to say about MMT, but Clint Ballinger cannot understand or accept this unassailable conclusion. So, he goes off-topic.

(i) “Egmont’s entire tower of babble (his own) is built around his ‘pure consumption economy’. This model is (extremely) simplified …”

In fact, the elementary production-consumption economy is the simplest possible macroeconomic configuration. ALL economic analysis has to start from the absolute analytical minimum and then proceed with ever-increasing complexity. This methodological procedure  is standard for more than 2300 years: “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)

The elementary production-consumption economy is SUFFICIENT to prove that the MMT sectoral balances equation is false. #1, #2 This means that MMT is scientifically dead already at the most elementary level.

From methodology, everyone could know: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen)

Because MMT is axiomatically false, the whole analytical superstructure is false. So, there is NO NEED to refute every MMT argument individually. If the premises are false, the whole theory is dead. Simple.

(ii) “Egmont states (regarding banking) that “These practical details are not forgotten but can be reintroduced at any time”. And yet he of course never does this.”

This is provably false. Money and banking have been treated extensively in working papers and blog posts, e.g., #3, #4 Any kindergartner can google this.

(iii) “Good economics has gone about as far as is possible in that direction, E.g., (Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth. Godley W., Lavoie, M. ) By far the most sophisticated and realistic effort in that direction is the ongoing Minsky Project by Steve Keen.”

Godley/Lavoie and Keen have been treated elsewhere and refuted. #5, #6 Any kindergartner can google this.

(iv) “He is better than the neoclassicals here, but only succeeds in creating a simplistic view of the monetary system that does not begin to approach the accuracy of MMT and circuit theory in this regard. He doesn’t seem to fully understand the role and importance of credit-money in the economy, and also believes there is a ‘fractional reserve system’ (there is not), which further implies a belief in loanable funds (another fallacy).

This is provably false. I “believe” neither in the fractional reserve system nor the loanable funds theory. #7, #8 Any kindergartner can google this.

In this style, it goes on. In the main, Clint Ballinger plays the silly rhetorical game of abstraction vs realism. This does not work. #9, #10 With their description of operational details, which MMT’s chief realist Warren Mosler trumpets as MMT’s chief merit, MMTers never got above the level of an information brochure of the FED’s PR department. Monetary Theory, though, deals with the function and effects of money in the economy as a whole. Monetary theory presupposes macroeconomics. And the fact of the matter is that MMT gets the foundational macroeconomic relations wrong. The lengthy description of the organizational details of Treasury/Central Bank operations cannot make up for the theoretical blunders. MMT blindly repeats the Fallacy of Insufficient Abstraction. #11

When Clint Ballinger’s smokescreen of irrelevant arguments is taken away, the whole issue reduces to the all-decisive question of which of the two macroeconomic relations, a.k.a. sectoral balances equations, is true/false:
(i) (I−S)+(G−T)+(X−M)=0 (MMT)
(ii) (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 (AXEC).

This question can be empirically decided. So, why does the MMT community, which certainly does not lack academics with free access to macroeconomic data and generous support/funding from the ultimate beneficiaries of MMT policy, not carry out this econometric study?

The obvious answer is that the MMT community’s real business is NOT science but quite ordinary political agenda-pushing. THIS is the point at issue, but Clint Ballinger tries to filibuster away the fact that the “End Game Of Modern Monetary Theory” has already been lost.

So, there is nothing left for MMTers in general, and Clint Ballinger, in particular, other than to say goodbye.

Egmont Kakarot-Handtke


#1 Macro for dummies
#2 Wikipedia and the promotion of economists’ idiotism
#3 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#4 Reconstructing the Quantity Theory
#5 The Emergence of Profit and Interest in the Monetary Circuit
#6 Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn
#7 Basics of monetary theory: the two monies
#8 Fixing the loanable funds blunder
#9 Richard Murphy: the MMT fraudster dressed up as realist
#10 Bagehot’s wisdom and the silliness of modern economists
#11 Economics and the Fallacy of Insufficient Abstraction

Immediately preceding Economics: A pointless left-right wrestling show

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AXEC121f

The minimum wage debate: a showpiece of economists’ hereditary idiocy

Comment on Sandwichman on ‘Seattle Minimum Wage’

Blog-Reference and Blog-Reference

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

The fact is that economists do NOT have the true theory. The fact is, in methodological terms, that economics is axiomatically false. The lethal blunder comes under the label of microfoundations or, as Krugman put it, “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The methodological blunder of the minimum wage debate consists of partial analysis and microfoundations. This type of analysis NEVER leads to results that can be generalized, but always to results that change from place to place and from time to time. So, this type of analysis (i) runs directly into the Fallacy of Composition, and (ii) remains forever inconclusive.

Interim result: the traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The axiomatically correct macroeconomic Employment Law/Phillips Curve #1 is reproduced under the label Graphic: #2

From this objective-structural-systemic relationship follows inter alia:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the Greek letter ρ stands for ratio).
(ii) Increasing investment expenditures I, exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete structural-systemic Employment Law is a bit longer and contains, in addition, the public sector and the foreign trade sector.

Items (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R, and vice versa.

From this, in turn, follows:
(1) The average wage rate has to be prevented from falling because this leads to rising unemployment and deflation. One possibility is to fix a minimum wage rate that increases over time. Note that this is a SYSTEMIC necessity and has NOTHING to do with social policy.
(2) The minimum wage rate has to be implemented nationwide (strictly speaking, worldwide). To implement it locally or for certain branches is absolutely counterproductive.
(3) The implementation has to be done intelligently. It is, for example, stupid to kill the marginal firms with the introduction of a nationwide minimum wage.
(4) Given their track record of idiocy, economists have to be kept out of further discussion and implementation.

The minimum wage policy has to be carried out under the macroeconomic condition w greater than p+r+pr, that is, roughly speaking, employment increases if the increase of the average wage rate w is greater than the increase of the average price p and productivity r.

To make local and partial minimum wage increases will in all eternity lead to inconclusive results and only keep a bunch of incompetent economists busy with senseless debate, inconclusive empirical studies, and brain-dead blog posts. Partial minimum wage increases have a distributional effect: those who do not get a wage increase pay in real terms for those who get an increase if employment and output are kept constant and the expenditure ratio is ρ_E =1.

Egmont Kakarot-Handtke


#1 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Graphic AXEC36b Structural-systemic Phillips Curve

Related 'Economics and the Fallacy of Insufficient Abstraction' and 'The role of labor and business in a well-organized society' and 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Supply-demand-equilibrium employment theory as an example of proto-scientific soapbubbling' and 'Wage rate and employment: the basics' and 'Textbooks and the mental cloning of dumb economists' and 'Minimum wage ― a fatal error in economic reasoning' and 'No doubts about wage-led growth' and 'Demand-led and wage-led growth' and 'NAIRU, wage-led growth, and Samuelson's Dyscalculia'. For details of the big picture see cross-references Employment/Phillips Curve.

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REPLY to Barkley Rosser on Jun 28

Note that the EconoSpeak admin = your sidekick Sandwichman, has deleted since Jun 24 the following posts:
The minimum wage debate: a showpiece of economists’ hereditary idiocy
Note on Marshall’s Magic Wand
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society

In these posts and the references, you find the detailed refutation of your unqualified blather. #1


#1 See also cross-references Employment/Phillips Curve and cross-references Scientific Incompetence.

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#PointOfProof

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REPLY to Barkley Rosser on Jun 29

I agree with you about the brilliance of Joan Robinson, which is encapsulated in her assessment of economics: “Scrap the lot and start again.”

The others, who are brilliant in your eyes, will not even make it into a footnote of the history of science. With regard to Adam Smith, I concur with Schumpeter: “… he had no such ambitions; in fact, he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” If this is your definition of brilliance, you are probably one of the dullest readers.

For an assessment of the rest of your list, see:
Marx, the moron
Walras is long gone
How Keynes got macro wrong and Allais got it right
Hayek and other informationally retarded proto-economists
The father of modern economics and his imbecile kids
How Arrow pushed economics over the cliff

Economics is a failed science, and those you call brilliant messed it up.

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Addendum on Jun 29

“Few people, and least of all we economists ourselves, are prone to offer us congratulations on our intellectual achievements. Moreover, our performance is, and always was, not only modest but also disorganized. Methods of fact-finding and analysis that are and were considered substandard or wrong on principle by some of us do prevail and have prevailed widely with others.” (Schumpeter)

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Twitter Oct 28, 2021 An example of econogenics

For more about econogenics, see AXECquery.

False models and true incompetence

Comment on Chris Auld on ‘Derek Zoolander, spherical cows, the Guardian, and econophysics’

Blog-Reference and Blog-Reference

Economics is a failed science. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got the foundational concept of the subject matter ― profit ― wrong.

Quite naturally, there are a lot of explanations/lame excuses swirling around. #1 One of them relates to the use of models: “Pop critics such as John Rapley should at least understand why economists use models with obviously false assumptions, they should understand why such models can be useful even they are wrong, and they should be aware that all sciences, not just economics, routinely use models with false assumptions.” (Chris Auld)

This is true, but the argument is nonetheless idiotic.

A chimpanzee can solve problems. For example, he can put chairs and boxes on top of each other and use a stick in order to get the bananas that the experimenter has fixed on the ceiling. Other chimpanzees then imitate the problem-solving strategy. This works fine until the problem situation changes such that the hitherto successful strategy fails and a new solution is required.

Let us call the creative problem solver a scientist. Economists, unfortunately, are only imitators/epigones/look-alikes: “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.” (Feynman)

It is pretty obvious that economists fall into the category of cargo cult scientists; they lack genuine problem-solving capacity. The problem is NOT that they apply models and abstractions and simplifications and ‘unrealistic’ assumptions and mathematics, the problem is that they do not apply these scientific tools properly. They are incompetent imitators and do not really understand what science is all about. #2

One example suffices. Walrasian Orthodoxy is defined by these verbalized axioms: “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)

The Walrasian hardcore contains three NONENTITIES ― HC2, HC4, HC5. To take equilibrium into the premises and then establish the properties of general equilibrium is a methodological blunder known since antiquity as petitio principii.

The basic question of economics is whether “the existing economic system is, in any significant sense, self-adjusting.” (Keynes) One simply cannot put the unknown answer into the premises. This is a primitive methodological blunder. Because of this, ALL equilibrium models are a priori false.

All this is known for 2300+ years: “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)

But instead, this happened in economics: orthodox microfoundations, as well as Keynesian macrofoundations, are provably false. Economics has no valid axiomatic foundations; because of this, the whole analytical superstructure is false, and because of this, economic policy guidance NEVER has had valid scientific foundations.

Economists are simply scientifically incompetent.#3 Their striking mental deficiency is the Fallacy of Insufficient Abstraction. #4

Egmont Kakarot-Handtke


#1 Failed economics: The losers’ long list of lame excuses
#2 All models are false because all economists are stupid
#3 Throw them out! Orthodox and heterodox economists are unfit for science
#4 “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter, 1946)

Related 'Economics and the Fallacy of Insufficient Abstraction' and 'Petitio principii — economists’ biggest methodological mistake' and 'Replacing the neoclassical axioms' and 'Economists’ proto-scientific methodology' and 'Cranks? What cranks? That’s economics!' and 'Toolism! A Critique of EconoPhysics' and 'Dilettantes at the end of the coal-pit' and 'Macro for dummies'. For more details of the big picture, see cross-references Scientific Incompetence.

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Graphic AXEC121i

Post Keynesianism, too, is proto-scientific garbage

Comment on Lars Syll on ‘What is Post Keynesian Economics?’

Blog-Reference and Blog-Reference and Blog-Reference

This is the first rule of scientific research: “… before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions.” (Davidson)

Hence: “To develop an economic theory applicable to a monetary economy, Keynes suggested rejecting three basic axioms of classical economics.” And: “The rejected axioms are the ergodic axiom, the gross-substitution axiom, and the neutral-money axiom.” (Davidson)

So far, Davidson is methodologically on firm ground. However, rejection is the easy part: “The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman) And here is the snag for Keynesians and Post Keynesians: “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell)

The fact of the matter is that Keynes #1 and the Post Keynesians #2 failed at construction. In technical terms, what has to be done is to fully replace the false Walrasian microfoundations with true macrofoundations. This is what a Paradigm Shift is all about.

Davidson proposes to take the following propositions as axioms

• money matters,
• rational calculations regarding the future are impossible,
• money contracts are a human institution developed to efficiently organize time-consuming production and exchange processes,
• unemployment, rather than full employment, is a common laissez-faire situation,
• the future is uncertain (nonergodic) and cannot be reliably predicted.

There is nothing to say against these propositions except that they cannot be taken as axioms.

Paul Davidson does not really understand what science and axiomatization are all about. The statement “the future is uncertain (nonergodic) and cannot be reliably predicted” is trivially true except for the fact that science, to begin with, does not predict the future. #3 When, according to folklore, an apple fell on his head, Newton did NOT predict when the next apple would fall, but he formulated the general Law of Falling Bodies.

In brief, Davidson's nonergodic axiom is not an axiom but an instance of moronic realism. The lethal blunder of Post Keynesians in general and Paul Davidson and Lars Syll, in particular, consists in the Fallacy of Insufficient Abstraction.

Keynes realized that the core of economics is the 'monetary theory of production'. Accordingly, the macroeconomic axioms have to describe the most elementary configuration of the monetary economy.  #4

Imagine Archimedes sitting in the bathtub and trying to solve the problem of the gold content of Hiero’s crown, and someone tells him the world is complex, uncertain, and unpredictable. Yes, Archimedes would have said, the only thing that is certain is that you are a moron. Eureka!

What scientists have come to understand is that historical uncertainty is compatible with eternal law/invariance. This holds for physics as well as economics. The problem of orthodox and heterodox economics is that neither approach has figured out how the monetary economy works, and this has nothing to do with ergodicity but with stupidity. #5

Egmont Kakarot-Handtke


#1 Finalizing the Keynesian Revolution
#2 Why Post Keynesianism Is Not Yet a Science
#3 Science does NOT predict the future
#4 The problem with macro in two words
#5 For details of the big picture, see cross-references Keynesianism

Related 'Keynes’ intellectual non-existence' and 'Economics and the Fallacy of Insufficient Abstraction' and  'First Lecture in New Economic Thinking'.

For more about Post Keynesianism see AXECquery.

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Graphic AXEC138

 The common denominator of the heterogeneous Post-Keynesian camp is that they have not realized to this day that Keynes messed up macrofoundations.

Profit Theory in less than 5 minutes

Comment on Bob on ‘Comments on Profit and Capital’

Blog-Reference

For the determination of monetary profit of the economy as a whole, one has to start with the most elementary case of a pure production-consumption economy without investment, government, and foreign trade. #1 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 Qm≡−Sm, in other words, loss is the counterpart of saving, and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Total profit is scattered among the firms that comprise the business sector.

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, waiting, risk, greed, the smartness of capitalists, or any other subjective factors. Total profit/loss is objectively determined in the most elementary case by the change in the household sector’s debt.

Economists who observe a single firm and generalize what they see do not understand that what is true for a molehill (= microeconomics) is NOT true for the universe (= macroeconomics). The microeconomic profit theory is simply a Fallacy of Composition.

The profit theory has been false from Adam Smith/Karl Marx until now.

Egmont Kakarot-Handtke


#1 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start, it holds X=O. Note that ALL variables are measurable.

Related 'How the intelligent non-economist can refute every economist hands down' and 'The future of economics: why you will probably not be admitted to it, and why this is a good thing' and 'Economists cannot do the simple math of profit — better keep them out of politics' and 'A tale of three accountants' and cross-references Profit.

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REPLY to Bob on Jul 7

The balances of the business sector, the household sector, the government sector, and the rest of the world are interrelated as follows Qm≡−Sm+Yd+I+(G−T)+(X−M). This is the Profit Law for an open economy (X−M) with a government sector (G−T) and with the business investment I and distributed profit Yd.

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REPLY to Bob on Jul 7

You say: “My first conclusion is that Qm is a measure of production and Sm is a measure of consumption. In a ‘perfect’ economy, everything that is produced is consumed.”

Not quite, monetary profit Qm and monetary saving Sm are nominal variables; the real variables are output O and quantity bought/sold X. All variables are related to a period of defined length, usually the calendar year. Because ALL variables are measurable, all conclusions are testable. There is no ambiguity of any sort.

For a detailed verbal and graphics-supported description of the elementary consumption economy, see ‘How the intelligent non-economist can refute every economist hands down’.

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REPLY to Bob on Jul 8

(i) You say: “I do not understand that type of diagram.”

Think of a Cartesian coordinate system#1. Take the first quadrant = northeast and throw the other three quadrants away. The first quadrant has only positive values on the axes. Make this four times. Now, put the first four quadrants together, and then you get a new coordinate system with ALL axes positive. Thus, you can easily walk from one quadrant to the next because the axes have the same dimension, e.g., L = hours per year, or C = dollars per year, or O, X units per year. Negative axes are not needed in economics because output O or working hours L are always greater than or at least equal to zero.

(ii) Productivity is a real magnitude with the dimension quantity per hour.

(iii) The Marxian definition of profit is ultimately based on the labour theory of value, which does not relate to the economy as a whole. But Marx also applied macro reasoning, for example: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.” This question is answered by the Profit Law Qm=−Sm (see above). #2


#1 Wikipedia Cartesian coordinate system
#2 For more details, see Marx, the moron and Profit for Marxists.

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REPLY to Bob on Jul 8

You say: “But surplus is not synonymous with profit.”

No, Marxian surplus is a real magnitude, and profit is a nominal magnitude. For the relationship between the two, see Section 4 ‘Profit, surplus, real shares’ in Profit for Marxists.

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REPLY to Bob, Tom Hickey

Everybody who has ever used a knife and fork, a wheelbarrow, or a cooking spoon somehow understands the concept of the lever and can apply it successfully in everyday situations. Science, though, goes beyond the endless multitude of concrete instantiations of the lever and tries to figure out the common denominator of ALL variants of levers past, present, and future. Science abstracts from the superficial reality of the Here and Now and tries to figure out the underlying fundamental reality, which has been found to be Fb/Fa=a/b: “This is the law of the lever, which was proven by Archimedes using geometric reasoning.” (Wikipedia)

The failure of economics is mainly due to the Fallacy of Insufficient Abstraction. #1 In other words, economists cannot rise above the level of storytelling. One storyline is that of supply-demand-equilibrium and the wonderful feats of the Invisible Hand; the other storyline is that of the struggle between the good guys=workers and the bad guys=capitalists. Storytelling is scientific rubbish, but people like it.

Economics understood as science, must go beyond common sense, plain description, and storytelling: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future …” (Schumpeter)

So the first thing to do is to formulate ‘a simple model’ of the abstract entity economy, more precisely, the simplest possible model. 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.

The most elementary economy is given with three equations Yw=WL, O=RL, C=PX, two conditions X=O, C=Yw, and the definition of total monetary profit Qm≡C−Yw.#2 This yields P=W/R (1), i.e., the market-clearing price P is equal to unit wage costs W/R. This is equivalent to W/P=R (2), i.e., the real wage W/P is equal to the productivity R. This holds, no matter how the wage rate W is set. A wage reduction leads to a proportional fall in the market-clearing price P. Profit Qm does NOT change because the budget is balanced, i.e., C=Yw, and from this follows Qm=0, i.e., profit is zero.

In the elementary monetary economy, workers always get the whole output O, the real wage W/P is equal to the productivity R. If productivity increases over time, the real wage rises; if productivity falls over time, then at some point the real wage hits the subsistence level. This, though, has NOTHING to do with exploitation or surplus or profit. So, as a matter of principle, the elementary consumption economy can reproduce itself at any level of employment L for an indefinite time as long as there are no external limits. It is impossible for the business sector as a whole to make a profit.

So, where does profit come from? Not from a longer labor time L, not from higher productivity R, not from a lower wage rate W, not from more greed, not from monopoly power, not from risk-taking, not from wishful thinking, or any other subjective factor.

It was Marx who asked the right question: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

Trivially true. As long as the budget is balanced, i.e., C=Yw, total monetary profit/loss Qm is zero. Because we know already that the macroeconomic Profit Law states Qm≡−Sm it is quite obvious that the business sector as a whole can only draw more out of the circulation, i.e. C greater Yw, if the household sector throws more into the circulation, in other words, if the household sector dissaves, i.e. if Sm≡Yw−C is negative, i.e. if C is greater than Yw.

From nothing comes nothing; even economists understand this. #3


#1 Economics and the Fallacy of Insufficient Abstraction
#2 For the detailed verbal description, see How the intelligent non-economist can refute every economist hands down.
#3 For more details, see The Emergence of Profit and Interest in the Monetary Circuit.

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Graphic AXEC143d

Money: from silly stories to the true theory

Comment on Peter Cooper on ‘Short & Simple 11 ― Money as an IOU’

Blog-Reference

“… in fact he [Adam Smith] disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

Not much has changed in 200+ years. The homely stories about how money comes into the world go as follows:

(i) “Before money, …, we all had to barter for the goods we wanted. If I wanted wheat and had chickens, I needed to find someone who wanted chickens and had extra wheat. Money solves this ‘double coincidence’ problem by letting me sell my chickens to buy your wheat. If we didn’t have money we’d invent it immediately.” (Stray)

(ii) “To increase and facilitate trade, …, a paper currency was organized by the Restaurant and the Shop. The Shop bought food on behalf of the Restaurant with paper notes and the paper was accepted equally with the cigarettes in the Restaurant or Shop, and passed back to the Shop to purchase more food. The Shop acted as a bank of issue. The paper money was backed 100 percent by food; hence its name, the Bully Mark.” (Radford)

(iii) “Eventually some goldsmiths noticed that the paper receipts they gave to their customers to evidence the valuables left in storage began to circulate as currency alongside their countries’ coins. A shopkeeper accepting these receipts in payment knew that he could go to the goldsmith to redeem them for gold and silver, and also recognized that a paper receipt was more convenient to use as currency than were pieces of metal.” (Turk et al.)

(iv) “For example, perhaps your neighbor offers to tend to your garden while you are away on holiday. You write ‘IOU’ on a slip of paper and promise that you will accept the slip of paper back again in payment for a service to be performed on your return. Your neighbor knows and trusts you and so accepts this arrangement. On returning home, you wash your neighbor’s car and mend a fence, accepting back the IOU as payment.” (Cooper)

(v) “When government uses the currency to purchase goods and services, it promises to accept back its IOU in payment of obligations to it. These obligations mostly take the form of taxes.” (Cooper)

Whether these stories are historically true does not matter much. The fatal weakness of storytelling economics is the Fallacy of Insufficient Abstraction. The theory of money has to be developed within the framework of a ‘monetary theory of production’ (Keynes).

The elementary production-consumption economy is, for a start, clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (Qm≡C−Yw, Sm≡Yw−C).

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market-clearing price is given by P=W/R. So, the price is determined by the wage rate, which has to be fixed as a numéraire, and the productivity. From this follows the average stock of transaction money as M=kYw, with k determined by the payment pattern.

What is needed for a start is two things (i) a central bank that creates money on its balance sheet in the form of deposits = overdrafts, and (ii), a legal system that declares the central bank’s deposits as legal tender. Money comes into the world through the autonomous transactions between the business and the household sector and the transfer of deposits.

This is the fully specified analytical account that connects the measurable variables L, R, O, X, P, Yw, C, M of an elementary economy and explains how transaction money comes into the world. Note that the central bank is passive; it only carries out the autonomous transactions which, in turn, determine the average quantity of money M. There is no such thing as monetary policy. The acceptance of money is not brought about by state power or by personal trust but by enforceable law.

Egmont Kakarot-Handtke


Related 'How money emerges out of nothing ― the functional account' and 'The ultimate ― analytical ― origin of money' and 'What is MMT?' and 'MMT is dead'

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REPLY to Calgacus on Jul 28

The history of money from the cowrie shell #1 to bullion to coins to notes and to the credit card shows a clear tendency toward progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. The ultimate data carrier is the server at the central bank and the chip under your skin.

Again, the pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. It is a bit stupid to get caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: money = information.

In the ‘monetary theory of production’, things get started like this. The firm says to the worker we pay you one dollar per hour. At the end of the first day, the firm owes the worker $ 8. Money starts as a credit relationship with the firm as a borrower and the worker as a lender. Let this go on until mid-month. Then the firm’s IOU is $ 120.

Now the firm goes to the central bank and tells them to transfer $ 240 to the worker. The central bank makes a book entry: the firm’s overdrafts $ 240 and the worker’s deposits $ 240. The private IOU of the firm has become money. The worker owes the firm 120 working hours for the rest of the month. The underlying private borrower-lender relationship has flipped. Vis-a-vis the central bank, the firm is the borrower.

Now, $ 240 is a rather abstract thing until the worker goes shopping. We know from above that the price in the pure production-consumption economy with market-clearing and budget-balancing is P=W/R. This translates into the real wage W/P=R. The ‘real’ value of money or the purchasing power is determined by productivity. This is how the arbitrary designation dollar (euro, yuan, ruble, etc.) becomes something very concrete, i.e., value of money = productivity. Money has NO intrinsic value.

By spending the money on the consumption good, the credit relationship is resolved. This is the elementary cycle of money creation and destruction. It starts with zero and ends with zero.

Note that this analytical account deals exclusively with the measurable variables L, R, O, X, P, Yw, C, M of an elementary economy and leads to testable propositions. The economist’s job is to explain the ‘quantity of money’ M with the precision of two decimal places and its relationship with the price P. Note well that it is NOT the quantity of money that determines the price in the elementary production-consumption economy. And this means that the commonplace Quantity Theory is dead. And the MMT story, too.


#1 “Shell money is a medium of exchange similar to money that was once commonly used in many parts of the world. Shell money usually consisted either of whole sea shells or pieces of them, which were often worked into beads or were otherwise artificially shaped. The use of shells in trade began as a direct commodity exchange, the shells having value as body ornamentation.” (Wikipedia)

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REPLY to Matt Franko on Jul 28

Nice try to start a futile semantic game. In every concrete historical situation, people know very well what money is. This, though, is a matter of indifference to the theory of money. What people think about the earth and the sun is irrelevant for astronomy, just as it is irrelevant for economics what storytellers tell about the historical emergence of money.

Money in the ‘monetary theory of production’ is in the most elementary case the stock of deposits at the central bank, which is measurable with the precision of two decimal places. It is a matter of indifference whether it is called dollar, euro, yuan, or ruble. Take the world economy as one and define one currency and call it Bancor, and all semantic variety disappears.

The point at issue is that MMT is provably false #1 and that Peter Cooper’s IOU story of money is beyond ridiculous. Just as your semantic crap. This is NOT a figure of speech.


#1 Refutation of MMT: all proofs and arguments you ever need

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REPLY to Matt Franko on Jul 28

When social scientists (an oxymoron, not a metonymy) are at a loss, they invoke complexity as an excuse. This does not work either. #1


#1 Complexity and stupidity

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REPLY to Matt Franko on Jul 28

The question on this thread is: does Peter Cooper’s Short & Simple 11 – Money as an IOU hold water? And the answer is not one drop.

So MMT is refuted on all counts. #1

Whether you understand the proof and its significance is your personal problem.


#1 For details, see Refutation of MMT: all proofs and arguments you ever need.