Wikipedia and the promotion of economists’ idiocy (II)

Comment on Wikipedia’s ‘Accounting identity’ #1

Own post, no external Blog-Reference

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

The first point to notice is that there is NO such thing as “true by definition”. #2 Truth has to be established by proof. Scientific truth is well-defined by material and formal consistency: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

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

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

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

• “You can define anything you want but as a sage once said ‘A rose by any other name will smell as sweet!’” (Davidson)
• “For, on principle, we may call things what we please.” (Schumpeter)
• “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions. (Blinder)
• “‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”

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

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

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

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

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

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

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

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

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

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

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

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

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

Egmont Kakarot-Handtke


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

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

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Graphic AXEC143d

MMT and the single most stupid physicist

Comment on Charles Adams on ‘The single most important piece of economics that everyone should know.’

Blog-Reference and Blog-Reference and Blog-Reference on Sep 8

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.” and “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In words, the public sector's deficit is the private sector's surplus or vice versa, or as Stephanie Kelton puts it succinctly in this video, the government's red ink is our black ink.”

The physicist Charles Adams is obviously just as stupid or corrupt or both as MMT's Stephanie Kelton. #1, #2 In fact, he is even worse because he has not realized that the MMT accounting identity/sectoral balances equation has already been refuted. #3, #4

To make matters short, here is the gist of the proof:

• The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.

• The elementary production-consumption economy is given with three axioms, two conditions, and two definitions, i.e., monetary profit/loss Qm≡Ec−Yw, monetary saving/dissaving Sm≡Yw−Ec. Legend: Ec consumption expenditures, Yw wage income.

• It always holds Qm≡−Sm, in other words, the business sector’s monetary profit/loss Qm equals the household sector’s monetary dissaving/saving −Sm.

• For the more complex economy, the axiomatically correct balances equation reads (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0, which reduces to Qm=G−T, that is, Public Deficit = Private Profit. #5, #6

• In marked contrast, the false MMT balances equation reads (X−M)+(G−T)+(I−S)=0, which reduces to S=G−T.

It is a curious fact that in Charles Adams’ The single most important piece of economics that everyone should know’ the word profit does not appear once despite the fact that profit is the single most important variable in economics. #7

This tells one that Charles Adams has NO idea of what he is talking about.

Egmont Kakarot-Handtke


#1 Down with idiocy!
#2 The Kelton-Fraud
#3 Wikipedia and the promotion of economists’ idiotism (II)
#4 For the full-spectrum refutation of MMT, see cross-references MMT
#5 MMT: How mathematical incompetence helps the Kelton-Fraud
#6 DSGE and profit―forget it! MMT and profit―forget it!
#7 MMT and the magical profit disappearance

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REPLY to Ed Zimmer on Sep 9

You say: “E.K-H’s so-called axioms don’t even hold up to elementary common sense.”

In the meantime, even the most retarded folks should have realized that common sense never has been and never will be a valid argument in a scientific debate.

About the relationship between common sense and science, all has been said by the great methodologist J. S. Mill 150+ years ago: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcilable with the theory they held and with a totally different one. It seems strange that such an instance as this, ..., should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” #1, #2, #3


#1 Why J. S. Mill had no friendly word for the bigots and votaries of common sense
#2 The bigots of common sense
#3 Misled by ordinary intuition and common sense

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REPLY to Matt Franko on Sep  9

Charles Adams states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity.”

You say: “Anyone can regurgitate an accounting identity.”

I say: “The axiomatically correct accounting identity reads in the most elementary case Qm+Sm=0 and the MMT identity is provably false.” #1, #2

Can you now write down your accounting identity? This is the precondition for determining which one is true.

After all, we are dealing with ‘The single most important piece of economics that everyone should know.’


#1 Wikipedia and the promotion of economists’ idiotism (I)
#2 Wikipedia and the promotion of economists’ idiotism (II)

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REPLY to Ed Zimmer, Tom Hickey on Sep 10

The axiomatically correct accounting identity reads in the most elementary case Qm≡−Sm, in words, macroeconomic profit/loss is the complement of dissaving/saving, or, as Charles Adams put it in general terms, “the sum of all sectors is zero”. The number of sectors is two, to begin with. This is the irreducible minimalist configuration. Analytically, this is the correct starting point.

The 3-bar symbol indicates a definition. A definition introduces a new variable that is composed of the axiomatically given variables, which are connected by mathematical operators. This technicality has been explained elsewhere and is of no importance in the present context.

The decisive point is that monetary profit for the business sector as a whole Qm depends alone on the dissaving of the household sector as a whole −Sm and NOT on productivity, the wage rate, exploitation, monopoly, market power, union strength, greed, profit maximization, etcetera which, in turn, means that the familiar microeconomic explanations of profit are false for 200+ years. And this, in turn, means that Distribution Theory is false. And this, in turn, means that economics is proto-scientific garbage from the founding fathers onward to MMT. #1

For the complex economy with more than two sectors follows the axiomatically correct balances equation (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0 #2, which is obviously different from the false MMT balances equation (X−M)+(G−T)+(I−S)=0. #3

The bottom line is that MMTers got the macroeconomic accounting identity wrong. This is a mathematical fact. #4 It tells the world that economists in general and MMTers, in particular, are too stupid for the elementary mathematics that underlies macroeconomic accounting. #5 It is a grave state of affairs when the elementary equation Qm+Sm=0 is beyond the understanding of academics.


#1 Ricardo, too, got profit theory wrong
#2 Go! ― test the Profit and Employment Law
#3 Rectification of MMT macro accounting
#4 Wikipedia and the promotion of economists’ idiotism (II)
#5 For details of the big picture, see cross-references Accounting

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REPLY to Tom Hickey, Matt Franko on Sep 10

Charles Adams deals with ‘The single most important piece of economics that everyone should know.’

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.”

Up to this point, all is fine in general terms.

In concrete terms, it holds for the two-sector economy (business, household) Qm≡−Sm (i).

For the three-sector economy (business, household, government) holds Qm+Sm−(G−T)=0 or Qm+Sm=(G−T) (ii), i.e. business sector’s profit Qm plus the household sector’s saving Sm is equal to the government sector’s deficit (G−T). #1

Up to this point, all is fine in accounting terms. But now comes the MMT blunder/fraud. Charles Adams says: “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In other words, the public sector's deficit is the private sector's surplus or as vice versa, or as Stephanie Kelton puts it succinctly in this video, the government's red ink is our black ink.”

The sleight of hand consists of the tacit introduction of an additional/redundant definition S≡Qm+Sm, i.e. private sector surplus S is the sum of the business sector’s profit Qm and the household sector’s saving Sm.

So, eq. (ii) Qm+Sm=(G−T) becomes S=(G−T) (iii), i.e., “our” black ink S is the government’s red ink (G−T). The MMT fraud consists of lumping “their” profit Qm and “our” saving Sm together to “our” black ink.#2 H okuspokus Simsalabim, profit is gone and then is heard no more when MMTers climb on a soapbox or advise Bernie Sanders and straightforwardly push their Wall Street/City of London agenda of deficit spending (G−T)>0, which results in “their” profit Qm for any given amount of “our” saving Sm, i.e., Public Deficit = Private Profit.

Outside academic economics, to let profit disappear is called accounting fraud, and accountants are sent to jail for it. This is ‘The single most important piece of economics that everyone should know.’


#1 Rectification of MMT macro accounting
#2 The Kelton-Fraud

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REPLY to Ed Zimmer on Sep 10

You say: “E.K-H’s basic error is believing an ‘identity’ (3-bar symbol) is different from an ‘equality’ (2-bar symbol), which is simply not the case for numerical variables …”

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

The axiom set consists of 4 real variables L, R, O, X, and 4 nominal variables Yw, W, Ec, P.

From these variables, only a subset reappears in macroeconomic accounting, viz., the nominal flows Ec and Yw.

Now, two new variables are introduced. Monetary profit of the business sector Qm is defined as Qm≡Ec−Yw (i) and monetary saving of the household sector Sm as Sm≡Yw−Ec (ii).

The 3-bar symbol ≡ means in the given context “is defined as”. #1

It obviously holds Qm+Sm=0 when (i) and (ii) are inserted. In the words of Charles Adams, “Something that is true is that the sum of all sectors is zero.” #2

This statement follows logically from the axioms (A1) to (A3) and the definitions (i) and (ii).


#1 Wikipedia List of mathematical symbols
#2 In the comment section, Adams refers explicitly back to Stützel, see also Keenonomics, aggregate demand/change of debt, and some misleading critique.

For more about the balance mechanics of Stützel, see AXECquery.

Truth by definition? The Profit Theory has been axiomatically false for 200+ years

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’

Blog-Reference and Blog-Reference

(i) You said in the intro: “This article continues the discussion of the Kalecki Profit Equation. The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively.”

(ii) You say in your latest post: “Egmont, the expression ‘I could care less’ best summarises my views on this topic. If a ‘senior MMTer’ wrote something that contradicts standard accounting identities, feel free to take it up with said ‘senior MMTer.’ I cannot recall reading anything like that, so as far as I am concerned, you are beating up on a straw man. (The complaint I saw revolved around MMTers using ‘saving’ to refer to sectoral balances, and not the standard national accounting version. Since ‘saving’ and ‘investing’ are commonly used to refer to things not matching the national accounting definition, I view that as grasping at straws.)”

In (i), you say that you are dealing with “an account identity (a statement that is true by definition)”. In (ii), you say that there are standard accounting identities. Now, the standard identities are also known to be “true by definition”. In fact, this is a very common phrase in economics.

Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”. Economists obviously have a serious problem with understanding the elementary mathematical logic of accounting. This problem has been unsolved since Keynes. After-Keynesians still claim that Keynes’ famous I=S is an accounting identity. #1

Kalecki came up with a quite different accounting identity: “The economy is closed (there is no international trade) and there is no public sector. With these assumptions, Kalecki derives the following accounting identity: P+W=Cw+Cp+I, where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists’ consumption, Cw is workers’ consumption, and I is the gross investment that has been made in the economy. Since we have supposed workers who do not save (that is W=Cw in the preceding equation), we can simplify the two terms and arrive at: P=Cp+I. This is the famous profits equation, which says that profits are equal to the sum of investment and capitalists’ consumption.” (Wikipedia) #2

Kalecki’s profit equation is axiomatically false, that is, beyond repair. #3

In my post ‘The final implosion of MMT’ I came up with the axiomatically correct accounting equation for the most elementary economic configuration, Qm≡−Sm #4, which you commented on with the blog post ‘Fun With Accounting Identities’#5: “An article with the flamboyant title ‘The final implosion of MMT’ by Egmont Kakarot-Handtke caught my eye. As I observed at Mike Norman Economics, this was probably just an attempt to troll people. That said, I think it provides another useful example of national accounting works (or does not work...).”

You did not get the point then, and I commented: “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).” and summarized “The current state of economics is that national accounting is provably false 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.”

Now, your post ‘Primer: The Kalecki Profit Equation (Part I)’ starts with (Model 1 Profits) = −(Household savings), in symbols, Qm≡ −Sm.

In principle, it is a good thing that you corrected your false assertions about macroeconomic accounting and adopted the axiomatically correct macroeconomic Profit Law. However, you are deceiving the general reader by attributing it to Kalecki.

I hereby inform you publicly that false attribution not only constitutes a violation of the standards of scientific discussion/publication but also of Wikipedia’s ‘Creative Commons Attribution-Share Alike 4.0 International’ as well as the International Copyright © and Trademark ® Laws. The correct attribution of the Model 1 to Model 5 profit equations is to AXEC/Egmont Kakarot-Handtke. #6, #7, #8

Egmont Kakarot-Handtke


#1 For details of the big picture, see cross-references Refutation of I=S
#2 Wikipedia Michał Kalecki The profit equation
#3 Refutation of Kalecki’s profit equation:

• What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example
• The monetary circuit and how economists got it wrong
• Kalecki got it wrong, Allais got it right
• Kalecki: the man who missed it by a hair's breadth
• Kalecki’s wrong definition of profit and income
• Loanable funds ― no hoax, just breathtaking stupidity
• Macro for dummies (II)
• Economists: scientists or political clowns?
• Profit and stupidity
• How the Intelligent Non-Economist Can Refute Every Economist Hands Down

#4 AXEC Oct 31, 2016, The final implosion of MMT
#5 BondEconomics Nov 1, 2016, Fun With Accounting Identities
#6 Rectification of MMT macro accounting
#7 DSGE and profit―forget it! MMT and profit―forget it!
#8 Keynes’s Missing Axioms

Related 'MMT: How mathematical incompetence helps the Kelton-Fraud' and 'Wikipedia and the promotion of economists’ idiotism (II)'

The Levy/Kalecki Profit Equation is false

Comment on Alex Barrow/Macro Ops on ‘Minsky and the Levy/Kalecki Profit Equation’

Blog-Reference (Link)

Alex Barrow comes directly to the point: “Let’s kick things off with the Levy/Kalecki Profit Equation. The Profit Equation is just a macroeconomic accounting identity for how the global economy actually operates. Specifically, it answers the question as to where ‘Profits’ come from and thus, growth.”#1

And this is the answer: “The actual accounting identity looks like this: Profits before tax = + Investment – Nonbusiness saving + Dividends + Corporate profits taxes. This accounting identity, which like any identity holds true under any circumstance, is just saying that corporate profits are the direct result of net investment minus nonbusiness (Households + Government + rest of world) saving before dividends and corporate taxes are paid out.”

And this is the rationale: “Well, if you pull back and look at the global economy as a whole, it’s a closed system. It's closed in the sense that profits aren’t magically appearing from anywhere outside of the global economy. But profits obviously aren’t a zero sum game. If one company earns profits it doesn’t necessarily mean that another company somewhere has to be operating at a loss. There wouldn’t be any growth if that was the case. So, where do profits come from then?”

Yes, where? “The answer is in net investment, which is a positive sum game. If we divide the economy into our four aggregate entities (1) US Corporations (2) Households (3) All levels of US Government and (4) the Rest of the World (RoW) and look at them as a whole, there needs to be net positive investment as a whole for their to be profits. Profits are essentially the result of expanding balance sheets (increases in debt). The more balance sheets expand the lower interest rates need to drop in order to decrease debt servicing costs and keep the cost of capital down for marginally profitable firms — essentially keep the economy from going into free fall.”

Alex Barrow, respectively his source, derives the Profit Equation with the help of the identity method. More specifically:

“II. FINDING THE SOURCES OF PROFITS: THE IDENTITY METHOD
Profits, Saving, and Investment
Aggregate profits, after corporate income taxes and dividends have been paid out, are the wealth the business sector accumulates during a period of time. Of course, businesses are not the only ones accumulating wealth ― households, government, and foreign entities also do so. The wealth the business sector accumulates is equal to the total new wealth created in the economy less that accumulated by the other sectors. In economics, the accumulation of wealth is called saving, and the creation of wealth is called investment. By common sense, the new wealth the economy accumulates equals the new wealth the economy creates; that is, saving equals investment.” and “But no matter what accounting system one uses, saving will always equal investment.”#2

This is NOT correct. On closer inspection, common sense gets the accounting identity  mathematically wrong.#3 To make matters short, here is the proof.#4, #5

The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector, which, in turn, consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown under the label Graphic. #6

The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget balancing, i.e., C=Y_w, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Y_w−C. The monetary profit/loss of the business sector is defined as Q≡C−Y_w. Ergo Q≡−S.

The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.

In other words, saving is NOT equal to investment (because there is NO investment in the elementary production-consumption economy), but saving is equal to loss.

So, Alex Barrow’s assertion is false: “ it [the global economy as a whole] is a closed system. Its closed in the sense that profits aren’t magically appearing from anywhere outside of the global economy. But profits obviously aren’t a zero sum game.” No, but profit/loss of the business sector and dissaving/saving of the household sector is a zero-sum game, i.e., Q+S=0.

When more sectors are added, the macroeconomic Profit Law reads with increasing complexity:
(i) Q≡−S in the elementary production-consumption economy,
(ii) Q≡I−S in the elementary investment economy,
(iii) Q≡(I−S)+(G−T)+Y_d in the investment economy with government deficit/surplus (G−T), and distributed profit Y_d.

The macroeconomic Profit Law fully replaces the false Profit Equations of Levy/Kalecki.#7-#12 The fact that the Profit Equation and the Profit Law look similar at the surface does not alter the fact that the Profit Equation is “educated common sense” (Stigum) and lacks proper scientific foundations.

Crucial conclusions: The monetary economy breaks down ― at the latest ― if macroeconomic profit Q turns negative. At the moment, the U.S. economy is on full life support of the government, i.e., the government deficit (G−T) is where the greater part of profit actually comes from. It is the government that prevents “the economy from going into free fall”.

The policy of deficit-spending/money-creation clearly benefits the Oligarchy because it increases macroeconomic profit according to the Profit Law, which entails Public Deficit = Private Profit. Thus, the Oligarchy’s financial wealth and public debt (currently $22 trillion) grow in lockstep. The Profit Law explains the extremely skewed distribution of income and financial wealth.

Economists claim since Adam Smith that the free market economy is self-regulating and self-optimizing if left to itself. In reality, it is just the opposite: the real part of the economy is kept on life support by the State, and the monetary/financial part is kept on life support by the Central Bank.

Economics is proto-scientific garbage for 200+ years now because it does not get the foundational concept of profit right, and the Levy/Kalecki Profit Equation is an integral part of the overall failure.

Egmont Kakarot-Handtke


#1 Macro Ops
#2 The Jerome Levy Forecasting Center, Where Profits Come From
#3 Wikipedia and the promotion of economists’ idiotism (II)
#4 Controlled demolition of MMT ― an exercise in elementary logic
#5 For details of the big picture, see cross-references Refutation of I=S and cross-references Profit/Distribution
#6 Graphic AXEC31 Elementary production-consumption economy

#7 Profit: after 200+ years, economists are still in the woods
#8 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#9 MMT Progressives: The knife in the back of WeThePeople
#10 MMT and grassroots movements
#11 Kalecki and Keynes: The double macroeconomic false start
#12 MMT: How mathematical incompetence helps the Kelton-Fraud

Related 'Are economics professors really that incompetent? Yes!' and 'Refuting MMT’s  Macroeconomics Textbook' and '#DrainTheScientificSwamp' and 'Macroeconomics: Drain the scientific swamp' and 'Is Nick Rowe stupid or corrupt or both?' and 'Keynes, Kalecki, MMT, and the accidental invention of the perpetual profit machine' and 'The failure of Post-Keynesianism' and 'Kalecki got it wrong, Allais got it right' and 'Rethinking deficit spending' and 'MMT Progressives: The knife in the back of WeThePeople' and 'Keynes’s Missing Axioms'.

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Graphic AXEC143d  Profit Law (with increasing complexity) and Balances Equation

#DrainTheScientificSwamp

Links on Nick Rowe’s ‘Explaining S=I: Inventories vs Adding up Individuals’ on Dec 18

Blog-Reference

Macroeconomics is one of the most embarrassing failures in the history of modern science. The fact is that economists do NOT understand to this day that I=S is provably false since Keynes.

• I is never equal S and even Nick Rowe will eventually grasp it
• How Keynes got macro wrong and Allais got it right
• Kalecki and Keynes: The double macroeconomic false start
• Heterodox economics: When stupidity becomes a public danger
• Keynesians ― terminally stupid or worse?
• For details of the big picture see cross-references Refutation of I=S

Egmont Kakarot-Handtke


Related 'Flawed logic' and 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It'.

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REPLY to Roger Sparks on Dec 27

I is NEVER equal to S. Therefore, it is a futile exercise to ‘explain’ I=S with some silly examples.

Here is the proof.

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

In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

• In case (i), the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e., X=O in all three cases. Accordingly, the market-clearing price as the dependent variable is given by P=C/X=W/R.
• In case (ii), monetary saving Sm is positive and the business sector makes a loss, i.e., Qm is negative. The market-clearing price P is less than W/R.
• 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, the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving. In still other words, saving is NOT equal to investment because there is NO investment in the elementary production-consumption economy.

Under the condition that the price remains constant, the market does not clear if saving is greater than zero, i.e., O−X>0 if Sm>0, i.e., the business sector’s inventory increases. The valuation of the inventory is NOT predetermined. For example, if it is valued with zero, then inventory investment is zero and I is NOT equal to Sm. If it is valued higher, then inventory investment is positive but still unequal to Sm.#1

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

Keynes’ premise that income = value of output is false. From the correct macroeconomic axioms follows:
(1) Qm≡−Sm in the elementary production-consumption economy,
(2) Qm≡I−Sm in the elementary investment economy,
(3) Qm≡Yd+I−Sm in the investment economy with profit distribution,
(4) Qm≡Yd+I−Sm+(G−T)+(X−M) in the general case with government in an open economy.

Simple algebra tells everyone that saving is NEVER equal to investment. Both orthodox and heterodox economists are too stupid for the elementary mathematics that underlies macroeconomic accounting.#2


#1 Primary and Secondary Markets
#2 For more details, see cross-references Refutation of I=S

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REPLY to Roger Sparks on Dec 29

Nick Rowe writes: “It’s easy to teach students the arithmetic showing that actual saving must equal actual investment (S=I).” and “S=I is an accounting identity, and accounting identities are true by definition.”

The fact is that “S=I is an accounting identity, and accounting identities are true by definition,” is one of the most stupid statements in the history of the failed/fake science of economics. #1, #2, #3 And the fact that all student generations since Keynes parrot this manifest arithmetic garbage is a metric of the desperately low IQ of economics students.

Take notice that the correct accounting identity for the elementary investment economy reads Qm≡I−Sm, that is, monetary profit Qm is the difference between investment expenditures of the business sector I and monetary saving of the household sector Sm.

Saving has never been nor will ever be equal to investment. So, ‘explaining’ I=S is not easy, just the opposite, it is impossible.

The fact that economists still claim ― 80+ years after Keynes committed the lethal blunder ― that I equals S is due to their utter scientific incompetence. This thread is the very proof that Nick Rowe and Roger Sparks and the rest (except Jamie, who got it: “This makes me want to scream in frustration”) are too stupid for the elementary mathematics that underlies macroeconomic accounting.#4, #5


#1 Wikipedia and the promotion of economists’ idiotism
#2 MMT and the single most stupid physicist
#3 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#4 A crash course in macro accounting
#5 For details, see cross-references Accounting

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REPLY to Nick Rowe on Jan 1

You write: “Here’s the arithmetic of S=I: Define Y as market value of newly-produced final goods (and services). In a closed economy … we divide Y into consumption goods C and investment goods I, so Y=C+I. And we define saving S as S=Y−C. Substitute the first equation into the second to get S=Y−C=C+I−C=I, so S=I.”

This is Keynes’ argument of GT p. 63. It is false because Keynes got macroeconomic profit wrong: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Let this sink in: the economist Keynes NEVER understood the foundational concept of his subject matter. And after-Keynesians NEVER spotted Keynes’ blunder.

In order to get the “arithmetic” right, one has to go back to the most elementary macroeconomic configuration, that is, the elementary production-consumption economy, which consists of the household and the business sector.

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 S≡Yw−C is zero, and the monetary profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e., X=O, i.e., there is NO change of inventory.
• In case (ii), monetary saving S is positive and the business sector makes a loss, i.e., Q is negative.
• In case (iii), monetary saving S is negative, i.e., the household sector dissaves, and the business sector makes a profit, i.e., Q is positive.

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

For the elementary investment economy, the Profit Law reads Q≡I−S. As everyone can see, there is NO such thing as an accounting identity I=S or an equilibrium of saving and investment.

For 80+ years, I=S is a monument of economists’ mathematical incompetence, and “S=I is an accounting identity, and accounting identities are true by definition” will forever stand out as one of the most idiotic statements in the history of so-called economic thought.

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REPLY to Roger Sparks on Jan 1

You say: “You can see that business would control the pricing of the products consumed but households would control whether consumption (the second exchange) would occur and when.”

What I indeed see is that you are one of those undereducated blatherers who overpopulate economics. The point at issue is the macroeconomic “arithmetic” and not human behavior/control. More specifically, the point at issue is the refutation of the brain-dead assertion: “S=I is an accounting identity, and accounting identities are true by definition.”

The point at issue is that I=S is mathematically false and by NO means “true by definition” and that economists are too stupid for macroeconomic accounting#1 and that they, after 200+ years, still do not understand what profit is.

Make no mistake, I=S is not only disqualifying for you and Nick Rowe but for the entire profession.#2

In the elementary production-consumption economy, the price is under the condition of market clearing, i.e., X=O, and budget balancing, i.e., C=Yw, the dependent variable, i.e., P=W/R. If the condition of market-clearing is dropped and the firm sets the price, then the market is NOT cleared and the change of inventory is given by O−X.

All these cases have been dealt with elsewhere #3, and they are NOT relevant to the point at issue. So, they can be left out for the moment. Again, the point is that investment is NEVER equal to saving and that Nick Rowe’s attempt to explain I=S is 200+ light years beside the point, as usual.#4

This is the state of economics: Walrasian microfoundations are false and Keynesian macrofoundations are false. There is NO economics that satisfies the criteria of science, only senseless blather.


#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Primary and Secondary Markets
#4 Cryptoeconomics ― the best of Nick Rowe’s spam folder

MMTers: too stupid for simple math

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

Blog-References

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

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

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

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

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

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

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

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

All this is provably false. #3-#8 

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

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

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

Egmont Kakarot-Handtke


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

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

For more about sectoral balances, see AXECquery.

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REPLY to Matt Franko on Feb 16

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

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

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

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


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

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

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PDF-Version

Either stupid or duplicitous

Comment on Mean Squared Errors on ‘What is it with economists and accounting identities?’

Blog-Reference

You say: “It's very strange. There seems to be something about accounting identities that causes otherwise reasonable economists — pardon my bluntness — to become either stupid or duplicitous.” (See intro)

It is not strange at all if one drops the unwarranted premise that there is, in the beginning, something like a ‘reasonable economist.’ It is as simple as that: being habitually confused, confuser-economists did not miss the opportunity to mess up accounting, too. This holds for balance-of-payments accounting, but in fact, goes deeper.

It started with Keynes. He gave the following elementary formal description of the economy: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This is the most basic accounting identity and, no surprise, economists got it badly wrong — from Keynes to Hicks to Krugman to Wren-Lewis #1. Actually, the fault in Keynes's two-liner is in the premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment goods industries.

Profit does not appear in Keynes's elementary formalism because he never came to grips with this pivotal economic phenomenon. Neither did the Post Keynesians until this day (2011). Unaware of the underlying conceptual and logical defects, economists finally messed up National Accounting (2012).

The root cause of all accounting errors/mistakes is a complete lack of understanding of what profit is. For an economist, this is disqualifying.

To make it short, here is the formally correct accounting identity Graphic AXEC09 for the closed economy (2014, eq. (47)). Derivation and explanation are to be found in the referenced papers.

Because the fundamental accounting identity for the closed economy has always been false, the identity for the open economy has also been false.

The problem with accounting identities has, indeed, something to do with equilibrium thinking, yet ultimately, the all-pervasive analytical blunder can be traced back to the provably false profit theory. #2

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

#1 See the 2012 MM-post Savings Equals Investment?
#2 More than two centuries of waffling in the dark

MMT and the magical profit disappearance

Comment on Peter Cooper on ‘Short & Simple 15 – The Sectoral Balances Identity’

Blog-Reference

Peter Cooper summarizes: “This is the sectoral balances identity. In words: Domestic Private Balance + Government Balance + Foreign Balance = 0. The balances of the three sectors cancel each other out. … The result can be aggregated a bit more by combining the domestic-private and foreign sectors into the Non-Government Sector. The identity then becomes Non-Government Balance + Government Balance = 0. … If the non-government manages to maintain a financial surplus, then by definition the government will be running a deficit. In doing so, non-government will accumulate net financial assets over the period and increase its stock of net financial wealth.”

Let us put the accounting right.#1, #2. At first, we have only the business and the household sector. The two sectoral balances are given as follows:

Q_m≡C−Y_w   profit Q_m is the household sector’s spending C minus wages Y_w,
S_m≡Y_w−C   saving S_m is wage income Y_w minus consumption expenditures C,
-------------
Q_m≡−S_m.

The business sector’s monetary profit Q_m is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law.

Now, the government sector GS has been added. The three sectoral balances are given as follows:

Q_m≡C+G−Y_w   profit Q_m is HS- and GS-spending C+G minus wages Y_w,
S_m≡Y_w−T−C    saving S_m is wage income Y_w minus taxes T and expenditures C,
B_m≡T−G         GS budget surplus B_m is taxes T minus government expenditures G,
-----------------
Q_m≡−S_m−B_m.

The business sector’s monetary profit Q_m is equal to the household sector’s budget deficit, a.k.a.. dissaving, plus the government sector’s budget deficit.

For three sectors, proper accounting yields three sectoral balances that add up to zero. Now MMT does not stop here but fiddles with the balances as follows: (i) Q_m+S_m+B_m=0, (ii) Q_m+S_m=−B_m=G−T, (iii) non-government balance = − government balance, respectively, private sector surplus = government deficit. Business sector profit/loss and household sector dissaving/saving are verbally lumped together to the non-government = private sector balance and thereby vanish out of sight.

Source: Twitter Deficit Owl

Why does MMT make profit disappear with this accounting shell game? Let S_m be zero, that is, the household sector’s budget is balanced, then (ii) says that the business sector’s profit is equal to the government sector’s deficit, i.e. Q_m=G−T, i.e. Public Deficit = Private Profit. While (iii) says that the non-government surplus is equal to the government sector’s deficit, which is misleading, to say the least.

Why MMT 'aggregates' the business and the household sector is at anybody’s guess. Formally, it is inadmissible, that much is clear. The destruction of valuable information is NOT the purpose of accounting, just the opposite.

Egmont Kakarot-Handtke


#1 Economists: just too stupid for counting
#2 The pure production-consumption economy is defined with the macroeconomic axiom set: (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) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start, X=O.

Related 'Why is MMT so false?' and 'MMT: The joy of public deficit spending' and 'MMT: The one deadly error/fraud of Warren Mosler' and 'Down with idiocy!' and 'Is Nick Rowe stupid or corrupt or both?' and 'Proving Bill Mitchell wrong ― burying MMT for good'. For the point-by-point refutation of MMT, see cross-references MMT. For the accounting blunder, in particular, see 'Rectification of MMT macro accounting' and cross-references Accounting.

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AXEC197a

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LINK on Aug 12

Peter Copper asserts: “The accounting identities are indisputable (provided we accept the principles of accounting).”

MMT violates the principles of accounting. For details, see MMT and the magical profit disappearance.

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REPLY to Matt Franko on Aug 13 and to Dean on Aug 14

Peter Copper asserts: “The accounting identities are indisputable (provided we accept the principles of accounting).”

Fact is
• accounting is elementary mathematics,
• MMTers do not understand the underlying math of accounting,#1
• the accounting equations of MMT are provably false,#2
• these are the correct accounting identities:

Q_m≡C+G−Y_w    profit Q_m, business sector,
S_m≡Y_w−T−C     saving S_m, household sector,
B_m≡T−G          budget surplus B_m, government sector,
----------------
Q_m+S_m+B_m=0.

• for THREE sectors, proper accounting yields THREE sectoral balances which add up to zero,
• it is either mathematical incompetence or fraud that profit does not appear in the MMT accounting identities,
• Peter Cooper violates the principles of accounting.

Takeaway: As far as Peter Copper only parrots Bill Mitchell and Randall Wray the charge of scientific incompetence applies to these spokespersons of MMT.#3


#1 A tale of three accountants
#2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#3 For the full-spectrum refutation of MMT, see cross-references MMT.

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REPLY to Dean on Aug 15

You say: “Yeah, I'm not arguing with anyone on the underlying math of accounting … all I really care about is proving to those that matter that it is not mathematically possible for everyone to be solvent …”

There are opinions and brain-dead blather. This is called politics. There are knowledge and proof. This is called science.

MMT belongs to the first category. Peter Cooper’s discussion about the sectoral balances identity demonstrates beyond any doubt that MMT is economics from suckers for suckers.

Note that you contradict yourself in one sentence. You care about proof but not about the underlying mathematics of accounting. What does your proof, then, consist of?

***

Kindle, Stephanie Kelton, Deficit Myth

Where is the third bucket (household sector, business sector, government sector)?

For more about sectoral balances, see AXECquery.

A crash course in macro accounting

Comment on Peter Cooper on ‘Fiscal Policy, Sectoral Balances, and Financial Sustainability’

Blog-Reference and Blog-Reference

You say: “PRIVATE Balance + GOVT Balance + FOREIGN Balance = 0” and “This is an accounting identity, which means it always holds true.”

This is NOT the case because you messed up the elementary mathematics of accounting. #1 To see this, one has to go back to the MOST ELEMENTARY economic configuration, that is, the pure production-consumption economy, which consists of the household sector and the business sector. #2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income E_c=Y_w, (ii) E_c is less than Y_w, (iii) E_c is greater than Y_w.

In case (i), the monetary saving of the household sector S_m≡Y_w−E_c is zero, and the monetary profit of the business sector Q_m≡E_c−Y_w, too, is zero.
In case (ii), monetary saving S_m is positive, and the business sector makes a loss, i.e., Q_m is negative.
In case (iii), monetary saving S_m is negative, i.e., the household sector dissaves, and the business sector makes a profit, i.e., Q_m is positive.

It always holds Q_m≡−S_m, 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.

The balances of the business sector, the household sector, the government sector, and the rest of the world are interrelated as follows: Q_m≡−S_m+I+Y_d+(G−T)+(X−M), and THIS is the correct accounting identity for an open economy (X−M) with a government sector (G−T) and with the business investment I and distributed profit Y_d.

Your accounting blunder consists of lumping together the business sector and the household sector. This makes the crucial relation between profit, distributed profit, saving, and investment invisible #3, which amounts to an intended/unintended destruction of valuable information, which in turn is contrary to the very purpose of accounting.

Egmont Kakarot-Handtke


#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 (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) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) E_c=PX consumption expenditure E_c is equal to price P times quantity bought/sold X. For a start, it holds X=O. Note that ALL variables are measurable. E_c and Y_w appear in National Accounting.
#3 How Keynes got macro wrong and Allais got it right

Related 'Rectification of MMT macro accounting' and 'Down with idiocy!' and 'Is Nick Rowe stupid or corrupt or both?' and 'A tale of three accountants'. For  details of the big picture, see cross-references Accounting

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REPLY to jrbarch on Jul 7

You say: “Therefore it makes perfect sense to sum businesses and households as the ‘private sector’ who hold these tax credits.”

It makes a real difference whether what you call tax credits are held by the households or by the firms. By lumping both together in what Peter Cooper calls the "private sector" this difference is made invisible. #1

If this is done unintentionally, it is sheer scientific incompetence; if this is done intentionally, it is what people call cooking the books. If one is not committed to science, though, it is merely brain-dead blather.

#1 For the political implications, see Austerity and the idiocy of political economists.

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REPLY to jrbarch on Jul 8

Peter Cooper argues: “For the economy to grow in a financially sustainable way, the private sector should normally be allowed to maintain a financial surplus (spending less than its income). For many countries (the majority with current account deficits), this means government needs to spend more than it taxes under normal circumstances.”

Because ‘spending less than income’ is the definition of saving, the condensed form of the argument reads: because the households should be allowed to save, the government must dissave, because from accounting follows with mathematical certainty that for any surplus there must be a deficit of equal magnitude somewhere else in the economy.

The problem with this argument is that economists in general and Peter Cooper, in particular, do not understand the elementary mathematics of accounting.

The balances of the business sector, the household sector, the government sector, and the rest of the world are interrelated as follows: Q_m≡−S_m+I+Y_d+(G−T)+(X−M). This boils down to Q_m=−S_m+(G−T) for I, Y_d, X, M = 0.

So, there are two limiting cases: (i) If the household sector’s saving S_m goes up and the government’s deficit (G−T) goes up by the same amount, the profit of the business sector Q_m remains unchanged. (ii) If the household sector’s saving S_m remains unchanged and the government’s deficit (G−T) goes up, the profit of the business sector Q_m goes up by the same amount. It holds that Public Deficit = Private Profit.

So, the counterpart of an increased public deficit is either increased saving of the households or increased profits of the firms, or some combination of the two. Therefore, to say that the counterpart of an increased public deficit is an increased surplus of the “private sector” obscures important real-world differences.

Worse. In the past decades, US households increased their debt; that is, they were dissaving. So, BOTH private and public households ran deficits. From the formula above follows that this boosts profit Q_m TWICE. And this is exactly what has been observed and criticized as a catastrophic deterioration of the income distribution.

So, by arguing for government deficits because the “private sector should normally be allowed to maintain a financial surplus,” Peter Cooper is de facto arguing for profit increases of the business sector. #1 He obscures this fact by lumping together the business sector and the household sector into the “private sector”. #2


#1 See also Keynesianism as ultimate profit machine.

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REPLY to jrbarch on Jul 9

You say: “So, to me, you are all on the same page, but with different concepts.” You are simply ill-informed. The formal foundations of MMT are logically defective, and because of this, MMT policy guidance has NO sound scientific foundations. For more details, see these comments

• Macrofounded labor market theory
• Economics is NOT about Human Nature but the economic system
• Where MMT got macro wrong
• Rectification and generalization of MMT
• Economics as poultry entrails reading
• Rethinking MMT
• Hobson got full employment policy almost right
• How to start off on the right foot
• Australian upside-down economics
• Modern Moronomic Theory

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REPLY to jrbarch on Jul 10

You say: “you have asked me to move logically from the sectoral balances framework to your own, but I can see no reason to do so?”

There is obviously a gross misunderstanding on your side.

The purpose of my post is to inform Peter Cooper that the accounting identity he starts with is defective and that, as a consequence, the rest of his intro is garbage.

The purpose of my post is NOT to educate jrbarch. And if you “can see no reason” to think logically, then simply do not. There is NO need to tell me.

Peter Cooper’s accounting identity is mathematically false. Whether you understand this or not is a matter of indifference.

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