It has been said before but economists still don’t get it

Comment on Nick Rowe on ‘Hydraulic Monetarism’

Blog-Reference and Blog-Reference

Nick Rowe concludes: “I’ve said all this before (and it’s all in Yeager and Clower and others). But maybe I’ve said it clearer this time.”

It has been said before: microfounded economics from utility maximization to supply-demand-equilibrium is false for 150+ years but one fraction of economists do not grasp it (= Orthodoxy) and the other fraction has never come forward with a superior alternative (= Heterodoxy). The theory of money circles in the endless loop of repetition ― except for MMT.

MMT has made the valid point that orthodox monetary theory is stuck with ridiculous barter stories and entirely misses the reality of fiat money. Fiat money does not circulate but is permanently created and destroyed. So, there is no fixed stock of money, to begin with. Let us call this lethal blunder of Orthodoxy the Moneybag Fallacy.

The Moneybag Fallacy was rectified by Wicksell and his giro system but for some reason, the news never illuminated the mental darkness of the Quantity Theory folks.

In the monetary economy, there is no direct barter, i.e. part of the stock of good 1 against part of the stock of good 2, but indirect barter, i.e. flow of labor time against the flow of goods. Money is created by wage payments and destroyed by consumption expenditures. In the most elementary case C=Y_w, that is, consumption expenditures are equal to wage income, that is, money is zero at the beginning of the period under consideration, is then created and destroyed through the transactions between the business and the household sector, and is zero at the end of the period. NO moneybag there! No circulation there! NO hydraulics there!

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

• In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
• 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.#1

It always holds Q_m≡−S_m, 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.

In case (ii)

• the household sector ends up with a stock of money = deposits at the central bank and the business sector ends up with overdrafts,
• the change of the household sector’s stock is given by ΔM=Y_w−C,
• the economy falls into recession.

In case (iii) it is just the other way round.

The household sector’s stock at the end of period t is given as the discrete numerical integral M_t=∑ΔM+M₀ with M₀=0.

Both the commonplace Quantity Theory and Hydraulic Monetarism is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 Money and time

Related 'MMT: Richard Murphy’s battle-for-money hoax' and 'Nick Rowe’s soapbubbling about money' and 'Money: from silly stories to the true theory' and 'Rectification and generalization of MMT' and 'MMT sucks'.

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REPLY to Nick Rowe on Jun 26

You said in the intro: “If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals.”

To compare money with land is as gaga as it gets. MMTers don’t get tired of shouting from every rooftop that money is produced out of nothing at almost no cost. As a matter of principle, the economy NEVER runs out of transaction money if the central bank understands what their primary task is.#1, #2

The apparatus of supply-demand-equilibrium is inapplicable to fiat money. To speak of a money “supply” is the Moneybag Fallacy all over again.

If every household “wants to increase their stock of money” they reduce their consumption expenditures. In this case, C is less than Yw and the deposits of the household sector (= money) increase and the overdrafts of the business sector increase also because the business sector makes a loss and both sides of the central bank’s balance sheet are always equal.

The same holds for a gold-coin economy. If the business sector pays the workers in gold coins and they fully spend their income, i.e. C=Yw, then the coins return to the business sector. If the households save, i.e. C less than Yw, then the household sector’s stock of coins increases until the end of the period under consideration and the business sector’s stock decreases. The business sector makes a macroeconomic loss and this triggers a recession.

In the elementary production-consumption economy, nobody can stop the households from increasing their stocks of money as long as they receive a wage income. The form of money, fiat money or gold coins, is irrelevant.

The household sector’s stock of money develops according to the discrete numerical integral M_t=∑ΔM+M₀, and the business sector’s stock is the exact mirror image except for the initial stock which, however, is zero in a fiat money system.#3

Economists never got the relationship between macroeconomic flows, differences of flows, change of stocks, and stocks straight.


#1 The creation and value of money and near-monies
#2 MMT: Richard Murphy’s battle-for-money hoax
#3 Reconstructing the Quantity Theory

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REPLY to Benjamin Cole, louis, Majromax, Jeremy Fox, Frank Restly, Roger Sparks on Jun 27

The history of money from the cowrie shell to bullion to coins to notes and to the credit card shows a clear tendency of 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. In the monetary economy of the digital age, the ultimate data carrier is the server at the central bank.

The pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. Your idiocy consists of getting caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: Money = Information. There is no ambiguity about money. Money is deposits at the central bank. Bank deposits are near money, not money.#2 And all other historical forms have to be treated as surrogates/substitutes/prefigurations of the real thing.

The theory of money is macro. Some people have realized this: “However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis.” (Fontana)

So, you are way behind the curve. The theory of money has to be built upon macrofoundations and not upon silly microeconomic barter or casino stories. The analytical framework is given by the ‘monetary theory of production’. (Keynes)

The remark “I have seen casino chips used for cash in Las Vegas” is not a contribution to the theory of money but proof that the representative economist has no idea about how the monetary economy works and how money functions. It is a wonder of Nature that a dead brain does not impair the faculty of blathering in the econblogosphere.


#1 Money: from silly stories to the true theory
#2 Basics of monetary theory: the two monies

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REPLY to Frank Restly on Jun 28

You say: “Simplistic stripped down models can aid in understanding ― it all depends on your audience.”

Because economics is a science the primary audience is the scientific community. The scientific community never had any problems with stripped down models but with FALSE models.

The story of how Zeus threw his thunderbolt at Typhon is NOT a stripped down model of how electricity works but a false model. The same holds for all barter stories. The defining characteristic of the economy is that labor time is exchanged for IOUs/money and money is exchanged for goods. The subject matter of economics is NOT barter or barter with a money-good but the ‘monetary theory of production’ (Keynes).

So, the most simplistic stripped down model in economics has to be a macro model. The ultimate methodological blunder of economics is microfoundations.

The scientific failure of economics is due to economists clinging to microfoundations. A scientist needs to read the microeconomic axioms#1 only once and knows for sure that they are proto-scientific garbage. And methodology tells us that if the axiomatic foundations are false the whole analytical superstructure is false.

Not to see that monetary theory has to be macrofounded is the disqualifying scientific blunder of Nick Rowe. It is not the only one.#3


#1 “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)
#2 Buddha on the microeconomic men in the dark
#3 Nick Rowe’s soapbubbling about money
► Is Nick Rowe stupid or corrupt or both?
► I is never equal S and even Nick Rowe will eventually grasp it
► Cryptoeconomics ― the best of Nick Rowe’s spam folder
► Getting out of IS-LM = Getting out of despair
► Nick Rowe: Bury me at the end of coal-pit
► Macro poultry entrails reading
► Worthless Canadian model bricolage
► The Humpty Dumpty methodology

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REPLY to Jacques René Giguère on Jul 4

You say: “Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.”

You confound historical storytelling with scientific theory. A historical account of the various forms of money is NO substitute for the theory of money, just as the history of the burning of Rome, London, San Francisco etcetera is no substitute for the theory of thermodynamics.

The theory of money has to be embedded in a consistent macroeconomic framework or in what Keynes called the ‘monetary theory of production’.#1, #2

The subject matter of economics is how the actual monetary economy works and NOT historical storytelling.#3


#1 The ultimate ― analytical ― origin of money
#2 How money emerges out of nothing ― the functional account
#3 It has been said before but economists still don’t get it

MMT: Richard Murphy’s battle-for-money hoax

Comment on Richard Murphy on ‘The battle for money has begun’*

Blog-Reference

The battle Richard Murphy refers to is about the institutional design of a better money order. The discussion, though, suffers from the odd fact that economists have until this day no scientifically valid theory of money. But this has never hampered the enthusiasm of economists. After all, they are in the political business and not really in the science business.

So, Richard Murphy argues: “… in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value.”

This is what all MMTers sermonize from their soapboxes, and it is provably false. The fact is that MMTers have no idea how the monetary economy works.

To get economics right, it has to be consistently reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Y_w in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1

The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest. At this juncture, Friedman et al. are buried for good.

What is needed for a start is two things: (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii), a legal system that declares the central bank’s deposits as legal tender.

Deposit money, which is a generalized IOU, is needed by the business sector to pay the workers who receive the wage income Y_w per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Y_w.

Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Y_w, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2. #2

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κY_w, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.

The transaction equation reads M=κY_w=κPX=κPRL (2) in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled, the average stock of transaction money M doubles. Because the central bank plays an accommodative role, there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.

As long as the central bank finances a growing wage bill Y_w=WL with money created out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/decreases according to (2), but there is NO inflation/deflation.

This is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy through government deficit spending. This has an immediate effect on macroeconomic profit.

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w, and monetary saving as S_m≡Y_w−C. It always holds Q_m+S_m=0, or Q_m≡−S_m, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

The complete Profit Law reads Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) and reduces to Q_m=G−T for Y_d, I, S_m, X, M = 0. Legend: Q_m monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.

Needless to say that Richard Murphy does not mention the profit effect once. Worse, MMTers regularly make this effect disappear. #4 It does not sit well with their image of social Progressives.

To sum up:

• MMT policy is NOT in the interest of the ninety-nine-percenters.
• MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
• The profit effect of MMT money creation/deficit spending reinforces the transformation from democracy to oligarchy.
• Politically, MMT is a fraud, and scientifically, it is garbage. #5

Egmont Kakarot-Handtke


* Tax Research UK
#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 MMT: Just another political fraud
#4 MMT and the magical profit disappearance
#5 For the full-spectrum refutation of MMT, see cross-references MMT

Related 'The Third Way: Towards the Happy Zero-Tax economy' and 'The ultimate ― analytical ― origin of money' and 'How money emerges out of nothing ― the functional account' and 'The creation and value of money and near-monies' and 'Reconstructing the Quantity Theory (I)' and 'It's about institution-building, stupid' and 'Money and time' and 'Basics of monetary theory: the two monies' and 'Richard Murphy: the MMT fraudster dressed up as realist'.

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REPLY to Richard Murphy on Jun 9 and Blog-Reference MNE

You say: “This is so ridiculous I can dismiss it in seconds. There is apparently no government in your model. And no overseas sector.

Obviously, you cannot read.

I clearly stated: “The complete Profit Law reads Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) and reduces to Q_m=G−T for Y_d, I, S_m, X, M = 0. Legend: Q_m monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.”#1

It is all there, government deficit/surplus (G−T) and the trade surplus/deficit (X−M).

Because of Public Deficit = Private Profit, MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.

Your assertion: “Money is debt. It is only created by government spending and bank lending.” is provably false. Money is, in the most elementary case, created by the central bank financing the wage bill Y_w.

MMT’s money-creation/deficit-spending is profit-making for the one-percenters.#2 Politically, MMT is a fraud, and scientifically, it is garbage.


#1 MMT: Richard Murphy’s battle-for-money hoax
#2 For the full-spectrum refutation of MMT, see cross-references MMT

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REPLY to Ralph Musgrave on Jun 9

You say: “Central bank created money (base money) is supposedly a liability of a central bank: it appears on the liability side of the CB’s balance sheet. But if you go along to the Fed with a $100 bill and demand that they pay you the $100 they allegedly owe you, you’ll be told to shove off. So in what sense is base money a debt?”

The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money.

So, how does money come into existence in the elementary production-consumption economy with pure fiat money? Schematically, as follows:

(i) The workers work for some time L in the fully integrated mega-firm = business sector.
(ii) The firm owes the workers the amount Y_w=WL. The wage rate W is given.
(iii) The firm could hand out IOUs to the workers, but instead turns to the central bank.
(iv) The central bank creates money by lengthening its balance sheet, i.e., by entering an overdraft for the firm on the asset side and a deposit of equal amount on the liability side.
(v) The firm transfers the deposits = Y_w to the workers. Thus, it discharges its liabilities vis-à-vis the workers. The firm now has a liability vis-à-vis the central bank.
(vi) The workers spend their whole income C=Y_w and buy the total output X=O. The workers’ deposits are fully transferred back to the firm.
(vii) The firm’s overdrafts and deposits are exactly equal and are canceled against each other. Money is fully destroyed. The central bank’s balance sheet shrinks to zero = initial state.
(viii) The money creation-destruction cycle starts again.

Money is not a thing; money is not a fixed stock; money is information. The information is stored on a medium, e.g. magnetic data carrier, a clay tablet, paper, a coin, etcetera.

Money = deposits at the central bank is accepted (i) by the workers as wage payment, and (ii) by the firm as payment for handing over the consumption good. There is NO state and NO taxes needed to enforce the acceptance. Central bank deposits are defined as legal tender; they discharge all kinds of liabilities/IOUs.

The central bank is tasked to support the autonomous transactions between the firm and the workers. In other words, the central bank creates exactly that amount of money that is needed to pay the wage bill, which steadily increases with growing employment and a constant wage rate.

The point is that there is NO such thing as monetary policy or an inflation target. In the elementary production-consumption economy, the central bank simply supplies the means of transaction = money = deposits. Nothing more, nothing less. The central bank does not interfere with the autonomous transactions between the business and the household sector.

There is NO government deficit-spending needed to bring money into existence, and NO taxation in order to enforce acceptance. The MMT money creation story, i.e., government deficits and taxes drive money, is a myth just like the barter and goldsmith stories. #1, #2


#1 The Third Way: Towards the Happy Zero-Tax economy
#2 The objective value of money

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REPLY to Richard Murphy on Jun 9

You say: “You have not shown there is a thing wrong with MMT, which is wholly familiar with and uses (I use in my theoretical work) the type of analysis you are doing.”*

Actually, this is the case:

(i) MMT is built upon this macroeconomic balances equation (X−M)+(G−T)+(I−S)=0, which is shown at any MMT presentation and is to be found all over the econblogosphere, including Wikipedia. #1

(ii) The MMT balances equation (i) is provably false. The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Y_d)=0. #2

(iii) The MMT balances equation is false because MMTers are too stupid to understand the elementary mathematics of macroeconomic accounting and do not know how the monetary economy works.

(iv) Because the foundational equation is false, the whole analytical superstructure is false. By consequence, MMT policy proposals have NO sound scientific foundations.

(v) The main defect of the MMT policy of money creation/deficit spending is that it produces a distribution that is generally regarded as socially unacceptable. #3

So, MMT is proto-scientific garbage and political fraud. #4 That’s what is wrong with MMT!

Richard Murphy and the rest of the MMT crowd (Kelton, Mitchell, Mosler, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine, Ehnts, Hickey, Pino, and so on ) are snake-oil sellers. #5


* Tax Research UK
#1 Down with idiocy!
#2 Rectification of MMT macro accounting
#3 Keynes, Lerner, MMT, Trump and exploding profit
#4 For the full-spectrum refutation of MMT, see cross-references MMT
#5 MMT: Academic snake oil for the people

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: firm’s overdrafts $ 240 and 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.

How money emerges out of nothing ― the functional account

Comment on Peter Cooper on ‘Short & Simple 10’

Blog-Reference

“Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money.” #1

“In MMT, ‘vertical’ money enters circulation through government spending. Taxation and its legal tender power to discharge debt establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met.” #2

Economists are storytellers, not scientists, and because of this, they explain economic phenomena historically. This is a bit dilettantish, just like physicists trying to derive the phenomena and laws of thermodynamics by recounting the history of major events from the Great Fire of Rome in AD 64 to the Great Fire of London in AD 1666. The methodological fact is that the historical approach does NOT work in science. Usually, it explains NOTHING.

Therefore, money has to be derived FUNCTIONALLY within an analytical framework that is defined in detail by
(i) Macrofoundations. #3
(ii) National Accounting, which determines the relationship between the nominal flows (wage income, consumption expenditures) and balances = differences of flows (saving/dissaving, loss/profit). #4
(iii) The relationship between the flows and balances of National Accounting and the changes in the stock of money/credit at the central bank.

Thus, stock-flow consistency is secured. The pivot between stocks and flows is the positive or negative nominal balances.

In order to reduce the monetary phenomena to the essentials, it is supposed that all financial transactions are carried out (at first without costs) by the central bank. The stock of money then takes the form of current deposits or current overdrafts. From this follows: quantity of money = debit side of the central bank’s balance sheet = current deposits.

In the initial period, the conditions of market-clearing and budget-balancing hold. The central bank provides the transaction medium and creates money out of nothing. Loosely speaking, it finances the business sector’s payroll, whatever it is. The economy NEVER runs out of money.

By sequencing the initially given period length of one year into months, the idealized transaction pattern that is displayed on Graphic AXEC86 #5 results.

It is assumed that the monthly income Y_w/12 is paid out at mid-month. In the first half of the month, the daily spending of Y_w/360 increases the current overdrafts of the households. At mid-month, the households change to the positive side and have current deposits of Y_w/24 at their disposal. This amount reduces continuously towards the end of the month. This pattern is exactly repeated over the rest of the year. At the end of each sub-period, and therefore also at the end of the year, both the stock of money and the quantity of money are ZERO. Money is present and absent depending on the time frame of observation.

In period 2, the wage rate and the price are doubled. Since no cash balances are carried forward from one period to the next,  no real balance effect happens provided the doubling takes place exactly at the beginning of period 2.

The transaction pattern looks the SAME if employment L is doubled and productivity R, wage rate W, and price P remain unchanged. So, only the REAL variables employment L and output O double, but the transaction pattern is identical with a doubling of the NOMINAL variables wage rate W and price P. This tells one immediately that the commonplace Quantity Theory of Money is false.

From the perspective of the central bank, it is a matter of indifference whether the household or the business sector owns current deposits. The pattern of transaction #5 translates into the AVERAGE amount of current deposits. This average stock of transaction money depends on income according to the transaction equation M=κY_w.

The variable M is a straightforward period average that results from the AUTONOMOUS transactions between the business and the household sector in the elementary production-consumption economy. The central bank enables the average stock of transaction money to expand or contract with the development of wage income. Analytically (not historically), money emerges from autonomous market transactions. In order for money to come into the world, a central bank is needed that issues transaction money in parallel with expanding/contracting wage income. #6 There is NO commodity like gold, and no government deficit spending is needed.

Both the Quantity Theory of Money and the Chartalist Theory of Money are figments of the historical imagination.

Egmont Kakarot-Handtke


#1 Wikipedia Money
#2 Wikipedia MMT
#3 Macrofoundations are given by (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. The nominal variables Yw and C reappear in National Accounting.
#4 See Graphic National accounts (a) Graphic AXEC94 balanced budget, (b) Graphic AXEC96 saving/loss, (c) Graphic AXEC95 dissaving/profit
#5 Graphic AXEC86 Idealized transaction pattern
#6 For more details, see Essentials of Constructive Heterodoxy: Money, Credit, Interest and Reconstructing the Quantity Theory (I).

Related 'Macro for dummies' and 'A crash course in macro accounting' and 'Where MMT got macro wrong' and 'A tale of three accountants' and 'Money and debt in six elementary steps' and 'Money and time' and 'The ultimate ― analytical ― origin of money' and 'Macro for dummies' and ' Money: from silly stories to the true theory' and 'Money is information'.

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REPLY to Peter Cooper on Jul 25

One way to explain the actual state of the world is the historico-genetic (K. Mannheim) approach. And this is how the development from barter to fiat money is usually presented. This history is quite interesting, but history is not science. From the history of the practical use of levers among animals and humans, one will never arrive at the Law of the Lever as put down by Archimedes.

Take notice that economics is defined as a science, and science is well-defined by material and formal consistency. Your series Short & Simple has been inconsistent in storytelling.

First of all, the theory of money/debt cannot stand alone but must be embedded in what Keynes called the 'monetary theory of production', which in turn must be based on macrofoundations.

The fact is that your macrofoundations are ill-defined. More specifically, your profit theory is provably false. As a consequence, your theory of money is false, too, no matter how many plausible pieces of history it contains.

This is lethal: you cannot show how, in principle, the flows of a simple monetary economy (which are measurable) affect the stock of money (which is also measurable). This cannot be compensated by stories like ‘how government’s position of strength’ had been used ‘in getting its own IOU widely accepted’.

Take notice that MMT has been thoroughly refuted. Here are all the proofs and arguments for your convenience, collected

• How money emerges out of nothing ― the functional account
• Macro for dummies
• A crash course in macro accounting
• Macrofounded labor market theory
• MMT: No sound basis
• Economics is NOT about Human Nature but the economic system
• Where MMT got macro wrong
• Windmill economics
• Rectification and generalization of MMT
• Why Bernie Sanders is unintentionally a godsend for the one-percenters
• Going beyond Wicksell, Keynes, and MMT
• Economists: Incompetent? Stupid? Corrupt?
• Economics as poultry entrails reading
• Why economists know nothing
• Rethinking MMT
• The final implosion of MMT
• Hobson got full employment policy almost right
• Clueless about money and profit
• History and future of the monetary economy
• Macro of and for the scientifically blind and deaf
• Helicopter money — a free lunch for the one-percenters
• Money and debt in six elementary steps
• Money, cranks, and morons
• How to start off on the right foot
• Australian upside-down economics
• Modern Moronomic Theory

To continue your series, Short & Simple is pointless.

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REPLY to Peter Cooper

Money has taken various historical forms (token, coin, note, deposit, etc.), and the banking system in each country is the outcome of a murky historical process. Therefore, the first thing to do is to abstract from the historical detail and to define a clear-cut analytical frame of reference. This frame has been called by Keynes the 'monetary theory of production'.

(i) The pure production-consumption economy consists of the business and the household sector. The household sector provides the labor input to the business sector, which consists initially of one firm. The product of the firm is sold to the household sector. Example: the wage income per period (e.g., year) is 100 [thousand/million/billion, euro/dollar/yen]. So, in a period of defined length, the households put in their work, and the firm owes a total of 100 monetary units to the household sector.

(ii) The firm issues IOUs, and these are used in turn by the households to buy the output. For simplicity, the wage income of 100 monetary units is fully spent on consumption goods. Starting from zero at the beginning of each period, IOUs are created by the firm and vanish completely until the end of the period. Clearly, IOUs are debt, and they are used exclusively for transactions between the business and the household sector.

(iii) IOUs work fine with one firm but not with many firms. If the business sector consists of many firms, the need for a general IOU arises. This general IOU is produced by the central bank and is called money. The central bank gives the firm money in the form of current deposits, and the firm owes overdrafts to the central bank. The firm pays the workers by transferring the deposits instead of IOUs. The workers spend their income, and the deposits return to the business sector, which reduces the overdrafts. At the end of the period, all deposits and overdrafts are again ZERO. So money is created out of nothing and vanishes into nothing until the end of each period. This process can continue in principle for all eternity, no matter how big or small the economy is. There is no such thing as a fixed quantity of money.

(iv) Only deposits are money, but, clearly, deposits are always exactly equal to overdrafts. Hence, money is the central bank’s half of what is essentially a credit relationship. Both sides of the central bank’s balance sheet are equal at any point in time by logical necessity. So, there is no such thing as debt-free money. But note that deposit/overdraft money as a TRANSACTION medium is entirely different from CREDIT for houses and cars, or for financing real investment of the business sector or for financing public deficits. Not keeping these things properly apart is a recipe for messing up the theory of money.

The fact that money is debt does NOT mean that it should be spent into existence by government deficits. The proper way of creating money is to finance an expanding wage bill. To bring money into the world by financing government deficits is a program for increasing the profit of the business sector. So, either MMTers in their scientific incompetence do not understand how the economy works, or MMT is a pseudo-scientific veil for a free-lunch program for the one-percenters.

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Graphic AXEC198a

Nick Rowe’s soap bubbling about money

Comment on Nick Rowe on ‘The Parable of the Fruit Trees’

Blog-Reference

“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.

What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long-defunct barter parable proves that he has no idea how the economy works.

As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) 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 is given by P=W/R (1). This is the most elementary form of the macroeconomic Law of Supply and Demand.

The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.

What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Y_w per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Y_w. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Y_w, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label Graphic. #1

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κY_w, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”

The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.

As long as the central bank finances the wage bill Y_w=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.

Egmont Kakarot-Handtke


#1 Graphic AXEC98 Idealized transaction pattern

Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.

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REPLY to Nick Rowe on Jun 14

Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”

The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.

The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow, and so on. Money is neither a stock nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, a clay tablet, paper, a coin, etcetera. As a matter of principle, money cannot be scarce; only the physical data carrier can become scarce.

Money starts as a medium of transaction, as shown in the previous post, and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e., do not fully spend their period income, that is, if consumption expenditures C are less than wage income Y_w. In this case, the household sector’s deposits at the central bank increase, and money morphs from a pure transaction medium to a store of value. #1

Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barter apples for bananas.

In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Y_w. This has some obvious consequences for the business sector.

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w, and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

The simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.

Now, give Nick Rowe a banana, and send him back into the barter woods.


#1 Money and time

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REPLY to Nick Rowe and other commentators on Jun 15

In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1

It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.

To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Y_w=WL₁+WL₂, and total employment is L=L₁+L₂.

In the initial period, the respective prices are equal to unit wage costs, i.e., P₁=W/R₁ and P2=W/R₂. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e., C=Y_w, so there is neither saving nor dissaving.

The distribution of total consumption expenditures C=C₁+C₂ between the two products determines the production of the respective quantities and the respective labor inputs L₁ and L₂. It holds C=C₁+C₂=W(L₁+L₂)=WL=Y_w.

So, if the household sector wants more of product 1, it spends more on it and less on product 2, such that C₁ goes up and C₂ goes down, and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and fewer in firm 2, such that L₁ goes up and L₂ goes down, and total employment L and total income Y_w remain unchanged.

The relative price, i.e., the exchange relation between the two products, remains unchanged, i.e., P₁/P2=R₂/R₁.

So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Y_w is now greater than zero. In this case, the business sector makes a loss and the economy goes into recession.


#1 The irreparable unreality of all ‘real’ models

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REPLY to Nick Rowe on Jun 16

The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.

In the monetary economy, agent 1 does not produce product 1 and barter directly with agent 2, who produces product 2.

In the monetary economy, agent 1 works in firm 1, which produces product 1 and gets the wage income Yw1, which is paid with a transfer of deposits at the central bank.

Analogous to agent 2.

Agent 1 then spends part of his income on product 2. Analogous to agent 2, who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.

Indirect barter presupposes the existence of money, which is used (i) to pay the wage bill, and (ii) to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.

Changes in preferences lead to changes in output and production, and the allocation of labor between the two firms. Total spending and total employment, and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.

Put simply, if agents want more of product 1 and less of product 2, more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.

Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.

Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money, and change in the composition of output, are mixed. Analytically, though, they have to be strictly kept apart.

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REPLY to Henry Rech on Jun 16

You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”

Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.

At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced, and money is produced (or ‘created out of nothing’) by the central bank/banking system. The economic analysis starts at zero. And this also holds for the theory of money.

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REPLY to Matthew Young on Jun 18

You say: “Simultaneous is a relative when money moves faster than fruit.”

The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.

The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant to the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time, and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.

Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but are as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to a logical error; the misuse of language that produces invalid conclusions.”*

Nick Rowe and Matthew Young have not gotten the point that in the monetary economy, barter is indirect and that, therefore, the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.


* Colin Rogers, Review of Political Economy

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REPLY to Nick Edmonds on Jun 19

You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”

Not at all! The real problem is that economists have, after 200+ years, still no clue how the price and profit mechanism works.

To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy, one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g., product, labor) deal with flows.

If part of the output is not consumed in the same period, then there remains a stock of durable goods = real assets, e.g., houses. This is how the secondary markets come into existence.

The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop economics.


#1 Primary and Secondary Markets

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REPLY to Nick Rowe on Jun 20

Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”

There is science, and it is binary true/false with NOTHING in between. Truth is well-defined for 2300+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”

In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication. #1, #2, #3

This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)

From Nick Rowe’s Parable of the Fruit Trees, nothing can be learned about how the price and profit mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.

Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)

One will not find a single scientist in the swamp. #4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.

Egmont Kakarot-Handtke


#1 It is better to be precisely right than roughly wrong
#2 “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)
#3 “’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’.”
#4 Getting out of the economics swamp

The objective value of money

Comment on David Glasner on ‘Is “a Stable Cryptocurrency” an Oxymoron?’

Blog-Reference

David Glasner recalls: “One of my first posts after launching this blog was called ‘The Paradox of Fiat Money’ in which I posed this question: how do fiat moneys retain a positive value, when the future value of any fiat money will surely fall to zero? This question is based on the backward-induction argument that is widely used in game theory and dynamic programming.”

This train of thought is based on 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.” This subjective-behavioral starting point is axiomatically false and has to be replaced by objective-systemic macrofoundations. Walrasian microfoundations and Keynesian macrofoundations have to be scrapped. This also affects the theory of money.

As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) 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 is given by P=W/R (1), i.e., the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation, see Figure 1. #1

The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.

So, what is the "value of money"? What can one dollar of wage income buy in the elementary production-consumption economy? All we have to do is divide the wage rate by the price. From (1) follows W/P=R, i.e., real wage = productivity.

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w, and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m. Under the condition of budget-balancing total monetary profit is zero.

What is needed for a start is two things: (i) a Central Bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender. Without the Central Bank, money takes the form of an IOU of the business sector.

Deposit money is needed by the business sector to pay the workers who receive the wage income Y_w per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Y_w.

Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Y_w, the idealized transaction sequence of deposits/overdrafts of the household sector at the Central Bank over the course of one period is shown in Figure 2. #2

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the Central Bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κY_w, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.

The transaction equation reads M=κY_w=κPX=κPRL in the case of budget balancing and market clearing, and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable.

Money comes into existence on the balance sheet of the central bank as soon as the Central Bank enters an overdraft for the business sector on the asset side and a deposit of an equal amount on the liability side (step 1). This deposit is then transferred to the household sector as wage payment (step 2) and returns in the form of consumption expenditures (step 3).

In the elementary production-consumption economy, money is a means of transaction and nothing else. The stock of money is zero at the beginning and the end of a period. Money is continuously created and destroyed. Strictly speaking, money itself has no value. Money is not stuff but information.

The workers accept money from the business sector in the form of wage income because they can be reasonably sure that the business sector, in turn, accepts the money and hands over the consumption good output. This cycle usually lasts for one month. The real value of money is, under the conditions of budget balancing and market clearing, exactly equal to productivity.

Over time, productivity changes, and therefore the "value of money" changes. The price is kept absolutely constant over time if the rate of change of the wage rate W in each period is exactly equal to the rate of change of the productivity R.

The ideas that the "value of fiat money" depends on convertibility into gold or on the taxing power of the state, or that it will surely fall to zero, are the crackpot ideas of folks who never rose above the proto-scientific level.

Egmont Kakarot-Handtke


#1 Graphic AXEC31 Elementary production-consumption economy
#2 Graphic AXEC98 Idealized transaction pattern, household sector, balanced budget