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

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

Blog-Reference

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

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

Here is what good teaching looks like.

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

This proposition is false. Where is the mistake?

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

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

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

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

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

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

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

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

Something is rotten with economics teaching.

Egmont Kakarot-Handtke


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

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

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

MMT: The fusion of Wall Street and Academia

Comment on Bill Mitchell on ‘When two original MMT developers get together to discuss their work’

Blog-Reference and Blog-Reference

Bill Mitchell summarizes: “Last week, Warren Mosler and I had one of our regular catchups and we discussed at length the state of play in Modern Monetary Theory (MMT). We are quite protective of it. We mused about how we started out on this Project and where it has gone. As old stagers do when they get together. We also reflected and compared notes on what the state of MMT is now, given the increasing visibility of the ideas in the mainstream media all around the world and the proliferation of social media activists who have chosen to identify and promote our ideas. There were aspects of that development that we identified as being of concern for us and other aspects which we considered to be a cause for optimism (celebration is too strong a word).”

In other words, the two MMT chief propagandists congratulated themselves and laid down the 2019 communication strategy for the foot soldiers, a.k.a social media activists, “who have chosen to identify and promote our ideas”. Unfortunately, these activists a.k.a trolls/operatives/shills/salespeople, impair the reputation of MMT because they “use the term MMT as a slogan rather than relating to it as a coherent and body of academic work in economic theory and practice that has been meticulously developed over more than 25 years.”

In order to restore reputation and credibility and to raise the low standards of social media communication, #1 and #2, Bill Mitchell took it upon himself to lay down the joint list of essential talking points of MMT propaganda.

What appears to be a bit strange at first glance is that Bill Mitchell and Warren Mosler do not address once the lethal critique of MMT, that is, that MMT’s policy of deficit-spending/money-creation is nothing but a free lunch for the Oligarchy. The word profit does not appear at all in the whole article. As the old quip says, Economics without profit is like Hamlet without the Prince of Denmark.

So, Bill Mitchell’s (Academia) and Warren Mosler’s (Wall Street) joint propaganda directive talks about everything between heaven and earth except MMT’s real political agenda, that is, money-making for the Oligarchy. #3 Obviously, it is intended as a user manual for disinformation and political fraud.

Accordingly, the basic principles of MMT, as laid down by the Oligarchy’s spokespersons, do not deal with how the monetary economy works but with how the state works.

Basic Principle 1: “The state, from inception, as the sole supplier of the funds needed to pay taxes or buy the debt issued by the state, must necessarily impose tax liabilities on the non-government sector before it can spend.”

This is NOT correct. A monetary economy with zero taxes is a real possibility. #4, #5, #6 So, the whole MMT “money story” breaks down already in the first sentence.

There is no need to waste time with the rest of the story. #7

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

This is the fact of the matter. The axiomatically correct macroeconomic Profit Law reads Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). With regard to the government’s budget, it boils down to Public Deficit = Private Profit, i.e., (G−T)≡Q_m. This piece of pure economic analysis translates into the scientific insight that MMT’s foundational sectoral balances equation is false, and into the political insight that MMT’s policy of deficit-spending/money-creation is nothing but a free lunch for the Oligarchy. In other words, “progressive” MMT policy is a political fraud. #8

The fraud is exactly located in this assertion: “In accounting terms, the government’s deficit (surplus) is exactly equal at all times to the non-government sector’s surplus (deficit).” #9

MMT is a refuted economic theory, and its proponents are either stupid or corrupt or both. Bill Mitchell’s and Warren Mosler’s joint propaganda directive is the incontrovertible proof.

The general public, a.k.a. WeThePeople is accustomed to the idea that the state is in the hands of the Oligarchy but upholds the idea of the independence, objectivity, and impartiality of science. Economics has never been a science, but what Feynman called a cargo cult science. It is NOT a coincidence that both Adam Smith’s Wealth of Nations and the United States Declaration of Independence were published in 1776. Together, they constitute the birth certificate of the US Oligarchy.

MMT stands firmly in this tradition. Its scientific content is zero, and its scientific ethics is zero. #10

Egmont Kakarot-Handtke


#1 You are fighting for life? On all fronts? MMT can save you! Or maybe not?
#2 The Kelton-Fraud
#3 MMT: A free lunch for the Oligarchy
#4 The Third Way: Towards the Happy Zero-Tax economy
#5 The ultimate ― analytical ― origin of money
#6 Nick Rowe’s soapbubbling about money
#7 For the full-spectrum refutation of MMT see cross-references MMT
#8 Economics: A pointless left-right wrestling show
#9 MMT and the magical profit disappearance
#10 MMT: Time to say goodbye

Related 'MMT, Warren Mosler, and the little helpers from Wall Street and Academia' and 'Deficit-spending/money-creation is ALWAYS a bad deal for WeThePeople' and 'MMT and the promotion of Wall Street's idea of social policy' and 'MMT: The one deadly error/fraud of Warren Mosler' and 'Cryptoeconomics ― the best of Bill Mitchell’s spam folder'. For details of the big picture, see cross-references Scientific Incompetence.

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REPLY to Joe on Dec 14

You say: “Imo, Principle 3 should be principle 1, as the sectoral balances is the most important economic principle, by far. It’s the basis of every single economic transaction, monetary or barter, ever done. I gained what you lost and you gained what I lost. We may decide we’re both better off but nevertheless, the zero-sum nature of it remains. This principle alone rules out much of mainstream economic thought, especially in the European continental context. Everyone can’t be in surplus simultaneously.”

Mathematically true: Everyone can’t be in surplus simultaneously.

MMTers, though, got the math wrong. The blunder is exactly located in this assertion: “In accounting terms, the government’s deficit (surplus) is exactly equal at all times to the non-government sector’s surplus (deficit).”

The axiomatically correct 3-sector relation reads (G−T)≡Q_m+S_m, #1 i.e., the government’s deficit (surplus) is exactly equal at all times to the SUM of the business sector’s surplus (deficit) and the household sector’s surplus (deficit).

The business sector’s surplus Q_m is called profit, and the household sector’s surplus S_m is called saving. The business sector’s deficit is called loss, and the household sector’s deficit is called dissaving. All combinations of the business sector’s profit/loss and the household sector’s saving/dissaving that are equal to (G−T) are possible.

The blunder of Principle 3 invalidates the WHOLE of MMT. The two storytellers, Bill Mitchell and Warren Mosler, are too stupid for the elementary mathematics that underlies macroeconomic accounting. #2 Needless to emphasize that the “social media activists who have chosen to identify and promote” their ideas understand even less. They are brain-dead agenda pushers, as the posts of S400 and Clint Ballinger clearly demonstrate.


#1 Causally speaking, it reads Q_m⇐(G−T)−S_m, but this is not the point at the moment. The point is that one has 3 sectors (government, business, household) and NOT 2 (government, “non-government”). The inadmissible collapsing of the business sector and household sector to the “non-government” sector makes profit disappear. This operation, the Humpty Dumpty Fallacy, is absolutely disqualifying for an academic economist.
#2 Wikipedia and the promotion of economists’ idiotism

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REPLY to Kaivey on Dec 14

You say: “Egmont says they when the government deficit spends it creates inflation …”

No, I prove the exact opposite: deficit spending per se does NOT cause inflation. #1


#1 MMT and the inflation-red-herring

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REPLY to Kaivey on Dec 15

You say: “… when the government deficit spends … the rich capture the money, but they capture most of people’s money in the end anyway. If people borrow from the banks, they capture this money as well when they buy goods and services. ”

The answer is in the mathematical truth: Everyone can’t be in surplus simultaneously.

So, if the balance of the government sector (G−T) is zero, and the balance of the household sector Sm is zero, the business sector as a whole cannot make any profit, i.e., Qm=0. This follows from the macroeconomic Profit Law Qm≡(G−T)−Sm.

So, “the rich” can capture NOTHING, i.e., cannot be in surplus, if the other sectors together are not in deficit. Profit for the economy as a whole does NOT depend on greediness or grabbiness or profit maximization or other psychological/behavioral factors, but solely on the macroeconomic balances.

While it is true that one firm can increase profit by increasing productivity or lowering wages, this does NOT hold for the economy as a whole. This is the Fallacy of Composition.

“WeThePeople” can effortlessly prevent “the rich” from “capturing” profit by setting the sectoral balances right. #1 With deficit-spending/money-creation, though, MMTers do the exact OPPOSITE.


#1 How the 99 percent can bring overall profit of the 1 percent legally down to zero in 2017

Occasional X: The futile attempt to recycle MMT (CXXXIX)

 

#Economics#AllYouNeedToKnow

“Uncle Sam’s red ink is our black ink!” (Stephanie Kelton)

No! The government sector’s red ink is the business sector's black ink i.e. deficit spending is a free lunch for the Oligarchy. The deception is in the word “our” which seems to refer to… pic.twitter.com/aELQSAbvoq

— AXEC (@EgmontHandtke) March 7, 2025

Macroeconomics for dummies (II)

Comment on Peter Cooper on ‘Short & Simple 7 ― A Fundamental National Accounting Identity’

Blog-Reference

The heteconomist Peter Cooper maintains: “Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.”

Both orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists of the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined. #1 In order to see this, one has to go back to the MOST ELEMENTARY configuration, that is, the elementary production-consumption economy, which consists of the household and the business sector. #2

In this elementary 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 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 the monetary circuit is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving, and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Q_m≡C−Y_w and the definition of household sector saving S_m≡Y_w−C.

Loss or profit is NOT income. Alone, distributed profit is income. The profit theory is false since Adam Smith. #3

Economists are too stupid for the elementary mathematics that underlies macroeconomic accounting. #4 The statement that total income equals total spending is simply false because of the all-important phenomenon of credit. Equipped with credit, the household sector can spend MORE than its period income (= dissaving in accounting terms) or, in the opposite case, LESS (= saving).

Egmont Kakarot-Handtke


#1 For details, see How the Intelligent Non-Economist Can Refute Every Economist Hands Down and Keynes’s Missing Axioms, Sec. 14-18
#2 The elementary production-consumption economy is given for a start by three macro axioms: (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start, holds X=O.
#3 Essentials of Constructive Heterodoxy: Profit and cross-references Profit
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

Related 'Macro for dummies (I)' and 'The new macroeconomic paradigm' and 'A crash course in macro accounting' and 'Rectification of MMT macro accounting' and 'Settling the Theory of Saving' and 'Profit theory in less than 5 minutes' and 'Economists: scientists or political clowns?' and 'You are fired!' and 'MMT: Time to say goodbye' and 'New Economic Thinking: the 10 crucial points' and 'From Keynes’ fatal blunder to the true economic model' and 'The canonical macroeconomic model'.

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Graphic AXEC121e and alternative notation AXEC121g, C, and E_C are interchangeable.

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REPLY to SDB on Jul 14

You say: “It’s logically impossible for any spending to not ‘go somewhere’ and result in income somewhere else.”

This is the usual vague blather.

The elementary production-consumption economy is, for a star,t defined by three macro axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w), and two definitions (Q_m≡C−Y_w, S_m≡Y_w−C). No vagueness here.

The condition C=Y_w says that consumption expenditures C are initially equal to wage income Y_w. Or, in the words of Peter Cooper, total spending is equal to total income.

Now it is logically and practically possible that consumption expenditures C are LESS than wage income Y_w, i.e., total spending is NOT equal to total income.

What happens in the two sectors follows from the definitions. For the business sector, it holds Q_m≡C−Y_w. Clearly, Q_m bears here a negative sign (C less than Y_w), which means the business sector makes a loss.

It is pretty obvious that the firm’s loss is something quite different from income. Wage income is a flow from the business sector to the household sector. Loss is the DIFFERENCE between two flows. Methodologically, it is NOT admissible to use the same term for entirely different phenomena. So it is inadmissible to speak of loss as a type of income. This blunder is called a category mistake.

With ‘loss income’ this is clear because it sounds already weird. But it is also inadmissible to speak of ‘profit income’ because profit, too, is the difference of flows, i.e., C−Y_w, and not a flow like wage income Y_w. Wage income and profit are NOT two different forms of income.

So the blunder of the representative economist consists of confusing a balance with a flow.

The parallel to wage income is distributed profit income or dividends. Needless to emphasize that the representative economist cannot tell the difference between profit and distributed profit either.

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TAKE-AWAY for non-economists on Jul 14

The fact that the simple statement ‘Total spending equals total income’ is still commonplace in economics has far-reaching implications.

(i) In 200+ years, economists have NOT figured out that the statement is false. This is a straight metric of scientific incompetence.

(ii) For 200+ years, the two fundamental economic concepts ― profit and income ― are ill-defined. Thus, all theories/models that contain these concepts are false. In other words, the whole analytical superstructure of economics is false.

(iii) This applies to the four main approaches: Walrasianism, Keynesianism, Marxianism, and Austrianism. Economics, therefore, is nothing but the mutually accepted pluralism of provably false theories. #1 Economics lacks a true theory.

(iv) This applies also to National Accounting #2, which is lethal because National Accounting is pivotal for empirical testing. The correct Fundamental  Law of Macroeconomic Accounting is NOT spending = income but Q_m+S_m=0 or Q_m≡−S_m, in other words, the business sector’s deficit (= loss) equals the household sector’s surplus (= saving) and vice versa, i.e., profit = dissaving.

(v) The claim that economics is a science is false and amounts to a misguidance of the general public and the government bodies that are responsible for economic policy. #3


#1 For more details, see How Keynes got macro wrong and Allais got it right and Tricky business and Where MMT got macro wrong and Heterodoxy, too, is proto-scientific garbage
#2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#3 Economics is not a science, not a religion, but proto-scientific garbage

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REPLY to SDB on Jul 14

(i) You say: “As best I can tell EKH is confusing a simple barter model for the real world.” The confusion is obviously on your side: (i) the title of this thread explicitly talks about National Accounting, (ii) National Accounting is about NOMINAL magnitudes, NOT real magnitudes, (iii) from all magnitudes that appear in the formal description of the elementary production-consumption economy, FOUR reappear in National Accounting, viz. C, Y_w, Q_m, S_m. #1

(ii) The elementary production-consumption economy is NOT a barter model but the simplest possible instantiation of what Keynes called the ‘monetary theory of production’. #2

(iii) You say “profit is simply a mark-up over cost”. This microeconomic definition translates for the consolidated business sector into the MACRO equation Q_m≡C−Y_w.

(iv) You say, “Perhaps one might ask where the money comes from to pay for the profits above costs?” Indeed, this question has been asked and already answered: “In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity.” #3

The fact is that you are ill-informed and way behind the curve. Your best is simply not good enough.


#1 The elementary production-consumption economy is, for a star,t defined by three macro axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w), and two definitions (Q_m≡C−Y_w, S_m≡Y_w−C).
#2 The irreparable unreality of all ‘real’ models
#3 Essentials of Constructive Heterodoxy: Profit’ p. 7

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REPLY to Magpie on Jul 15

You say: “To paraphrase: So the blunder of Egmont Kakarot-Handtke consists of confusing a balance with a flow.”

You are simply ill-informed. There are two balances of flows: X−O, the difference betweenthe  quantity X sold and the quantity produced O per period. This balance changes the inventory = real stock. The other balance is C−Y_w, i.e., the difference between consumption expenditure C and wage income Y_w. This balance changes the stock of money. The stock increases in the case of saving, i.e., C−Y_w greater than zero, and decreases in the opposite case of dissaving.

Mathematically, it holds: the business sector’s stock of products and the household sector’s stock of money are determined by the sales ratio (X/O) and the expenditure ratio (C/Y_w). So the relation of stocks (numerical integrals) and ratios (numerical derivatives) is well defined for the case of discrete flow variables. #1

Your gloating [Considering that Michal Kalecki is credited with the witticism that economics is the science of confusing stocks with flows, one can conclude that Egmont Kakarot-Handtke truly is a practitioner of scientific economics. :-)] is premature.

For my take on Kalecki, see the cross-references. #2


#1 Primary and Secondary Markets Section 2 Residuals and the emergence of stocks
#2 Cross-references Kalecki

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REPLY to Tom Hickey on Jul 15

You say: “In scientific modeling, which economic purports to do, fundamental assumptions are stated and key terms define in terms of the model being constructed. ... Economists adopt different assumptions and define key terms differently.”

And here you have it: the muddled heads of economics define what they please without taking care of whether the definitions fit consistently together. In economics, Humpty Dumpty calls the shots: “‘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. ’”

And this is why economics has been, for 200+ years, not more than confused blather. Not even the foundational concepts of profit and income are properly defined. This is like medieval physics before the concept of energy was defined and understood. The representative economist does not understand what profit is and has never realized that the statement ‘total spending for the economy as a whole equals total income’ is abysmal logical crap.

Science proceeds differently. The foundational concepts, including the dimensions of the magnitude,s are consistently defined: “The most basic rule of dimensional analysis is that of dimensional homogeneity.” #1

The tried and tested means to establish coherent talk and dimensional homogeneity is, since 2000+ years, axiomatization: “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)

And here you have it: The elementary production-consumption economy is, for a start, clearly defined by three macro axioms (Y_w=WL, O=RL, C=PX), two conditions (X=O, C=Y_w) and two definitions (Q_m≡C−Y_w, S_m≡Y_w−C). #2

The axioms and definitions can be reduced to one equation, the First Economic Law #3, which is dimensionless and satisfies the Buckingham π theorem. #4

You say: “Profit is a weasel word”. Did it ever appear to you that this is the most damning characterization of economics? The first thing scientists do is to eliminate weasel words. Economists have not achieved this in the past 200+ years. They are simply too stupid for consistent scientific modeling.


#1 Wikipedia Dimensional analysis
#2 For the complete verbal and graphics-supported description of the elementary production-consumption economy, see How the intelligent non-economist can refute every economist hands down.
#3 Graphic AXEC06 First Economic Law
#4 Wikipedia Buckingham π theorem

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REPLY to Magpie on Jul 15

You say: “Answer this extremely simple question.”
(i) Loss is the DIFFERENCE between two flows.
(ii) If loss, as you clearly wrote above, is not a flow, then what on earth is it? (A stock? … If it’s not a flow, then it must be a stock.)

Wage income Y_w is a flow from the business to the household sector. Consumption expenditure C is a flow from the household to the business sector. Loss is the difference between these two flows, Q_m≡C−Y_w, if C is less than Y_w. Loss diminishes the stock of money of the business sector.

So we have the flow, the difference of flows, and the change of stock. Loss is, so to speak, the first derivative of the stock of money. Or, vice versa, the stock of money of the business sector is the numerical integral of loss/profit.

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REPLY to SDB on Jul 16

(i) You say: “… after accumulation of savings is widespread, then profit of the business sector/dissaving of the household sector can occur without a change in the stock of money. Yes? It’s a shift if deposit balances from the household to the business sector, with no change in the stock of money.”

No. In the simplest case, money consists of the debit side of the central bank’s balance sheet. If the household sector dissaves, profit of the business sector goes up, and BOTH sides of the central bank’s balance sheet get longer by the SAME amount. Money has been dealt with elsewhere at length.

(ii) You say: “I still don’t understand your problem with the notion that total spending = total income.”

Start with total spending C = total wage income Y_w. In the next period, the household sector takes up credit from the central bank, and total spending C is greater than wage income Y_w. So the statement total spending = total wage income is obviously not generally true.

What happens is that the profit of the business is now Q_m≡C−Y_w. But profit (or loss as the case may be) is NOT income, so the statement total spending = total wage income changes for the GENERAL CASE to total spending C is numerically equal to total wage income Y_w plus/minus profit/loss Q_m (to recall Y_w is a flow, Q_m is a balance). #1

From the accountant’s perspective, only Q_m≡C−Y_w is the 100 percent correct statement, i.e., if spending C is equal to wage income Y_w, profit is zero; otherwise, there is a profit or loss. Everything else is layman’s babble.


#1 See also Figure 5 in Keynes’s Missing Axioms, p. 25

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REPLY to Magpie on Jul 16

You say: “If flows are like first derivatives, so to speak, as you say, then one should expect of them that they can be added and subtracted: first derivatives, I'm sure you know (don’t you?) are additive.”

First of all, I do NOT say ‘flows are like first derivatives’. Time to learn to read!

In economics, we are in a world of discrete variables. And because there are no underlying continuous and differentiable functions, we speak in analogies. So the stock of money of the business sector is the numerical integral = sum of discrete period values of profit/loss. Profit/loss, i.e., the change of the stock of money, in turn, is a difference of flows. The change of stock is ANALOGOUS to the first derivative (see the graphic in the working paper Primary and Secondary Markets).

I do NOT say ‘flows are like first derivatives’, I say ‘the difference of flows is like the first derivative’.

Needless to emphasize that the formalism of calculus does NOT one-to-one apply to discrete period variables. This does not matter at all because the analogy holds.

So we have the flow, the difference of flows = the change of stock, and the stock, that is, we have perfect stock-flow consistency for discrete variables.

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REPLY to SDB on Jul 16

You ask: “Why is profit not income for the business sector?”

To say profit is income for the business sector is like saying a whale is a fish. It is simply scientifically incorrect.

If you subscribe to anything-goes and freedom of speech and the human right of ignorance, you can say profit is income of the business sector; if you subscribe to scientific principles (material/formal consistency, dimensional homogeneity), you cannot. To lump income (= flow) and profit (= difference of flows = accounting balance) together is a category mistake.

The fact that the representative economist cannot, until this very day, tell the difference between profit and income is proof of utter scientific incompetence for 200+ years. #1


#1 Economists: scientists or political clowns?

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REPLY to SDB on Jul 16

(1) I have translated the argument into accounting. It is self-explanatory:

(a) Grahic AXEC94, National accounts, two sectors, initial period C=Y_w, consumption expenditures = wage income
(b) Graphic AXEC95, National accounts, dissaving C > Y_w, consumption expenditures greater than wage income, profit Q_m = dissaving −S_m
(c) Graphic AXEC96, National accounts, saving C < Y_w, consumption expenditures less than wage income, loss −Q_m = saving S_m

(2) You ask, “So do you prefer the edit: total spending = total revenue? (instead of total spending = total income).”

Absolutely. From the perspective of the household sector, C is total spending; from the perspective of the business sector, C is total revenue. The accounts make it clear that this is ALWAYS the case because it is two views of the same thing.

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REPLY to wilwon32 on Jul 17

(i) You are right, the definitions of terms can easily degenerate into wordplay and give rise to misinterpretation. For example:
• TRUE Total spending (of the household sector) is total revenue (of the business sector).
• FALSE Total spending for the economy as a whole equals total income.
• FALSE Income = value of output.

It is the second statement that has become known as the fundamental accounting identity. This is the exact point where the whole macro went wrong.

(ii) Most famous example: Keynes

This is the piece of evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore, saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end, he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because profit is ill-defined, the whole theoretical superstructure of Keynesianism is false. This includes MMT. #1

(iii) All language problems are eliminated by turning to mathematical formalism and/or graphical representation.

(a) Graphic AXEC94, National accounts, elementary production-consumption economy, two sectors, initial period C=Y_w, consumption expenditures = wage income.
(b) Graphic AXEC95, National accounts, dissaving C > Y_w, consumption expenditures greater than wage income, profit Q_m = dissaving −S_m (with Q_m≡C−Y_w, S_m≡Y_w−C, Q_m=−S_m).
(c) Graphic AXEC96, National accounts, saving C < Y_w, consumption expenditures less than wage income, loss −Q_m = saving S_m.

The balances Q_m and S_m change and redistribute the stock of money in the economy and are the interface to the theory of money. The accounts establish the logical connection between flows, the difference of flows = the change of stock, and the stock of money.

(iv) From the accounting graphics, it is immediately obvious that Keynes’s foundational identity “Income = value of output” is false.

This seemingly commonsensical identity is the biggest methodological blunder in all of economics because it led to the treatment of profit as income of capital.

Because the profit theory is false since Adam Smith ― “... one of the most convoluted and muddled areas in economic theory: the theory of profit” (Mirowski) ― economics became the failed science that it is today.

(v) The scientific incompetence of the representative economist is documented by the fact that he cannot tell the difference between profit and income until this very day. Economists have NO idea of the foundational concepts of their subject matter.


#1 Where MMT got macro wrong

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NOTE on Short & Simple 8 on Jul 17

The concept of GDP with GDP = Total Output = Total Income is essentially the same as the age-old ‘Income = value of output’ error/mistake. See The Common Error of Common Sense: An Essential Rectification of the Accounting Approach and You are fired!.

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NOTE on Short & Simple 9 on Jul 21

Peter Cooper writes: “We understand that, as a rule, total spending must equal total income.”

This is NOT the case, as can be gleaned from the most elementary cases of National Accounting.
(a) Graphic AXEC94, Two sectors, initial period C=Y_w, consumption expenditures = wage income
(b) Graphic AXEC96, Saving C < Y_w, consumption expenditures less than wage income, loss −Q_m = saving S_m
(c) Graphic AXEC95, Dissaving C > Y_w, consumption expenditures greater than wage income, profit Q_m = dissaving −S_m

Dissaving/saving = change of household sector’s debt means that wage income (total income) and consumption expenditures (total spending) are NEVER equal for the economy as a whole. Peter Cooper is fired because of the lack of elementary logical faculties. #1


#1 You are fired!

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NOTE on Short & Simple 10 on Jul 24

Peter Cooper writes in Short & Simple 10: “We have also noted (in parts 5 and 9) that a household or business can spend independently of current income. They can do this either by drawing down past savings or through borrowing.” #1

Peter Cooper wrote in Short & Simple 9: “We understand that, as a rule, total spending must equal total income.” #2

There are two things that Peter Cooper does not understand
(i) National Accounting, which determines the relationship between flows (wage income, consumption expenditures) and balances = differences of flows (saving/dissaving of the household sector, loss/profit of the business sector)
(ii) The relationship between the flows and balances of National Accounting and the changes in the stock of money/credit at the central bank.

This prevents any understanding of how money is created and destroyed in a monetary economy. Accordingly, he claims that money comes into the world through the deficit spending of the government.

In order for money to come into the world, the government is NOT needed as a deficit spender but only as an institution builder. What is needed is, roughly speaking, a central bank that issues transaction money in parallel with expanding/contracting wage income. #3


#1 Link to source
#2 Link to source
#3 For details, see Essentials of Constructive Heterodoxy: Money, Credit, Interest

Related 'How money emerges out of nothing ― the functional account'

Controlled demolition of MMT ― an exercise in elementary logic

Comment on Randall Wray on ‘JAPAN DOES MMT?’*

Blog-Reference and Blog-Reference (Link)

Randall Wray analyses the current situation in Japan: “From the MMT perspective, what Japan needs is a good fiscal stimulus, albeit one that is targeted. Japan has three ‘injections’ into the economy: the fiscal deficit (which has fallen from 7% of GDP to about 5% over the past few years ― still a substantial injection), the current account surplus, and private investment. But what it needs is stronger growth of domestic consumer demand ― which would also stimulate investment directed to home consumption.”

This recommendation is based on the “sectoral balance perspective”. This perspective is clearly defined by the sectoral balances equation, which is given by (I−S)+(G−T)+(X−M)=0. The very characteristic of the MMT balances equation is that it does not contain the balance of the business sector, i.e., profit/loss. Accordingly, the word profit does not appear once in Randall Wray’s post. An economic model without profit, though, is like Hamlet without the prince or physics without the concept of energy.

The question is, why does macroeconomic profit not appear in the sectoral balances equation? The short answer is that economists in general, and MMTers, in particular, are scientifically incompetent.

What MMT policy guidance lacks is the underlying true macroeconomic theory. Here it is. #1, #2

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) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown under the label of Graphic. #3

Elementary production-consumption economy

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=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. 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.

It is the definition of macroeconomic profit, i.e., Q≡C−Yw, where the logical blunder of MMT sneaks in. A definition ≡ is a one-way operator: a new variable (= definiendum) is introduced as a relationship of variables that are given by the axioms (= definiens). #4 While in an equation y=x−z it is possible to bring z to the left side, i.e., y+z=x, this is NOT admitted in a definition. The case is analogous to the prohibition of division by 0.

The operator ≡ defines a one-way relationship; the operator = defines a two-way relationship. The methodological failure of economists consists of not keeping these logical relationships properly apart.

Macroeconomic profit has been defined above as a relationship of axiomatic variables, i.e., Q≡C−Yw. Now, the representative economist comes along and performs the inadmissible operation Q+Yw≡C and introduces one more definition, i.e., Q+Yw≡national income≡NI. This reduces to NI≡C, which is an improper definition because it applies TWO terms for the same thing, i.e., the terms “national income NI” and “consumption expenditures C” are interchangeable. This is like saying the words “apple” and “orange” apply to the same thing. So, the definition of “national income NI” is redundant, leads to economic gobbledygook, and therefore has to be cut off with Occam’s Razor.

The same holds for the investment economy. Profits for the two sub-sectors are given by Qc≡C−Ywc and Qi≡I−Ywi. Total profit Q is defined as the sum of sub-sectoral profits, i.e., Q≡Qc+Qi≡C+I−Yw. GDP is defined as GDP≡C+I, so Q≡GDP−Yw. The definition of GDP is admissible, but the definition of national income NI≡Q+Yw, is inadmissible. Therefore, NI≡GDP, or Keynes’ Income = value of output (GT p. 63), is economic gobbledygook. It leads to I=S and IS-LM and all the other falsehoods of After-Keynesian macroeconomics.

The axiomatically correct sectoral balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0. #5, #6

Ramifications: The Wray Curve, the Kelton See-Saw #7, the Krugman Cross #8, and the rest of MMT is proto-scientific garbage.

Egmont Kakarot-Handtke


* New Economic Perspectives
#1 True macrofoundations: the reset of economics
#2 The canonical macroeconomic model
#3 Graphic AXEC31 Elementary production-consumption economy
#4 Wikipedia Definition
#5 Wikipedia and the promotion of economists’ idiotism (I)
#6 Wikipedia and the promotion of economists’ idiotism (II)
#7 Stephanie Kelton What Happens When the Government Tightens its Belt?
#8 Scott Fullwiler The Sector Financial Balances Model of Aggregate Demand

Related 'Accounting for dummies' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Is Nick Rowe stupid or corrupt or both?' and 'Profit, income, and the Humpty Dumpty Fallacy' and 'Mad but true: 200+ years after Adam Smith economists still have no idea what profit is' and 'Keynesians ― terminally stupid or worse?'. For details, see also cross-references Accounting and cross-references MMT.

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#PointOfProof

Jun 6

before

after

MMT: Money-making for the one-percenters

Comment on Stephanie Kelton/Op-Ed on ‘Congress can give every American a pony (if it breeds enough ponies)’

Blog-Reference

Stephanie Kelton explains how the economy works. For laypersons, the point to grasp is that government spending comes before taxation:
“1. Congress approves the spending, and the money gets spent (S)
2. The government collects some of that money in the form of taxes (T)
3. If 1>2, Treasury allows the difference to be swapped for government bonds (B).”

The point is, of course, that it does NOT matter much whether (S) comes before (T) or vice versa, this is merely a question of cash management, the point is whether total spending (S) is greater, equal, or less than total taxes (T) in the period under consideration, i.e. whether one has a government deficit, a zero balance, or a surplus at the end of the current budget period.

The crucial point is NOT that the government can make money appear out of nowhere like magic, which has always been trivial; the crucial point is what happens in the economy. Stephanie Kelton does not tell us, most probably because she has no idea.

What the layperson cannot see is that MMT has NO sound scientific foundations. The MMT models are based on Keynesian macroeconomics, which was refuted long ago. #1 Because it is defective, the MMT macro has to be fully replaced.

As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro 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, the price is given by P=C/X=W/R, i.e., the market-clearing price is in the initial period 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. #2

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 (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Now, the government decides that in the next period, every American should get a pony. So, government expenditures in period 1 are C_g1, and taxes T are zero. The government runs a deficit; the money comes from the Central Bank, i.e., is created out of nothing.

It is assumed for simplicity that the business sector doubles initial employment L₀, i.e. L₁=2L₀. The wage rate W remains unchanged, and therefore total wage income doubles, i.e. Y_w1=W2L₀. Under the condition of budget balancing, the household sector’s consumption expenditures, too, double C_h1=Y_w1=2WL₀.

So, total expenditures are C_h1+C_g1=2C_h0+C_g1, that is, are more than double the expenditures in the initial period. On the other hand, output exactly doubles O₁=RL₁=R2L₀. The market-clearing price is now P₁=C₁/X₁=(2C_h0+C_g1)/2X₀=P₀+C_g1/2X₀, that is, the market-clearing price rises while employment and output double. This is a one-shot increase and has NOTHING to do with inflation. The price increase affects the redistribution of real output between the household and the government sector.

The profit of the business sector was zero in the initial period and is now positive, i.e. Q_m=C_g1, i.e., equal to the budget deficit. It always holds Public Deficit = Private Profit. This configuration can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously, with the business sector’s pile of cash rising continuously, and with the number of ponies rising continuously and with price stability. Quite obviously, nobody has any reason to complain. In Stephanie Kelton’s words: “Just imagine how high those poll numbers would climb if everyone understood how easy it would be for Congress to pony up.”

It is remarkable that the word profit does not appear once in Stephanie Kelton’s op-ed, but the word pony appears eight times. Never were more ponies used to propagate a profit booster program for the one-percenters. #3

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Graphic AXEC31 Elementary production-consumption economy
#3 For the full-spectrum refutation of MMT, see cross-references MMT

Related 'MMT: The one deadly error/fraud of Warren Mosler' and 'Selling public debt with Ricardo’s tear gland rhetoric' and 'Down with idiocy!' and 'Political economics: Who hijacks British Labour?' and 'MMT: Just another political fraud'.

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REPLY to Matt Franko on Sep 30

You say: “The govt bond accounting is Cash Basis (see US Daily Treasury Statement) while I don’t think the other terms in your equations are accounted for in Cash Basis ... they are accounted using a Modified Accrual Basis.”

The difference between Cash Basis and Accrual Basis plays no role in the present context. Monetary profit Q_m is equal to the increase of the business sector’s deposits at the central bank, which, in turn, is equal to the increase of the government sector’s overdrafts at the central bank because both sides of the central bank’s balance sheet are ALWAYS equal (as everyone knows from their accounting course, except Matt Franko). If and when the government consolidates its debt by selling bonds or T-bills, or whatever to the business sector is independent of the development of the debt in a certain period. In the present context is important to realize that Public Deficit = Private Profit. It is of NO interest here if and how the deficit = increase of overdrafts is ultimately funded. #1, #2

Needless to emphasize that the household sector will be taxed somewhere in the future in order to pay back the government’s debt. So, the households get their ponies on credit without realizing it, while the business sector gets its profit for good. The payback part is entirely missing from the pony story. Stephanie Kelton’s wonderful proposal is like the auto dealer saying I give you this brand new car for free, please confirm my generosity with your signature at the end of this credit agreement.

Stephanie Kelton is a scientifically incompetent economist, and MMT is Trump University economics.


#1 Fixing the loanable funds blunder
#2 Reconstructing the Quantity Theory (I)

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REPLY to Matt Franko on Oct 1

Each government entity, each firm, and each bank around the world has incoming payments and outgoing payments. These are not synchronized, and therefore, there is a smart guy, let us call him the cash or liquidity manager or treasurer, whose main task is to maintain constant financial solvency.

Imagine the following situation. The cash manager knows that the government spends the amount G on ponies on Jan 1 and that taxes T are paid on Dec 31. It holds G=T. So, the cash manager has to take up credit for one year either from the banking system or by selling some short-term paper. Vice versa, the taxes come in on Jan 1, and the ponies are bought on Dec 31. So, the cash manager can buy some ultra-safe paper and hold it for one year. No cash manager in this world has any problem with handling both situations. At the end of the year, both cases amount to the SAME, except for the interest. The cash manager has NO long-term financing problem.

Things are different if T is less than G. If this happens year after year, government debt increases continuously, and the cash manager eventually starts to issue government bonds of different maturities and to roll them over again and again. The growing government debt is the problem that alarms people, and NOT the bridging of the short-term gaps between outgoing payments and incoming taxes.

The obvious mistake of Stephanie Kelton’s op-ed is to confound the two cases of short-term cash deficits and long-term budget deficits. Short-term cash deficits become budget deficits if T < G.

Why Stephanie Kelton forgets to mention that Public Deficit = Private Profit and that people have to pay for the ponies in the form of deferred budget surpluses, which are needed to eventually redeem the accumulated public debt, is a bit mysterious. But then, perhaps this is absolutely normal at Trump University.

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REPLY to Calgacus on Oct 1

You quote Wray, “money is a cross-balance sheet RELATIONSHIP”. Yes, trivially true and known since the Middle Ages, but MMTers are too stupid to do the accounting properly. For the proof, see #1, #2.

It is the most remarkable feature of MMT that macro profit does not appear in the balance equations. By consequence, MMTers miss the most important “cross-balance sheet relationship”, that is, Government Deficit = Profit of the business sector. The fact is that MMTers got profit theory wrong, and this is disqualifying for every economist. #3

Accounting is elementary mathematics, and one needs no Theoretical Computer Scientists to do it. The signature of arithmetic consists of addition, multiplication, and successor function symbols, the equality and less-than relation symbols, and a constant symbol for 0. (Wikipedia) That’s all, but MMTers fail already at the level of elementary logic.

You say “The government does not need a cash manager because the job of the government is to be financially INsolvent.” The cash manager of the government coordinates and bridges the gaps between outgoing and incoming payments. As long as the budget is balanced, i.e. G=T, the job of the government’s cash manager is essentially the same as the non-government’s cash manager. Their deficits = overdrafts at the credit side of the central bank’s balance sheet create uno actu deposits at the debit side = money. The only difference between the non-government cash manager and the government’s cash manager is that the central bank cannot limit the deficit creation = money creation of the latter. The point is, though, that the newly created money lands one-to-one as profit on the accounts of the business sector. Take all the technicalities of cash management away, then MMT’s pony program turns out to be a profit booster program. It seems that some Wall Street folks understand this better than Stephanie Kelton.

At the end of the whole exercise, a sub-group of the general public is left with some ponies, and all of the general public is indirectly left with the government’s debt. Whether the debt takes the form of overdrafts-deposits (= money) at the central bank or assets-liabilities in the form of bonds is a separate issue. Overdrafts-deposits (= money) is the most convenient and cheapest form of government debt.

The accumulated debt can be carried over for an indefinite time, but this makes it only invisible but not disappear. The household sector is ― indirectly via the government ― left with the debt, and the business sector is left with profit, which is held either in cash = deposits at the central bank/banking sector or in government paper. Government paper is Triple-A quality and carries interest, which makes the folks in the business/banking sector even happier.

As long as the debt is revolved, all is fine. Interest for the public debt is reliably taken from the household sector and transferred to the bond-holding business/banking sector. But the market economy breaks down as soon as the household sector starts to redeem private or/and public debt, which must happen eventually because this is the very nature of debt. #4

What Stephanie Kelton is ― knowingly or unknowingly does not matter ― actually doing under the banner of social programs is to boost the profit of the business/banking sector and to postpone the breakdown of the economy. In political terms, this is what the MMT dog & pony act in the LA Times is all about. MMT is just another example of the scientifically degenerate state of economics.


#1 Rectification of MMT macro accounting
#2 A tale of three accountants
#3 Why economists don’t know what profit is
#4 Mathematical Proof of the Breakdown of Capitalism

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REPLY to Matt Franko on Oct 1

You say: “G−T does not equal the net amount of Treasuries issued... G is Accrual, and T is Accrual... Treasury issuance is Cash...”

Roughly speaking, G and T are the sums of transactions that take place during one period on the Income Statement/Profit-Loss Accounts, while the buying and selling of government securities are transactions that are recorded on the balance sheet.

G and T are flows, while cash and the amounts of diverse government securities are stocks. The difference of flows Δ=G−T of the government sector changes the stock of money by Δ.

All this has NOTHING to do with the difference between Accrual Basis and Cash Basis Accounting. For the interrelationship between macro flows, their balances, and stocks, see #1, #2. For the basics of National Accounting, see Wikipedia.#3


#1 Essentials of Constructive Heterodoxy: Money, Credit, Interest
#2 Essentials of Constructive Heterodoxy: Financial Markets
#3 Wikipedia “National accounts broadly present output, expenditure, and income activities of the economic actors (households, corporations, government) in an economy, including their relations with other countries’ economies, and their wealth (net worth). They present both flows (measured over a period) and stocks (measured at the end of a period), ensuring that the flows are reconciled with the stocks.”

Related 'MMT: Just political heat, no scientific light' and 'The profit effect of a Job Guarantee'

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Graphic AXEC122

Occasional Tweets: Beginner's mistake in the cost-benefit analysis

 

#War#EconomicWarfare#Bargain

We all remember: 'Let's build a wall and make Mexico pay for it.' Same thing now: 'Let's bring down RUS and make UKR/GER/EUR pay for it.' Needless to emphasize that EURs human/economic #Destruction does NOT go into the US #CostBenefitAnalysis.

— E.K-H (@AXECorg) November 21, 2022