December 7, 2017

Selling public debt with Ricardo’s tear gland rhetoric

Comment on Simon Wren-Lewis’ ‘Government debt phobias, and possible cures’

Blog-Reference

Arguing against all kinds of land-related taxes, Ricardo took an emphatic social stance: “Such taxes, therefore, fall almost always upon the necessitous person, and must, therefore, be very cruel.” (Principles, p. 154) Needless to emphasize that Ricardo knew quite well that land taxes are normally not a concern of poor people but appear very cruel to rich people.

As a rule, economists put the poor widow in the foreground and in the emotional limelight when they lack sound arguments. Simon Wren-Lewis is no exception, he abuses the underpaid nurses in order to argue against reducing the public debt. When nurses or babies or pandas appear in an economic/political argument the odds are that the general public is taken for a ride.

The problem with the debt discussion is that it is macroeconomics and macro is scientific garbage since Keynes. The apex of scientific incompetence is microfounded macro. Keynesian macro, on the other hand, and Post Keynesianism and MMT as the latest reincarnation has been based on provably false balances equations.#1 Roughly speaking, macroeconomic profit theory is false and because of this, the whole analytical superstructure is false, and because of this, economic policy guidance lacks sound scientific foundations.

The point everyone can agree upon is “It makes perfect sense in many situations for the government to increase its debt.” Yes, but it should be added that public debt is always a bad deal for the ninety-nine-percenters.#2 The discussion about deficit spending and inflation is a red herring. The disastrous effect of a growing public debt is NOT on inflation but on the distribution of income and wealth.

Curiously, the word profit does not appear once in Simon Wren-Lewis’ post. Neither does it appear in the contributions of MMTers ― the most outspoken champions of deficit spending and the propagandists of the debt-does-not-matter meme.#3

From axiomatically consistent macrofoundations follows Public Deficit = Private Profit. With deficit spending, the business sector is always better off. The household sector, on the other hand, always holds the bag. It is taxed in real terms in the period of consumptive government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

Neither orthodox nor heterodox economists have figured out how the price and profit mechanism works. Macroeconomics in general and the profit and employment theory, in particular, is provably false since Keynes.

Economists’ care for the poor widow and the unemployed teenager and the underpaid nurse, and the endorsement of popular social agendas is, as a rule, rhetorical window dressing. In particular, if the proposed policy is deficit spending and permanent increase in the public debt. The macroeconomic Profit Law states Public Deficit = Private Profit. MMT policy, in particular, is a wellness program for the one-percenters which is realized with the help of the sovereign money issuing state and paid for in real terms by the ninety-nine-percenters.#4

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting
#2 MMT, money printing, stealth taxation, and redistribution
#3 MMT: The one deadly error/fraud of Warren Mosler
#4 For details of the big picture see cross-references MMT


Related 'MMT is ALWAYS a bad deal for the 99-percenters' and 'Austerity and the utter scientific ignorance of economists' and 'Austerity and the idiocy of political economists' and 'Austerity and the total disconnect between economic policy and science'

***
COMMENT on Jure Jordan on Dec 9

You say (i) “State prints its own money. Can you go bankrupt if you could print money?”

No, but that is NOT the issue. Distribution is the issue. If the state/central bank creates new money for the business sector to pay the wages for additional workers and the household sector as a whole spends total income on consumption, i.e. Ch=Yw, then the household sector gets the whole output and the price remains constant if average wage rate and productivity are constant, no matter how much the economy and the average stock of transaction money expands.#1

To produce money in order to enable the autonomous transactions between the business and the household sector is the original task of the central bank, that is, it has to see to it that THE ECONOMY never runs out of money.

If the state issues new money and it is added to consumption expenditures, i.e. C=Ch+Cg, there is a one-off price increase which results (i) in the redistribution of output, and (ii), in the monetary profit Qm=Cg. So, the household sector = ninety-nine-percenters is taxed in real terms via the price mechanism and the business sector = one-percenters makes additional profit. The real distribution and the distribution of financial wealth changes.

One can repeat this feat for an indefinite time without inflation. The central bank finances the deficit, and public debt vis-a-vis the central bank grows steadily if it is not consolidated by issuing interest-bearing bonds or other securities. These financial variants do NOT alter the fact that the wage income receivers are period after period TAXED in real terms without realizing it.

The price mechanism is NOT an information system as Hayek hallucinated but the very tool of stealth taxation/redistribution.

(ii) “No country pays off its debt, ever.”

This is a historical fact. But the indefinite rolling over does not make the debt disappear. The problem is simply pushed beyond the time horizon according to the old policy motto ‘After me, the deluge’. The question is what happens if the debt is eventually redeemed. And the answer is that the market economy breaks down.

(iii) “Debt interest is almost never paid by taxes but by new debt.”

True, but this is only ‘After me, the deluge’ with a vengeance. What MMT is in effect saying is, don’t worry, we will pay neither interest nor principal but, when the day of reckoning comes, redefine debt as a gift of the central bank.

The MMT debt-does-not-matter argumentation appeals to the corrupt part of the population. In the political realm, this kind of half-truth/trickery/deception/fraud is standard procedure. Economics, though, claims since 200+ years to be a science. The real problem starts when academics ignore the separation of science and politics and become the loudspeakers of Warren Mosler’s MMT sales team.#2

#1 MMT, money printing, stealth taxation, and redistribution
#2 MMT: Money-making for the one-percenters

December 5, 2017

Settling the Phillips Curve for good

Comment on Josh Hendricks’ ‘The Phillips Curve, Again’

Blog-Reference

Josh Hendricks summarizes: “the Phillips Curve is something that people desperately want to believe in, despite the lack of evidence.”

Not so. The Phillips curve has been messed up back in the 1960s by both pro- and anti-Keynesians. Thus it became one of the conspicuous landmarks of the cargo cult science economics. For the axiomatically correct Phillips curve see:
Egmont Kakarot-Handtke

Economists’ rude awakening

Comment on Peter Dorman's ‘The Great Awokening’

Blog-Reference and Blog-Reference

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Economics claims to be a science but is NOT. Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.

From Adam Smith/Karl Marx up to the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” economists claim that their economic policy guidance has ― in contrast to those of politicians, cranks, demagogues, preachers, snake-oil sellers, agitators, impostors, etcetera ― scientific foundations.

Fact is that there is NO greater embarrassment in the history of modern science than economics. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the foundational concept of the subject matter ― profit ― wrong. What we actually have is the pluralism of provably false theories.

Both orthodox and heterodox economics is scientifically unacceptable. Because of this, economics has nothing to offer in the way of a well-founded advice: “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)

Fact is that economics has by now degenerated to pure political agenda pushing. A short visit of the econoblogosphere suffices to realize that economic content has virtually evaporated:
• Tolerance And Terrorism In Saudi Arabia#2
• John Davidson’s Bad Faith Defense of General Kelly#3
• If we treat plutocracy as democracy, democracy dies#4
• Republican Class Warfare: The Next Generation#5
and so on.

Since the founding fathers, economists violate the principle of the separation of science and politics. Economics is what Feynman famously called a cargo cult science.#6

Economics is currently completing its career from failed science to fake science to political fraud.#7 It is time now to expel economists officially from the sciences. The first step is to abolish the fake economics Nobel.

Egmont Kakarot-Handtke

#1 Why is economics such a scientific embarrassment?
#2 EconoSpeak
#3 Uneasy Money
#4 mainly macro
#5 Economist’s View
#6 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#7 For details see cross-references Political economics

***
REPLY to Six on Dec 6

You say “Numbers can never explain ‘how the actual economy works’. They can just give one numerical description after the fact. You need the wordy part of economics to attempt to do the explaining part.”

On Wikipedia, MMT gives this formula for the interdependence of sectoral balances, G−T=S−I−NX, and a verbal description and then draws some economic policy conclusions.#1

The sectoral balances formula is provably false. Because of this, the “wordy part” of MMT is vacuous blather and the economic policy proposals, e.g. a pony for every American, are just silly sales talk.#2

Followers of MMT, of course, do not understand the balances formula but only the pony story. For political purposes the “wordy part” is sufficient.

Economics claims to be a science, and Mitchell, Tcherneva, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne etcetera claim to do science. They are NOT. MMT is a proto-scientific sitcom and a pseudo-social spoof.#3

#1 Wikipedia, Modern Monetary Theory
#2 For the full-spectrum refutation see cross-references MMT
#3 Austerity: Who takes the little man for a ride?

December 2, 2017

MMT is ALWAYS a bad deal for the 99-percenters

Comment on Noah Smith/Bloomberg View on ‘Bigger Deficits for Bad Tax Cuts Is a Bad Deal’

Blog-Reference and Blog-Reference

Noah Smith summarizes: “Her [Stephanie Kelton’s] reasoning, common in MMT circles, is that government deficits are also private-sector surpluses. That’s simple accounting ― since there are only the government and the private sectors in the world, when the government borrows it’s the private sector that lends. When banks or individuals buy government bonds, they become net lenders, meaning that they’re running a financial surplus with respect to the government.”

That’s NOT simple accounting, that’s false accounting. Fact is that economists get macroeconomic accounting wrong since Keynes.#1 The scientific embarrassment is that accounting is elementary mathematics. Because MMTers are too stupid for elementary math the whole theoretical superstructure falls apart, which, in turn, means practically that MMT policy proposals have NO sound scientific foundation.

Whatever Stephanie Kelton thinks she is doing or claims she is doing for the ninety-nine-percenters is a matter of indifference, what she is actually doing is agenda pushing for the one-percenters.

From correct macroeconomic accounting follows Public Deficit = Private Profit. With MMT policy, the business sector is always better off. The household sector, on the other hand, always holds the bag. It is taxed in real terms in the period of government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

The Pavlovian counter-argument against MMT is that it produces inflation. This is nonsense, more precisely, old Quantity Theory nonsense. MMT policy does not cause inflation but massive distributional distortions.#2

MMTers and Post Keynesians and Functional Financers in their utter scientific incompetence simply have no idea how the monetary economy works. The profit and employment theory is provably false since Keynes.#3

With MMT policy, Warren Mosler and his scientifically incompetent academic supporters have found a way to propagandistically endorse full employment, healthcare, and all other popular social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state.#4

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting
#2 MMT, money printing, stealth taxation, and redistribution
#3 MMT: The one deadly error/fraud of Warren Mosler
#4 MMT and the promotion of Wall Street socialism


Related 'Selling public debt with Ricardo’s tear gland rhetoric'

***
REPLY to Matt Franko on Dec 2

You say: “Well the MMT people will often readily admit that ‘the only limit to high deficit is inflation’ so your point here is a bit off the mark... iow it is not a counter argument but a disagreement on scale effect of the tax cuts... iow Smith thinks the "inflation" threshold will be breached and apparently the MMT elites do not...”

What the MMT people readily admit is old Quantity Theory nonsense. Deficit spending leads to a one-off price hike and NOT to inflation.#1 The disastrous effect of MMT is NOT on inflation but on DISTRIBUTION.#2

The whole inflation argument is a bit off the mark.

#1 MMT was right all along: Gov-Deficits do NOT cause inflation
#2 Austerity and the idiocy of political economists

***
REPLY to MRW on Dec 3

You say: “You’re still peddling this notion that the US federal level macroeconomy is based on your definition of science, terms you insist must be obeyed in order for you to grant the poobahs from your point-of-view the honor of being an economic scientist here.”

The Law of Gravity and 2+2=4 applies always and everywhere. This is the very kick of science that it applies universally. The same holds, of course, for economic laws and the elementary math of accounting.

Warren Mosler argues: “In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”#1

No, correct accounting says Public Deficit = Private Profit. Warren Mosler is either stupid or he deliberately deceives his brain-dead followers. His assertion “Simply put, government deficits ADD to our savings (to the penny).” is false. It is NOT “our” savings but “their” profits.

If you do not understand what science is all about, that’s OK. But that academics and people with an economics diploma like Mitchell, Tcherneva, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne etc. join Warren Mosler’s sales force is strange, to say the least.

#1 MMT: The one deadly error/fraud of Warren Mosler

***
REPLY to MRW on Dec 4

You say: “I don’t agree, Public Deficit = Private Profit. Doesn’t make sense.”

National accounting deals with period flows for the economy as a whole. Your airport example shows that you do not understand what aggregated period flows are. The lack of sense is in your head.

Consistent National Accounting results in the formula Public Deficit = Private Profit. Private profit is total monetary profit for the business sector as a whole. The formula is provable and testable to the penny. For the proof see ‘Rectification of MMT macro accounting’.

For the MMT accounting mistake/error/fraud see ‘MMT and the magical profit disappearance’.

Public deficit spending has always been a profit machine for the one-percenters, see ‘Keynesianism as ultimate profit machine’.

That people who call themselves Progressives argue for deficit spending is either stupidity or fraud or both, see ‘Austerity: Who takes the little man for a ride?’.

MMT policy does NOT cause inflation but the gigantic distortions of the distribution of income and wealth that so-called Progressives criticize so vehemently. A bit schizo, isn’t it?

November 27, 2017

Freedom for fake scientists?

Comment on Barkley Rosser’s ‘A Race To Suppress Academic Freedom?’

Blog-Reference

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

It is important to realize that theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.

Orthodox economics is clearly defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

Since the soapbox economists and agenda pushers Adam Smith and Karl Marx, economics is what Feynman called a cargo cult science. In the genuine sciences, peer review is institutionalized as quality control, in economics it has been perverted to an instrument of selection and career promotion of suitable spokespersons and representatives of the prevailing view.

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got the foundational concept of the subject matter ― profit ― wrong. What we actually have is the pluralism of provably false theories.

This pluralism is not an indicator of academic freedom and creativity but the very proof of scientific degeneration, incompetence, and confusion. Pluralism is a political concept and relates to matters of belief. Science is about knowledge and the sole criterion is true/false with truth clearly defined as material/formal consistency.

Theoretical economics is scientifically unacceptable from Jevons/Walras/Menger onward to DSGE. So, what remains is political economics.#1 And that is exactly what can be observed from Krugman’s liberal soapbox blather to Keen’s leftist agenda pushing. Not to forget Barkley Rosser, the expert for political unrest in Catalonia, Saudi Arabia, and China who, disqualifying for an economist, does still not know what profit is.#2

Economists have never understood the overriding importance of the separation of science and politics and simply ignore that they have NO political mandate. Strictly speaking, there is no place for political economics in academia. Because of this, the question of whether there is more academic freedom in the USA or in China is pointless. In the last 200+ years, economists have never been more than useful political idiots. Time to make economics a science.

Egmont Kakarot-Handtke

#1 For details see cross-references Political economics
#2 You are fired!


For details of the big picture see cross-references Science.

***
REPLY to Barkley Rosser on Nov 28

You say: “As for me not knowing what profit is, well, I know that you think the most important thing about profit is to distinguish between retained and distributed earnings, which is an utter accounting triviality.”

In the last instance, it is not an accounting triviality but one of elementary mathematics. And the fact of the matter is that economists are too stupid for simple math.#1 You still don’t get it.#2

All this, though, does not matter much because academic economics is, to begin with, NOT about scientific excellence but about political agenda pushing.

Traditionally, there are two methods of governance: carrot and stick. In entrenched/ affluent societies the carrot is preferred (= an offer you cannot refuse), while vulnerable post-regime-change societies rely more on the stick (= a threat you cannot ignore). Neither method has much to do with the Humboldtian ideal of unconditional academic freedom.

#1 National Accounting: scientific incompetence or political fraud?
#2 How the intelligent non-economist can refute every economist hands down

***
REPLY to Barkley Rosser on Nov 29

You say: “Every accountant and the vast majority of economists are fully aware that retained earnings and distributed earnings are not the same thing, yes, this is trivial arithmetic we all know, even the dumbest of us, …”

No, you simply don’t get it.

Macroeconomics is false since Keynes. Here is the corpus delicti 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 macroeconomic profit is ill-defined
(i) the whole theoretical superstructure of Keynesianism is provably false,#1
(ii) all I=S and IS-LM models are provably false,#2
(iii) Post Keynesianism is provably false,#3
(iv) MMT is provably false,#4
(v) all microfounded approaches are a priori false.

Macroeconomic profit is in the Keynesian case given with Qm=I−Sm. The Profit Law says that the monetary profit of the business sector Qm is equal to the difference between investment expenditures of the business sector I and monetary saving of the household sector Sm (or dissaving −Sm as the case may be).

The correct macroeconomic Profit Law Qm=I−Sm REPLACES the untenable Keynesian I=S.

The scientific incompetence of the representative economist consists in not having realized in 80+ years the foundational error in Keynesian and After-Keynesian macro. No more proof of utter scientific incompetence is needed.

All this elementary stuff comes well before the distinction between profit and distributed profit is introduced as even the dumbest member of orthodox and heterodox academic economics has to admit.

When distributed profit Yd is taken into the picture the Profit Law expands to Qm=Yd+I−Sm. Only Allais got this equation right,#5 the rest of econ academia is still lost in the proto-scientific woods.

Fact is that economists have not gotten the Profit Law right in the last 200+ years. Academic freedom has been perverted into the privilege to produce cargo cultic trash for the political Circus Maximus and to violate the scientific standards of material and formal consistency with impunity.

#1 Keynesians ― terminally stupid or worse?
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Why Post Keynesianism Is Not Yet a Science
#4 Where MMT got macro wrong
#5 How Keynes got macro wrong and Allais got it right


Related 'Macroeconomics without Keynes'

***
ADDENDUM on Nov 30

Behind the facade of academic freedom, peer review has long ago been corrupted to gatekeeping. See James Heckman’s Summary Chart on Twitter.

Source: Twitter, James Heckman

Accordingly, the scientific content of AER and the rest of economic journals has been zero for generations.

***
REPLY to Barkley Rosser on Dec 1

This is the track record of economics:
  • profit theory, false since 200+ years,
  • Walrasian microfoundations (including equilibrium), false since 140+ years,
  • Keynesian macrofoundations (including I=S, IS-LM), false since 80+ years,
  • Walrasianism, Keynesianism, Marxianism, Austrianism = mutually contradictory, axiomatically false, materially/formally inconsistent,#1
  • unresolved pluralism of provably false theories,#2
  • scientific content of economic journals = zero,
  • scientific content of economic textbooks = zero,#3
  • economics is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”,#4
  • what is entirely missing among economists is scientific competence,#5
  • economics never rose above the proto-scientific level.#6
#1 Fact of life: your econ prof is scientifically incompetent
#2 “There are always many different opinions and conventions concerning any one problem or subject-matter …. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper)
#3 The father of modern economics and his imbecile kids
#4 Yes, economics is a bogus science
#5 For details of the big picture see cross-references Science and cross-references Failed/Fake scientists
#6 The real problem with the economics Nobel

***
REPLY to Barkley Rosser on Dec 2

With regard to economics, academic freedom has been clearly defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

In economics, peer review ensures that only papers that conform to methodological individualism ≈ Walrasianism ≈ Neoclassics ≈ Orthodoxy are accepted. It is plain that the AER as flagship journal has executed these methodological guidelines faithfully for generations and the rest has followed suit. Unfortunately, methodological individualism is proto-scientific junk since 140+ years.

What more proof does anybody need that, with regard to economics, academic freedom has been perverted to a license for morons to crowd out scientists.

Your comparison of academic freedom in the USA and China is simply absurd and a deflection of the plain fact that economics is a cargo cult science and that the representative orthodox/heterodox economist is either stupid or corrupt or both.

MMT, money printing, stealth taxation, and redistribution

Own post, no external Blog-Reference

The MMT message is: “The only limit to how much a currency issuing government can spend is inflation. Not the debt. Not the deficit. Inflation.” (see Twitter and the blogosphere)

This joyful political message is based on MMT economic theory which, as a matter of fact, is provably false. Needless to emphasize that the general public cannot see that MMT economics is scientific garbage, a feature that it shares with Walrasianism, Keynesianism, Marxianism, and Austrianism. But lack of sound scientific foundations has never been a disadvantage in discussions about economic policy.#1

Because economics is a failed science it has to be reconstructed from scratch. As the new analytical starting point, the pure 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) 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 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.#2


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 forever to rest.

From (1) follows W/P=R, i.e. the real wage is equal to the productivity. So, for a start, labor gets the whole product.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, 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.

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 Yw 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=Yw.

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=Yw, 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.#3


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=κYw, 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=κYw=κPX=κPRL in the case of budget balancing and market clearing and this yields the commonplace correlation between 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.

Let us now introduce government deficit spending. Total expenditures consist now of household sector spending Ch, with Ch=Yw, and government sector spending Cg. The money for government spending is created out of nothing by the central bank.

The market clearing price is according to the macroeconomic Law of Supply and Demand P1=(Ch+Cg)/X0=P0+Cg/X0, that is, there is a hike of the market clearing price which depends on the amount of additional nominal government demand Cg. Employment, productivity, and output are kept constant, i.e. O1=O0=X1=X0. The one-shot price increase has NOTHING to do with inflation. The price increase effects the redistribution of output between the household and the government sector in the period under consideration.

The real share of output of the household sector, which was initially 100 percent, is now lower, i.e. Oh1=Xh1=Ch1/P1<Oh0=Ch0/P0 with Ch1=Ch0. In real terms, the household sector is taxed. The real tax is given with Oh0−Oh1 and it is proportional to government spending Cg and, in turn, to money creation. The government simply uses the price mechanism for real taxation. The households cannot see that they are taxed.

The profit of the business sector was zero in the initial period and is now positive, i.e. Qm=Cg, 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 and with the business sector’s pile of cash rising continuously. As MMT claims, there is no operational limit to government deficit spending/money creation.

With MMT policy, the business sector is clearly better off. The household sector, on the other hand, holds the bag. It is taxed in real terms in the period of government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

MMT policy is an economic shell game with massive and virtually unlimited redistributive effects to the detriment of the ninety-nine-percenters.#4

Egmont Kakarot-Handtke

#1 For details see cross-references Political economics
#2 Wikimedia, Pure production-consumption economy
#3 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#4 For the full-spectrum refutation of MMT see cross-references


Related 'MMT is ALWAYS a bad deal for the 99-percenters'

November 26, 2017

Dear philosophers, economics is a system science

Comment on Lars Syll’s ‘La discipline économique et le mirage de la ‘vraie science’’

Blog-Reference

Frédéric Lordon maintains: “Car l’économie a été soumise comme aucune autre science sociale au démon de la tentation galiléenne: n’est-elle pas par excellence science social du quantitatif et science des rapports sociaux nombrés?”

Frédéric Lordon’s mistake is to unthinkingly subsume economics under the so-called social sciences. The subject matter of economics, though, is the structure and behavior of the economic system. To explain individual/social behavior is the task of Psychology, Sociology, Political Science, History, Biology/Evolution, Philosophy, etcetera.#1

With Political Economy, economics started on the wrong foot. Since Adam Smith/Karl Marx, economists NEVER understood what science is all about. Until this day, economics is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is entirely missing among both orthodox and heterodox economists is scientific competence.#2 After more than 200 years economists have not even figured out what profit is, that is, they do not understand the pivotal phenomenon of their subject matter.#3 By consequence, neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations.

The scientific incompetence of economists consists in the fact that it is beyond their means to realize that NO way leads from the second-guessing of Human Nature/motives/behavior/ action to the understanding of how the economic system works.#3 Analogously, NO way leads from the second-guessing of the motives, emotions, and ruminations of passengers/ crew to the understanding of how big metallic objects can fly. In other words, from psychology NO way leads to the Laws of Aerodynamics.

The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science: “The fundamental problem, therefore, of the social science, is to find the laws according to which any state of society produces the state which succeeds it and takes it place.” (J. S. Mill)

The social sciences cannot, for deeper methodological reasons, rise above the level of storytelling. And this is exactly what Walrasianism, Keynesianism, Marxianism, and Austrianism is. Neither approach satisfies the non-negotiable criteria of science, i.e., material and formal consistency.

In order to become a science, economics has to perform the paradigm shift, that is, it has to move from false Walrasian microfoundations and false Keynesian macrofoundations to true systemic macrofoundations. Thereby, retarded epistemologists like Syll and Lordon are more a handicap than a help.

Egmont Kakarot-Handtke

#1 Economics is NOT a social science
#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#3 Brief history of soapbox economics