August 12, 2017

MMT and the magical profit disappearance

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

Blog-Reference

Peter Cooper summarizes: “This is the sectoral balances identity. In words:
Domestic Private Balance + Government Balance + Foreign Balance = 0

The balances of the three sectors cancel each other out. … The result can be aggregated a bit more by combining the domestic-private and foreign sectors into the Non-Government Sector. The identity then becomes:
Non-Government Balance + Government Balance = 0

… If the non-government manages to maintain a financial surplus, then by definition the government will be running a deficit. In doing so, non-government will accumulate net financial assets over the period and increase its stock of net financial wealth.”

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

Qm≡C−Yw   i.e profit Qm is household sector’s spending C minus wages Yw,
Sm≡Yw−C    i.e saving Sm is wage income Yw minus consumption expenditures C,
Qm+Sm=0    or Qm=−Sm.

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

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

Qm≡C+G−Yw   profit Qm is HS- and GS-spending C+G minus wages Yw,
Sm≡Yw−T−C    saving Sm is wage income Yw minus taxes T and expenditures C,
Bm≡T−G         GS budget surplus Bm is taxes T minus government expenditures G,
Qm+Sm+Bm=0 or Qm=−Sm−Bm.

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

For three sectors, proper accounting yields three sectoral balances which add up to zero. Now MMT does not stop here but fiddles with the balances as follows:

(i) Qm+Sm+Bm=0, (ii) Qm+Sm=−Bm=G−T, (iii) non-government balance = government balance. Business sector profit/loss and household sector dissaving/saving are verbally lumped together to non-government balance and thereby vanish out of sight.

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

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

Egmont Kakarot-Handtke

#1 Economists: just too stupid for counting
#2 The pure consumption economy is defined with the macro axiom set: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start X=O.


For the point-by-point refutation of MMT see cross-references MMT. For the accounting blunder, in particular, see 'Rectification of MMT macro accounting' and cross-references Accounting.

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LINK on Aug 12

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

MMT violates the principles of accounting. For details see ‘MMT and the magical profit disappearance
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REPLY to Matt Franko on Aug 13 and to Dean on Aug 14

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

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

Qm≡C+G−Yw    profit Qm, business sector,
Sm≡Yw−T−C     saving Sm, household sector,
Bm≡T−G           budget surplus Bm, government sector,
Qm+Sm+Bm=0,

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

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

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

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REPLY to Dean on Aug 15

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

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

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

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