An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
A big thank you to Egmont Kakarot-Handtke for his statement of the bliteringly obvious, namely that if you divide the economy into two sectors, public and private, you lose the distinction between two major elements of the private sector, namely households and employers.
Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.
You ask ‘What is the profit theory?’ For the comprehensive answer see ‘The profit theory is false since Adam Smith’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
This means in concrete terms: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.
It should be obvious: who cannot tell what profit is has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
The profit theory is the pivot of all of economics and it is false since more than 200 years. As every economist knows from the Palgrave “A satisfactory theory of profits is still elusive.” (Desai, 2008)
Accordingly, the rectification of profit theory affects not only MMT but the four major approaches Walrasianism, Keynesianism, Marxianism and Austrianism.*
Ralph Musgrave
You say “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”
Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides the confirmation.
Matt Franko
Profit distribution has been dealt with in the paper mentioned above (see eq. 1) and elsewhere.**
Egmont Kakarot-Handtke
* For more details of the big picture see cross-references http://axecorg.blogspot.de/2015/03/profit-cross-references.html ** See working papers on SSRN https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
It should be obvious: who cannot tell what profit is has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
Profit: the difference between the amount earned and the amount spent in buying, operating, or producing something.
I would then say that profit is a necessary component of commodity production. Where 'commodity' is defined as a good or service that can be traded or exchanged.
Knowing what profit is should be easy, predicting it appears to be difficult.
If you are not including the govt as a sector under the current USD systemic arrangements then you are not analyzing what is actually going on... ie bad science...
We can think about hypothetical arrangements all day long but of what use is that?
iow we could say "what if we could defy gravity!" but that is not realistic...
go ahead and include firms as a separate sector but then you have to still think govt / non-govt with households & firms as sub-sectors to the non-govt sector...
What we do for USD system is typically govt and non-govt sectors.... ie just the 2 sectors where firms households and foreigners are in the non-govt...
Another thing is stop thinking with the word "money" its a figure of speech and unacceptable for scientific terminology...
I have to give that at least a 9/10 as a troll attempt. The accounting was so obviously wrong that I do not think a 10/10 would be justified. But a very good job! Congratulations!
"Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. "
"An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid)."
Its like he is somewhat accruing the profits of the firms and using cash basis for the savings of the households....
"Accounting is an elementary form of mathematics."
You need to listen to Scott Fullwiler starting at minute 38:15 here. At least the first two/half-to-three minutes, because it doesn't appear to me that you could answer Fullwiler's accounting challenge correctly either. I think you should watch Fullwiler's full presentation, up to you. The slides link is in the description. https://www.youtube.com/watch?v=PadIPCEsbGA
Mathematics, arithmatic, are USED in accounting. Accounting isn't a subset, or form, of mathemetics. Accounting is recording events AFTER the fact: accounting for . . . a series of actions already taken. Higher mathematics is giving form to that which is yet unknown. Higher mathematics, not the mundane kind, brings unknown things or worlds into manifestation. Accounting, whether numerical or verbal/aural (aka, history), is always always after the fact. Therein, understanding the correct order of the transactions is key to recording the event. Higher mathematics, on the other hand, can define the world we don't yet know, and give it form. E=mc^2.
Also, I think you might be interested in Paul Davidson's explanation of how everyone is utterly confused about Keynes and his belief in or acceptance of axioms. Keynes rejected axioms; he did not believe you could foretell the future economy on the probability distributions of the past, and create a model that would predict it. Paul Samuelson wanted axioms--and made them up--because he wanted economics to be a science, a hard science like physics or astronomy. It was the only way Samuelson felt he, and the profession, could become respectable in 1947. You can expand from this Davidson link to find other sources, if interested. The Appendix in Davidson's book is a hoot describing this history...devastating. https://www.youtube.com/watch?v=31wjPE-mUb4
"This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid)."
Inferior? Why? Under what circumstances is it inferior? When I finish work today, should I race home and update my checkbook register to reflect the money I earned today, even though that money isn't in my bank account?
Cash based accounting reflects reality, other methods may well be a form of subterfuge.
I vote for taxing away all USD balances at 5:00pm on the 30th thus balancing the budget for the month and then crediting it all back at 8:00am the next morning just to shut the Peterson morons up once and for all and then just let the competent people do what they do for the rest of the month....
"When I finish work today, should I race home and update my checkbook register to reflect the money I earned today"
No but you could enter it on your personal statements as "Wages Receivable" as an asset under accrual...
People typically run their checkbooks as "Cash Basis"...
Mike uses the Daily Treasury Statement to do his MMT Trader reports which the DTS is Cash Basis... while the Monthly Treasury Statement that most people refer to when they talk about "the deficit!" is a Modified Accrual Basis...
"Modified accrual accounting is an accounting method commonly used by government agencies that combines accrual-basis accounting with cash-basis accounting. Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred. A modified accrual accounting system can also divide available funds into separate entities within the organization to ensure that the money is being spent where it was intended."
So you can see how the Peterson people can get their panties all in a bind.... they dont accrue taxes/fees receivable while they DO accrue all liabilities....
Why don't you open your blog for comments? That could be interesting. People like this kind of discussion, I guess.
Unfortunately, I'm unable to discuss because I can't follow your logic.
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth"). That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G. The "after tax profit", or A, is, by definition A = Y - T. The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C. So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that. So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
"The root of the problem is that he has confused cash flow for profits". I don't understand what you are saying too. I would like to understand.
"For example, a business can pay a $1000 dividend to its owner, and the dividend is saved in the bank. The household sector has $1000 in savings, and there is no effect on business sector profits."
Well, you are just employing a very restricted meaning for the word "profit". E.K-H is employing a broader meaning.
If a business pay $1000 dividend to its owner, then the business will lose $1000 in equity. That's an economic loss to the company. It will not be recorded as an accounting loss, but as an accounting withdraw of capital reserves or something. Nonetheless, the effect is the same: decrease in equity and economic loss to the business. But I'm not sure if that's your point...
Well... I guess there is some kind of bug, my another comment disappeared. So here it is again:
AXEC / E.K-H,
Why don't you open your blog for comments? That could be interesting. People like this kind of discussion, I guess.
Unfortunately, I'm unable to discuss because I can't follow your logic.
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth"). That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G. The "after tax profit", or A, is, by definition A = Y - T. The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C. So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that. So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah.
Bob
You parrot only Econ 101 micro stuff. Take notice that the micro definition is subject to the fallacy of composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Matt Franko
Stick to the well-defined proof and refute it if you can. All else comes latter.
Brian Romanchuk
Which part of Qm=-Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).
Matthew Franko
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.
MRW
Take notice that Keynes has been refuted. See ‘How Keynes got macro wrong and Allais got it right’ http://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
Take also notice that Davidson has been refuted. See ‘Why Post Keynesianism Is Not Yet a Science’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438
Take finally notice that Samuelson has been refuted. See ‘Samuelson or Who is the smartest smartie?’ http://axecorg.blogspot.de/2016/08/samuelson-or-who-is-smartest-smartie.html
Economists got profit wrong and because of this economics is a failed science. MMT is no exception.
Andre there is standard terminology in Accounting... its not like Economics with words like "money!" and "inflation!" etc...
Here is how the transaction is done or you go to jail for fraud or lose your CPA license:
"How do you record a dividend payment to stockholders?
A dividend to stockholders or shareholders involves two entries. The first entry occurs on the date that the board of directors declares the dividend. In this entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid. Retained Earnings is a stockholders' equity account and Dividends Payable is a current liability account. Some corporations debit a temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividends account is closed to Retained Earnings.
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited."
There are TWO entries required.... this example is using Accrual Basis as this firm has a "Dividends Payable" account in their Chart of Accounts which gets an entry when it is declared and not when they actually pay it... ie Accrual...
Ok. So, correcting myself: when dividens are paid, there is actually an accounting loss. If Matt is right, then the claim "there is no effect on business sector profits" does not hold.
Now I can understand even less of what Brian Romanchuk said.
---
"Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah."
You are not working with elementary accounting equations. You are working with a model that's in your head. I'm trying to understand what's going on into your head, because that may lead to a very interesting discussion.
Until now, I'm having trouble in understading your model. I tried to post something, but the comment simply gets deleted. I think it's a bug, I don't know.
But here I go and I will try again:
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth"). That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G. The "after tax profit", or A, is, by definition A = Y - T. The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C. So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that. So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
Ok. So, correcting myself: when dividens are paid, there is actually an accounting loss. If Matt is right, then the claim "there is no effect on business sector profits" does not hold.
Now I can understand even less of what Brian Romanchuk said.
"Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah."
You are not working with elementary accounting equations. You are working with a model that's in your head. There is no accounting model like the one you are describing, so I think you're talking another language. Maybe it's a better language than the one used today, but I can't even tell. I'm trying to understand what's going on into your head, because it may lead to a very interesting discussion.
Until now, I'm having trouble in understading your model. I tried to post something, but the comment simply gets deleted. I think it's a bug, I don't know.
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth"). That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
"Which part of Qm=-Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit)."
That's simply not true. As I said, a person that gathers an apple from a tree does create value. It's a value addition ("profit") of 3 units of account, if you followed my previous example. And this value addition ("profit") does not remove value from anyone else.
If the person kept the apple for herself, then there was no practical way that the Statistics Authority could account for the value addition ("profit"). But in theory, it should be accounted.
But then that person A actually sells the apple to another person B. Now the Statistics Authority can and do account this transaction. It will be included in the GDP. The transaction itself actually did not add any value. The value was added when the apple was gathered, not when was sold. So the transaction does not affect anymore the balance sheet of the person A. It also does not affect the balance sheet of person B, who only changed one kind of asset to another: he exchanged the apple for an orange. He gave up one orange that was worth 3 units of account for one apple with the same value, so no "losses" here.
And just one more thing: MMT is about fiat currency, state chartalist theory and "tax drives money" approach. I don't understand exacly how you could "prove that the formal foundations of MMT are inconsistent" if you did not say anything about these fundamentals.
But maybe you did "disprove" MMT or maybe put a good challenge to it, and I'm avid to understand what you are trying to say.
EKH: I am curious. How does one prove "the formal foundations of MMT are inconsistent" - when nobody, including yourself, has formally axiomatized the theory? Writing one's own list of axioms and calling it "axioms of MMT" (or anything else) is not axiomatizing a theory.
I do not think you understand MMT well enough to axiomatize it, or even recognize a semi-formal axiomatization. You certainly don't appear to understand what is most fundamental to the theory - the definition of money. It doesn't appear to me that you have looked at the basic texts and books. The core of the theory is rather more subtle and simple and philosophical than it may look like to many at first; even those at MMT blogs.
I agree with a substantial amount of what you say at RWER, but you usually go rather too far. I would be happy to help you learn MMT, but it is hard to learn anything if one is wrongly convinced they understand it already.understand it already.
You parrot only Econ 101 micro stuff. Take notice that the micro definition is subject to the fallacy of composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Add the tax receipts (and write offs) if you wish to know the overall profit of firms. Is that measurement important? Without looking at other indicators, what will "overall profit" tell us about the performance of the economy?
The macro economy is dominated by commodity production. Business plans are devised around the production and exchange of commodities for money. When hiring labour, the wage contract is most commonly used, which is based upon a profit model. There are of course other profit models, with their respective contracts.
A "theory" of profit should be able to make some predictions. Such a theory would be welcomed!
He is free to make up whatever definition of "profit" he wants. I could define "profit" as a furry animal that purrs, and I could say that there is a "profit" on my lap. However, everybody else would decide that is crazy, and say that thing is actually a "cat".
There is no accepted school of accounting and economics that views dividend payments (or capital expenditures) as an expense that subtracts from profits. The whole point of creating a business is to make a profit, so that you can pay yourself a dividend!
The definition he is using is the net financial flow, which is not the same thing as profits. Everybody knows that net financial flows across all sectors in a currency area sum to zero.
Alright. So Net Financial Flows it is. As I understand, he just defined it with the wrong name, but no big deal. That fact by itself doesn't invalidate his theory. Payment of dividends does change the blance sheet, decreasing assets and equity.
MMT does say that financial instruments net to zero. A financial asset to someone is a financial liability to other, so that's actually in line with MMT.
What I believe is the problem of EKH's theory is that it doesn't acknowledge real assets.
When MMTers say that (S-I) = (G-T) + (X-N) it considers both real and financial assets, so you cannot compare that equation with other equation that considers only financial instruments.
Also, this equation is not a even a theory. It doesn't actually say much thing, despite the propaganda the MMT community makes. So I don't even know what has to be "disproved" here. If someone claims something like "S is always proportional to G by a factor of 2", then you have a model that may or may not be proved with evidence. But I don't think people claim such a thing.
I beleive he's got stocks and flows horribly confused.
The accounting identity he sites is a flow. One of the derivable flows if profitability. However profit is not a stock. Positive profit increases the stock of equity for a business but it is not a stock.
In his example of the lady and the apple, she has the stock of one apple asset and a stock of equity equal to one apple. There is no profit because there has been no flow of expenditures!
So this is yet an other "discussion" on semantics? How not...
All this discussions end up being discussions about semantics "you do not understand what "profit" is" is the same as "you do not understand what "money" is".
There is no formalized proof whatsoever going on here... just an other debate about semantics: "with my definition of X you are wrong", well ok, that works the same for everything else.
This is the big problem with economics... fortunately accounting is not really economics as pointed above. And the definition of "profit", fortunately, isn't either rocket science (as it's really an accounting construct) and most people can stick to simple crystal clear definition of it.
Why people does want to make something more complicated than it REALLY is, to obfuscate?
Well Ignacio this is how people operate so you can see how things are so screwed up...
"to obfuscate?"
Noooooo... here is this guy who probably has never taken an Accounting course in his entire life and he is talking all about Accounting... he's simply unqualified...
Over here you have to take a test to become a CPA idk about Europe.. but here there are regulatory requirements and continuing education.... (I have sibling who is CPA...)
Look at the CVs of all of the Peterson people: PoliSci, Law, Econ, MBA, Marketing, no accounting people other than David Walker perhaps who has a BS ...
They use this whacky Modified Accrual in Federal govt here where the liabilities are accrued while the revenues are realized on cash basis so of course it looks bad... which btw who cares it is just accounting ex post as long as everybody is competent and understands the accounting differences it shouldnt matter...
I would bet that Walker doesnt even understand these differing principles between regular business Accrual and Federal Modified Accrual... he and the Peterson people are all looking at it as pure business Accrual (govt as household...)
So again it comes back to training and competency/qualifications and the most vocal morons out there you can see are all unqualified...
If you could get Walker on a show and ask him to briefly explain the differences between Accrual and Modified Accrual I would bet he would go "what is Aleppo?" on you... he wouldnt even know what you were talking about...
So no obfuscation... ie no "neo-liberal conspiracy!" ... they are all just stupid...
Over here, there is this website Pinterest which has NO REVENUES ie NO PROFITS yet it has been given a value of $7B (Accrual) and they have never even left VC phase yet....
We are in a constant fight against deformed use of language which shapes flawed perception (although my argument is that many times is the other way around and language does not shape cognition but the other way around, is the deformed perception which deforms meaning and language to keep cognitive biases up, but this an other topic altogether).
Some people just want 'really hard' to the meaning of something be their way so they can be right, I don't mean like a conspiracy, for the simple fact that "I will be right if this is true". IMO we yet don't understand the strong limitations biases have on operations.
There is no back checking of axiomatic definitions against reality, this goes back to Lars post the other day on 'economics as applied math'. I define a concept however I want I can prove anything in an axiomatically closed mathematical system. This is like proving that the syntax of a language is right, but if the meaning is devoid of connection with reality it has no use as science.
There is a huge confusion between proving something right syntactically and proving it right semantically, ie: "with my definition of 'whatever' my proof is syntactically right", yes, but is your definition really right?
"although my argument is that many times is the other way around and language does not shape cognition but the other way around,"
Yes I've seen you say that and it is very interesting... I have been studying that will get back to you on that at some point... Hebrew Scriptures have God scrambling our language at Babel post flood ... I've always assumed this was to slow us down at least a bit maybe to your point it is more than just a bit...
So pre-flood we had subsistence/equilibrium economy and efficient language... post flood we've had surplus economy BUT f-ed up language... (at least these differences...)
"Over here, there is this website Pinterest which has NO REVENUES ie NO PROFITS yet it has been given a value of $7B (Accrual) and they have never even left VC phase yet...."
I see. Technically it is wrong to say that "profit/loss" is the same thing as "change in equity". Ok, I took notes.
But for the present discussion, I don't think it's important to make a distinction between profit/loss and other kinds of changes in equity. It may be useful later for other discussions. But I believe we can ignore this kind of detail right now and move on to more important aspects of the discussion. I don't think that it's this detail in nomenclature that could invalidate EKH claims.
"although my argument is that many times is the other way around and language does not shape cognition but the other way around,"
I don't think LS would have any quarrel with that. He was knowledgeable about psych, anthropology and sociology. But he was not doing that. He was doing logical analysis.
His claim is that one can uncover what is going on with respect to confusion just by looking at how language operates.
This is very similar to the MMT position of starting with monetary operations to determine what is actually happening financially and economically.
LW pointed out that analyzing operations, in his case of the symbolism, is different from nominalism or pragmatism. It is unique and it is foundational.
The difference between LS and MMT is that language is a culture artifact while "money" is both a cultural artifact and an institutional artifact and presently the institutional arrangements make operational analysis very clear. LS is saying that while language use is not exactly institutional although there are established rules of surface grammar that change over time rather slowly.
LW sought to show that analysis of dictionary meaning and the rules of grammar is insufficient to reveal what is really happening at the level of what he called "deep grammar." LW's use of "deep grammar" is different from Chomsky's.
For LW the deep grammar (actual rules being adhered to in language use in particular situations) is contextual. A lot of confusion results from the assumption that similar words mean the same thing owing to identity of sign.
This is a big problem even in the scientific use of math. Variables are defined in terms of sets. The problem is that in ordinary language the actual use of a sign to indicate a set doesn't means that the boundaries of the set are as exact as assumed because the sign is applied with somewhat different rules in different contexts.
K ("capital") is an example in econ. "Capital" is a slippery term.
Another obvious example is "money." R & R presumed that it meant the same thing over a long historical period when the monetary system changed and with it the institutional arrangements establishing the operational rules along with it. So it was adding apples and oranges.
Greenspan famously said that that central banks act as if the world were still on a gold standard even thought that is no longer the case. So here analysis of the institutional arrangements would be misleading, since the policy makers weren't following those rules.
Why did they and do they do this. It seems clear that it is owing to some cognitive bias. It might be different for different bankers and banks. Germans might be cognitively biased toward "morality." Swiss toward thrift. The US and UK toward "sound finance." Some of this could be due to special interests. Central banks in emerging nations might just be conforming to "standard operations." Determining this would require a scientific investigation rather than a logical one. But a logical one would reveal that that the are all operating as if on a gold standard, although the reasons for it might be somewhat different.
"I don't think LS would have any quarrel with that. He was knowledgeable about psych, anthropology and sociology. " Should be LW (Ludwig Wittgenstein) rather than LS.
For the proper handling of profit, distributed profit and retained profit see (2015a).
André
Accounting and economic theory are like hand and glove. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
It is a big mistake to play accounting against theory/model. At a deeper level they have a common formal core. For the basic model see (2015b).
Calgacus
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”
You are behind the curve, see ‘From Orthodoxy to Heterodoxy to Sysdoxy’ http://axecorg.blogspot.de/2016/03/from-orthodoxy-to-heterodoxy-to-sysdoxy.html
Bob
You are parroting a widely held misunderstanding about predictions. See ‘Science does NOT predict the future’ http://axecorg.blogspot.de/2016/08/science-does-not-predict-future.html
Brian Romanchuk
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details see on your blog http://www.bondeconomics.com/2016/11/fun-with-accounting-identities.html?showComment=1478091221448#c2577717684502316735
Tom Hickey
The Wikipedia definition is micro, we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C-Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macro one arrives at micro by successive DIFFERENTIATION. Differentiation is top-down, aggregation is bottom up. The methodologically correct way is to start with macrofoundations and then to differentiate. Because of this the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable and as hard as any variable in physics. It is only economists’ brains that are mushy.
Egmont Kakarot-Handtke
References Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110 Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
You say: “I believe he’s got stocks and flows horribly confused.”
It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and money.
The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the accuracy of two decimal places. The big problem in economics is not semantics but scientific incompetence, see ‘Feeble minds, shaky assumptions, and the inevitable failure of economics’.*
Egmont Kakarot-Handtke
References Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL http://ssrn.com/abstract=1917012 * http://axecorg.blogspot.de/2016/07/feeble-minds-shaky-assumptions-and.html
"The MOST ELEMENTARY macro profit definition is Qm=C-Yw."
Sounds like Marx's surplus value = capitalists' profit. I am not offering this by way of criticism. Just inquiring about your view on it.
According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold— Wikipedia/Surplus_value
"Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory."
100% agreed. What I'm saying is that, when you claim "the business sector’s deficit (surplus) equals the household sector’s surplus (deficit)", you are not following accounting standards, national or not.
In my very simple apple example, that follows accounting rules, it is possible for both business and household sectors to have surplus at the same time. Actually, any individual may have a surplus alone, independent of other individuals. Unless you have some sort of assumption and simplification, which may be the case - I'm just not being able to understand which assumptions you made.
Also, it is not clear how your variables (Qm, C and Yw) relate to national accounting. You have a few mathematical equations that hold no direct relation to national accounting, so it's hard to compare.
But, for me, the most relevant aspect is that you do not talk about currency. You do not talk about currency creation and allocation. You just assume something that is not clear. Probably that the economy employs some sort of commodity currency, or maybe that there is no currency at all, so you are not even trying to challange MMT theory. You just assume away currency, and don't give a reason for it - but it is essential to explain why, if you are challanging MMT.
I mean, I could just say "MMT is wrong because I define it as wrong". That's not the way to discuss a theory. A better alternative would be "MMT is wrong because of evidences X, Y, and Z".
You are parroting a widely held misunderstanding about predictions. See ‘Science does NOT predict the future’
A 'theory of profit' that tells us something useful about the economy would allow for some predictions. There are several theories of profit that have been advanced, but they aren't useful. No predictions or policy prescriptions can be derived from them. The question is whether your Profit Law is useful.
Referring to the elementary macro profit definition Qm=C-Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provable false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.
Egmont Kakarot-Handtke
References Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301
"The difference between LS and MMT is that language is a culture artifact while "money" is both a cultural artifact and an institutional artifact and presently the institutional arrangements make operational analysis very clear. LS is saying that while language use is not exactly institutional although there are established rules of surface grammar that change over time rather slowly."
But Tom you can trace back the language in the documentary records and see where the word "money" came from in the first place which was a figure of speech derived from the name of the Roman temple that was over the numismatic system..... this is a reset t=0 point iow from that point on, ie from the time the word "money" appears, the institutional conditions changed .... so in this case the language can yield clues to what was going on institutionally...
Before that t=0, there was no such thing as the figure of speech "money" ... you can check the documentary records the word is not there....
the authorities would just use the actual name of the numismatic elements (silver, gold, copper) or the nomenclature of the coins (denarius, drachma, stater, etc...) there was not in existence a figure of speech that conflated these systems and f-ed up the terminology...
so which came first the figure of speech which led to the cognitive change in the institution or the cognitive change in the institution which led to the figure of speech?
The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.
This said, the elementary Profit Law* indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy breaks down, see (2014).
Egmont Kakarot-Handtke
References Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578 * See Wikimedia https://commons.wikimedia.org/wiki/File:AXEC08.png
But Tom you can trace back the language in the documentary records and see where the word "money" came from in the first place which was a figure of speech derived from the name of the Roman temple that was over the numismatic system.
Etymology is minimally useful in analysis of the logic of language. Use of signs as symbols is everything that that is determined by the context. Terms (signs) are used in many different contexts to signify differently. When they do, the symbols are different even through the sign remains the same. Authors, even those using technical definitions, often do this in a single paper when the technically defined term is also an ordinary language term. To do this inadvertently is a mistake. To do it purposefully for persuasion is sophistry.
Money in ordinary language may signify a number of things. generally many if not most people use "money" and "cash" equivalently to denote their bank balance, for example. Another use of "money" is to denote a set of sets, such as, different currencies. There are many possible uses of the terms "money." LW would say that they are linked by a relationship similar to family resemblances rather than denoting essences. That is to say, there is no common link but rather a web of overlapping rules. Only analysis of a particular contexts will shows the rules that are in play in any particular use.
One of the difficulties is that the context is independent of language. This makes understanding and translation of historical works where the context is either lost or murky difficult to impossible. We may know what someone said, but what was meant by it can no longer be determined with accuracy because the context has to be recreated and there may be different ways of doing this.
There are further nuances. Speakers often know that their words will be interpreted differently within the same audience. This is how code words operate, for example, affording plausible deniability while conveying clear signals to those in the know. Winking is not even necessary.
Referring to the elementary macro profit definition Qm=C-Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provable false, see (2014).
Don’t forget that sound (speech) came first, and then was written down.
Speech (sound) carries its own power. Think of orators like Hitler for a ‘bad’ influence and Joan Sutherland for ‘good’.
Sound, articulated and intoned well, creates very clear thought-forms that are more easily transmissible, impressionable, from one mind to another; logic embedded in the thought-form as an aspect. They carry the understanding of one consciousness to another, mind being the medium. There is also direct communication, and an emerging power of telepathy.
It involves an element of ‘vision’. Consciousness, awareness, vision are synonyms – sound is a tool. The written word loses this power.
The most potent factor is ‘where the speaker is at’. Sound allows listeners to tune in and experience what the speaker is experiencing, and makes the thought-forms more transmissible and receivable. Their ‘truth’ is embedded in the speaker.
The speaker may create a very clear thought-form, but it must be received through the filter of another mind which may colour it beyond recognition.
This said, the elementary Profit Law* indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy breaks down, see (2014).
Excellent. Therein lies the basis for your prescription:
A reduction of the wage rate cannot eliminate loss because it is ρE < 1 that makes the loss. By consequence, the most flexible wage cutting cannot turn the economy around; only an increase of the expenditure ratio could. This does not happen if the household sector aims at full redemption. Note that full redemption is not an accident but a constitutive part of the households’ optimal consumption plans. All boils down to budget balancing over the very long haul. A balanced budget is the economic analogon to a physical conservation law.
I'm interested in what can be tested, and in the kinds of policies that may follow from it.
Theories that have zero utility are plentiful in economics. If you want your theory to distinguish itself outside of the academic community, it has to accomplish something tangible. In this case, better economic management.
You say “Also, it is not clear how your variables (Qm, C and Yw) relate to national accounting.” Simply follow the references, see (2012).
You say also “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).
You say finally “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blogpost. This is why references are given. If you follow the references you will find for example ‘Clueless about money and profit’* and when you enter money in the search field you will find much, much more.**
Do not tell I assume something away when you are too stupid to look things up.
Egmont Kakarot-Handtke
References Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL http://ssrn.com/abstract=1895268. Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL http://ssrn.com/abstract=2124415. Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569663
* See http://axecorg.blogspot.de/2016/09/clueless-about-money-profit.html ** Google gives you 8300 hits for [“full name”+money]
EKH: Someone is behind the curve. To repeat- "Writing one's own list of axioms and calling it "axioms of MMT" (or anything else) is not axiomatizing a theory."
You have to take a sympathetic look at, make a generous interpretation of - and above all understand, (at least well enough to take a classroom test on it, say) - other people's work to prove it is inconsistent - a strong word, a strong claim. On the other hand, should one be surprised at not being listened to - if one doesn't listen to other people?
One could just as well "prove" your work is inconsistent by taking the axioms of any theory known to be inconsistent & calling that EKH theory. Your procedure is in principle wrong - your link, which I have looked at before, neither mentions nor cites MMT work. (Tómasson and Bezemer is the closest, but they provide no relevant exposition and their concerns are somewhat different, and you cite them with approval.)
From what I have read of your writing, some of which I do like, you still need to do some further reading of MMT in order to comment significantly on it. For one thing, probably unconsciously following Hilbert's good advice - which I think I've seen you quote - MMT considers "simple examples" which are rather simpler than what you call 'the simplest possible examples.' Take a look at John Henry's article on Ancient Egypt in the Alfred Mitchell-Innes MMT book for one that is simpler (and therefore more enlightening a la Hilbert) than any you have considered. What Keynes called "Babylonian madness" is very, very helpful for understanding.
Tom:
There are many possible uses of the terms "money." LW would say that they are linked by a relationship similar to family resemblances rather than denoting essences.
Not really. MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field. This is the sort of question - that such success is possible - that I think EKH (or the modern mainstreamers, the neoclassicals, for that matter) do not err about. He often rightly criticizes other people at RWER - fellow "heterodoxers" for asserting things are confused or impossible to know - when they aren't.
... that's a really good point too Matt: when someone points to their mouth repetitively and with a certain expression on their face, you know they’re hungry, in every language on the face of this earth!
It’s a pity we didn’t have some little green light that comes on our forehead when understanding is sinking in (and an orange one for lying).
Definitely the politicians should all have their mouths duct taped, and not be allowed to open them again until they have daily, sung half a dozen songs from Monty Python:
“So remember, when you're feeling very small and insecure, How amazingly unlikely is your birth, And pray that there's intelligent life somewhere up in space, 'Cause there's bugger all down here on Earth”.
The weird thing is, we have the intelligence, but just don’t use it. So we can hear, understand, observe, perceive etc – but allow greed, cruelty, and confusion??? That’s so wrong. Intelligence is not just SSRN papers (general observation) ....
It is pretty obvious that you do not understand the difference between science and sitcom. This sad fate you share with 99 percent of people who call themselves economists.
When the ancient Greeks invented science more than 2000 years ago they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994).
That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.
And this brings us back to the core issue of this thread. The core issue consists in the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical and eco-friendly.
The representative economist has not gotten the essential point of the scientific method and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms and economic policy advice is not different from poultry entrails reading.
As Popper said, science is conjecture and refutation. MMT has been logically refuted, therefore MMT is out of science. End of sitcom.
It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus, set a good example.
MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field.
This only works if one says that anything that doesn't fit one's characterization is a misuse. That is a POV.
There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.
A single counterexample counters a universal claim.
Is Monopoly money, money or "money." Is stage money, or money or "money." It is obviously "money" in that sense that the term is used coherently in accordance with rules. But is it actually money? How would one decide this. Stage money is used as token for something real (cash) but doesn't actually function as such. On the other hand, Monopoly money is both a token for the real thing and is used in the same way. It was designed as a teaching tool. Would monopoly money be any different if the game were played on the board with actual cash Instead of play money.
Were temple coins money? They had only one use as a religious offering. It doesn't not appear that they had any economic use other than to transfer real goods or financial instuments to "money changers" that served like the tax collectors of the time.
Is there some essence somewhere that can be used as a template for comparison. The essence theory has been discredited in philosophy. It has been replaced by set theory. As far as I know, set theory has not been successfully extended to ordinary language. Nor has a propositional calculus to account for it. These apply to technical usage and specified rules. The rules of ordinary language have not been formalized.
"Money" is a term with broad use in ordinary language, which is a reason that is so tricky when used in technical fields. Even if such terms are defined technically, it is extremely easy to expand their use in the technical setting owing to the cognitive bias brought in from ordinary language use.
All one can do is bring in a definition. But what is the definition is disputed, including among experts in a field. Where is the criterion to decide whose criteria is the only correct one, or even prove that any of the definitions are the only correct one?
So we have one side arguing that only gold is money and another arguing that gold is not money. What is the logically and empirically compelling criterion independent of a POV that a perfectly object expert mediator could use standing outside both systems of rules.
I prefer the Innes view, but I don't find it either logically or empirically compelling either. It's an attempt at "best explanation." Some experts agree that it is, while others do not. Since I am not an expert in the field, what I happen to think is of little matter.
In my estimation, the Innes view of money arising from debt is counter-intuitive for many if not most people. That makes it difficult to argue that it captures the "essence" of what the term "money" denotes. A numeraire like gold makes much more sense to most people as the "essence" of money. This makes putting the debt-based view across as an uphill battle and defending it strikes many people as stretching, e.g., using the no-good-Scotsman argument.
E.K-H has "proven" that a description of monetary operations is incorrect via "proof" that includes both monetary operations and physical (non-monetary) operations.
You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”
This is a widespread misunderstanding among economists.* And the confusion is busily kept alive by political economists. Therefore, it is important to first of all keep in mind that there is political economics (= agenda pushing) and theoretical economics (= science).
Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis1982, p. 698]**
In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong, there is only materially/formally true/false.
Vague blather, untestable wish-wash, inconclusive either-or and storytelling has always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby to save their job has always been the apex of smartness of scientifically incompetent political economists.
So, there are the hard rocks of true and false and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, Austrians.***
It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.
Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits an pieces together in an orderly fashion.” (Schmiechen)
All this is known since more than 2000 years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Economists are either too stupid to understand this or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value since more than 200 years. MMT is no exception.
Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampie.
In sum: There ARE absolute universal criteria of scientific truth and they tell you that MMT is false.
Egmont Kakarot-Handtke
* See ‘Humpty Dumpty is back again’ http://axecorg.blogspot.de/2015/11/humpty-dumpty-is-back-again.html ** See also ‘Marshall and the Cambridge school of plain economic gibberish’ http://axecorg.blogspot.de/2016/09/marshall-and-cambridge-school-of-plain.html *** See ‘Economic recommendations out of the swamp between true and false’ http://axecorg.blogspot.de/2016/04/economic-recommendations-out-of-swamp.html
"There ARE absolute universal criteria of scientific truth and they tell you that MMT is false."
Fercrissake, E K-H, MMT is about accounting, double-entry accounting. That's what the government uses. Well in fact it is quadruple-entry accounting, which Scott Fullfiler has pointed out that every accomplished accountants can't figure out (Link Above). Look at the Daily Treasury Statements. Various MMY-styled blogs infect it with politics or social engineering, but Warren Mosley has maintained from Day One that the accounting is separate from the politics of how it's used.
You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”
Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.
Accounting is elementary mathematics and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.
In the elementary consumption economy* three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i) wage income is assumed to be Ym=100 monetary units (e.g. trillion dollars) and consumption expenditures are assumed to be C=100 monetary units. Then the monetary saving of the household sector Sm=Yw-C is zero and the monetary profit of the business sector Qm=C-Yw, too, is zero.
In case (ii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=-10. The whole output is sold, i.e. O=X, and the market clearing price P is now lower than in case (i).
In case (iii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=-10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market clearing price P is now higher than in case (i).
It always holds (a) Qm+Sm=0 or Qm=-Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the MOST ELEMENTARY form of the PROFIT LAW for the economy as a WHOLE.
When government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T-Cg)=0 or Qm=-Sm+(Cg-T) or Qm+Sm=(Cg-T), that is, the red ink of the government sector (Cg-T) corresponds to the blank ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note, that in the last few years total household sector saving has been negative (-Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm=-Sm+(Cg-T).
Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (Cg-T) is equal to the business sectors monetary profit Qm, in other words government’s red ink is business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all times. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do NOT think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this due to the fact that economists in general and MMTers in particular are too stupid for the elementary mathematics of national accounting.**
Egmont Kakarot-Handtke
* The macrofoundations are given with three structural equation: 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 details see ‘Accounting basics’ http://axecorg.blogspot.de/2015/10/accounting-basics.html
Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (Cg-T) is equal to the business sectors monetary profit Qm, in other words government’s red ink is business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all times. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do NOT think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this due to the fact that economists in general and MMTers in particular are too stupid for the elementary mathematics of national accounting.**
Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation). I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent seeking behavior (as explored by Michael Hudson, for example).
If sectoral balance based-macro (which MMT is) and functional finance (which MMT recommends as policy) are to be used in addressing the balance of growth, employment and price level, using automatic stabilization with a buffer stock of employed by instituting an ELR, then skewed distribution owing to economic rent must also be addressed.
Warren Mosler has proposed addressing land rent with a land tax and other forms of economic rent with legislation and regulation.
But it is true that MMT-based policy being advanced is addressed at employment rather than distributional effects taking capital/labor share and economic rent into consideration. I think in their view, first things first and employment policy is the priority politically.
You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”
Take notice that Kalecki is wrong. See paper ‘What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803
You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent seeking behavior (as explored by Michael Hudson, for example).”
Take notice that the concept of rent is false. See paper ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932119
It is pretty obvious that you do not understand the difference between science and sitcom.
Perhaps. But I am the straight man, the foil in this sitcom. :-)
These equations prove that the formal foundations of MMT are inconsistent.
What "formal foundations of MMT"? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them. Your "refutation" is founded on nothing but the rhetoric and doxa you purport to criticize. To refute a theory you have to discuss it, what the theory asserts, to actually cite some work of the theory. You simply don't bother.
Even if you were right, you are asking the reader to do 90+% of the work of the refutation, which would be to connect what you say (what you say MMT says) with what MMT does actually say, e.g. in a work labelled MMT - say something by Mosler, Wray, Mitchell, Fulwiller, Kelton, Forstater etc. So there just isn't any proof there. A (very insufficiently founded) claim of a proof or refutation is not the same thing as a proof or refutation. What you are doing just isn't how it has ever worked in any discipline - except in sitcom land, I guess.
I am mostly fine with your views about science etc. I've expressed my appreciation at RWER, against many there who have much more theoretically confused and defective views. The problem is that your work fails based on the (pretty good) criteria you present, on very simple and formal levels. If one doesn't do minimal things that would be very easy if one understood a theory enough to refute it, that are ALWAYS done in any refutation in any discipline, how can you expect anybody to take the "refutation" seriously, to even bother to read it? I for one haven't even tried to follow this "refutation."
(1/2) Me, Calgacus: MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field.
Tom: This only works if one says that anything that doesn't fit one's characterization is a misuse. That is a POV.
What if there just isn't anything that doesn't fit the characterization? That is my statement.
The meatiest thing below is: "A single counterexample counters a universal claim."
I agree. My statement is that there are no counterexamples. You haven't given any. At least not stated clearly, in a way that I understand. I can explain to you or anyone how stage money or Monopoly money, under ordinary interpretations, is money, as used in MMT. But one has to be careful as always: The money in a game of Monopoly is not the pieces of paper.
Is there some essence somewhere that can be used as a template for comparison. The essence theory has been discredited in philosophy. It has been replaced by set theory. As far as I know, set theory has not been successfully extended to ordinary language. Nor has a propositional calculus to account for it. These apply to technical usage and specified rules. The rules of ordinary language have not been formalized.
It is a distraction and a digression - and I will not say more about it, for this is one of my major points, to not get bogged down into a discussion of such impractical and not immediately relevant matters (like essences, language games, rules, Wittgenstein and family resemblances): but I disagree with everything above, and I contend that the movement all over philosophy has been against such extreme "analytic philosophy" for 40 to 50 years and more. Starting at least since the later Wittgenstein :).
Set Theory is a branch of mathematics with major foundational use in mathematics. There are more recently developed branches that are "better" foundations, more in line with a more classical, Aristotelian, retrospective conception of "foundation", than the dogmatic "ultimate basis" type of foundation that Set Theory along with First Order Logic purported to be for much of the 20th century, and which had some definite negative as well as positive effects on philosophy. As for discrediting, I follow Hegel: "No philosophy that deserves the name ever has been or can be refuted".
I am talking in practical terms. Anything people have ever called money anywhere fits the MMT definition just fine. Can't say that about any other definition. Modern philosophers, even some good ones, waste a lot of time that could be better spent IMHO talking about things like "Is water H2O?" I anticipated this kind of quibbling when I said "about as well as anything has been defined that way in any field." I am saying Money is a credit/debt relation a la Innes, MMT etc - is as good a definition as "Water is H2O". "Counterexamples" and quibbling is about as impractical and unimportant as the modern Water / H2O "debate". Some chemists once thought water was HO. They were wrong. Like the commodity theory of money, it may have a wee bit of truth in it, but it doesn't really work. Real, definite, true progress is possible.
Some arguments you are giving, like EKH's aren't really appropriate. They are too universal, too (in pretense) strong. They never come to grips with the matter, with what MMT actually says. They're just free-floating skepticism that could be directed at anything. Sure, if one wants to be skeptical for no definite reason, fine. But that is just a desire to not understand, not an argument.
All one can do is bring in a definition. But what is the definition is disputed, including among experts in a field.
I disagree that the MMT definition is disputed. It is simply ignored, and not heard of. The MMT definition isn't disputed seriously, mainly because it isn't understood. If one understands it, there is no way to conceive how to disagree seriously, to not be compelled. And there have been people who do understand it, but don't understand the consequences, don't understand how the creditary point of view makes everything so much simpler, makes so many consequences obvious. (Perhaps the accountant you know who got it instantly is one of these.) The problem is not that MMT etc is counterintuitive, but that it is hyperintuitive. The problem with the social sciences is not that there is so little knowledge, but that there is so much, so much that everyone finds social knowledge so easy that they have a hard time understanding what they know already. The problem is what was already in Hegel's time "the foolish modern prejudice" that social knowledge is impossible, only knowledge of nature is easy and possible. Many natural scientists form one the largest contingents to not hold this prejudice - they know how hard what they do is!
In my estimation, the Innes view of money arising from debt is counter-intuitive for many if not most people.
That is NOT the Innes / MMT view. Money doesn't "arise from debt." It is credit / debt. Water doesn't "arise from H2O." It is H2O. There are subtleties, but to get to serious arguments - I'm thinking of some I had (and never finished posting about) with Dan Kervick - "Refuting" Dan made me understand things much better- one has to stop making non-serious arguments. The non-serious, free-floating kind of arguments that chemists who really wanted to know just what compound of H and O water is never made. The ball is in EKH's court to explain how what he says has anything to do with MMT. The ball is in your court to give a specific concrete example of any problem with the MMT understanding of money that is intelligible to the man in the street.
You quote me “These equations prove that the formal foundations of MMT are inconsistent.” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”
False. I refer in my posts to the formal foundations that haven been presented at many places and that are COMMON knowledge. Either you do no follow the references or you are not familiar with the MMT accounting equations.
For the proof see my post on Bill Mitchell’s blog ‘Modern moronomic theory’ http://axecorg.blogspot.de/2015/08/modern-moronomic-theory.html
It reads: “The fundamental flaw of your argument is to take national accounting at face value. With this, you unfortunately share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income an profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).
Already your first equation GDP = C + I + G + (X – M) is logically defective and by consequence the rest of your argument. This holds in particular for (I – S) + (G – T) + (X – M) = 0 which boils for the most elementary case down to Keynes's I=S (Keynes, 1973, p. 63).
...
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.
Because your profit theory is false your monetary theory, too, is false (2015, Sec. 7).”
One more time: The formal foundations of MMT are defective and because of this the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fulwiller, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.
You are asserting a theory of money, one which I happen to agree with.
What you have said as I read it is that foundations are disputed and you that "know" your foundations are the correct ones based on reasoning and evidence you accept, but not all do.
Well, that is precisely the issue. Anti-foundationalism arises from the inability to establish foundations based on universal absolute criteria that unassailable.
Yes, a "philosophy" as the articulation of the foundations of a world view, or lack of foundations, can never be refuted if the view follows logically from the foundations — as long as the debaters agree on the logic, which is not always the case.
So Hegel with a dialectical view is one view, absolutisms of various types are other views, skepticism is another view, and relativism is another. They are all correct from a particular POV and they represent the multifarious facets of human "knowledge."
There are different ways of seeing "reality," which is even a knottier term than "money." One view is that these different POV's are different constructs, and that "reality" is social, that is, a social construct. Many social constructs of the same data (sense information) are possible. Owing to this different explanations arise. Shifts take place even in the same construct and nuance is common. "Reality" is not homogenous as a mirror image of the objective world in all subjects. The same "facts" can be interpreted differently.
If one begins with "commodities are exchanged in markets for commodities," then from this POV "money" is a commodity and labor power is also commodity.
If one begins with commodities are exchanged for money, which is not a commodity, and labor power is not a commodity either, then the first view cannot be correct.
Then there is the Mehrling "hierarchy of money" with gold at the apex in a fixed rate system in which money is redeemable for gold. If gold is not somehow "money," what is it doing in a hierarchy of "money."
An interesting example is block chain. What constitutes "money" is a legal question, and courts in different jurisdictions have ruled differently about block chain. In some jurisdictions it is "money" and in others it is "property," hence not money. In those various jurisdictions block chain is institutionally what the courts say it is.
I will believe that questions such as these are decidable definitively when decided definitively based on publicly available criteria that are compelling of assent. But that still leaves the question of whether mutual assent is agreement within a particular POV rather than based on supposed "real essences" that transcend all POV's as absolutes, like Platonic forms or Aristotle's formal causes of things that the active intellect apprehends though intellectual intuition and with which the passive intellect is informed.
So far, I haven't seem any commodity theory types persuaded to abandon their views based on opposition they accept. Rather the argument is driven back to mutually exclusive assumptions that are foundational. The arguments end politely with agreeing to disagree or in exchanging insults, as we have seen here at MNE on occasion.
My view is that theories are explanations, and the goal is best explanation rather than "final truth." What constitutes "best explanation" is controversial just like almost everything else where competing explanations are possible.
My view is that "best" explanations based on the criteria of correspondence, consistency, economy, and usefulness are tentative on a the possibility of better explanation forthcoming. This is especially relevant in the case of a complex adaptive systems in which emergence is a factor, like social systems, where finance and economics are artificial social constructs and subject to change.
I have concluded from my non-experts study that the MMT is the best explanation available. But the analysis is disputed in the Post Keynesian community, with which MMT is most closely associated.
Rather than being the definitive answer, the MMT view of money appears to me to be a disputed claim at this point. In my view, if that claim is accepted, then a lot of other things fall into place. As a best explanation is more comprehensive than other explanations, while also economical and useful, e.g., in macroeconomics and policy. Being accounting based, it is perfectly consistent, since all accounts must balance across the whole system. If this is the case, then the MMT can be expected to replace other views as more effective and efficient.
You complained: “What ‘formal foundations of MMT’? You just use the phrase.”
You can find the formal foundations also on Wikipedia. See my comment: ‘Wikipedia and the promotion of economists’ idiotism’ http://axecorg.blogspot.de/2016/11/wikipedia-and-promotion-of-economists.html
Economics is hard enough but nothing is able to seep through the grey matter without reading things dozens and dozens of times...after reading MMT and AXEC for nearly two years now I am in agreement with AXEC, however I would prefer to explain it by re-labeling the business sector as that part of the household sector which owns businesses (those who receive passive income one way or another) compared to the rest of the household sector which does not.
Once the business sector is seen as being owned by a section of the household sector, then the net wealth of that part of the household sector is made up of government deficits and the dissavings of the rest of the household sector
The ratio of income received by the first class (passive) compared to the income earned by the rest (active), which is the profit ratio can only increase/decrease when the expenditure ratio (C-Y) also increases/decreases, and the expenditure ratio can only increase if govt deficits and household debts increase (+ exports). The passive incomes received by the upper classes depends solely on the expenditure ratio and nothing else.
As more and more people seek to establish and increase their ability to receive passive income (increased middle class), the profit ratio must increase and the real wages of the rest must decrease. No amount of increased employment fixes what the increase in profit ratio does to real wages or to the fact that govt deficits + household debts must also increase.
An illustration of the decline in real wages over the last 40 years https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/1500/attachments/original/1497298286/Labour_Share_Hits_Record_Low.pdf
Please critique me if I have any of this wrong Egmont
Having just spent some hours attempting to tease anything of practical utility (meaning: anything which might inform criticism of the "rationale" for existing macroeconomic policies and go on to suggest an intellectually-plausible basis for alternative policies capable of improving upon the (IMO pretty disastrous) societal results they produce) out of E.K-H's posts, one shaft of light has - a bit belatedly - dawned. (A lot of wasted time would have been saved if it had occurred to me after the first one or two).
It is this:- that the strength of any protagonist's argument is inversely related to the quantity of gratuitous invective s/he finds her/himself obliged to use in "support" of it. Measured by that criterion, E.H-K's argument can be scientifically measured (I hereby promulgate) to be totally invalid.
His position boils down to:- "I have a monopoly of widom; therefore anyone who disputes my pronouncements must ipso facto either be a complete idiot or a charlatan". There's nothing whatever to be gained by engaging in discourse with any person taking such a position: effectively that person has chosen to isolate himself inside a hermetically-sealed chamber.
84 comments:
A big thank you to Egmont Kakarot-Handtke for his statement of the bliteringly obvious, namely that if you divide the economy into two sectors, public and private, you lose the distinction between two major elements of the private sector, namely households and employers.
Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.
What is the profit theory?
What if the business pays a dividend? To a household.
This guy doesn't understand accounting....
"Accounting is an elementary form of mathematics.". Whaaaattt?
Bob
You ask ‘What is the profit theory?’ For the comprehensive answer see ‘The profit theory is false since Adam Smith’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
This means in concrete terms: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.
It should be obvious: who cannot tell what profit is has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
The profit theory is the pivot of all of economics and it is false since more than 200 years. As every economist knows from the Palgrave “A satisfactory theory of profits is still elusive.” (Desai, 2008)
Accordingly, the rectification of profit theory affects not only MMT but the four major approaches Walrasianism, Keynesianism, Marxianism and Austrianism.*
Ralph Musgrave
You say “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”
Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides the confirmation.
Matt Franko
Profit distribution has been dealt with in the paper mentioned above (see eq. 1) and elsewhere.**
Egmont Kakarot-Handtke
* For more details of the big picture see cross-references
http://axecorg.blogspot.de/2015/03/profit-cross-references.html
** See working papers on SSRN
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
It should be obvious: who cannot tell what profit is has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
Profit: the difference between the amount earned and the amount spent in buying, operating, or producing something.
I would then say that profit is a necessary component of commodity production. Where 'commodity' is defined as a good or service that can be traded or exchanged.
Knowing what profit is should be easy, predicting it appears to be difficult.
"Accounting is an elementary form of mathematics.". Whaaaattt?
Arithmetic is part of math.
AXEC - why is your title the implosion of MMT versus the Implosion of Everyone Except AXEC?
Are households and business sector really different, when many businesses are pass through entities?
EKH,
If you are not including the govt as a sector under the current USD systemic arrangements then you are not analyzing what is actually going on... ie bad science...
We can think about hypothetical arrangements all day long but of what use is that?
iow we could say "what if we could defy gravity!" but that is not realistic...
go ahead and include firms as a separate sector but then you have to still think govt / non-govt with households & firms as sub-sectors to the non-govt sector...
What we do for USD system is typically govt and non-govt sectors.... ie just the 2 sectors where firms households and foreigners are in the non-govt...
Another thing is stop thinking with the word "money" its a figure of speech and unacceptable for scientific terminology...
I have to give that at least a 9/10 as a troll attempt. The accounting was so obviously wrong that I do not think a 10/10 would be justified. But a very good job! Congratulations!
Seems like he is combining accrual basis and cash basis...
http://www.accountingcoach.com/blog/acrrual-basis-accounting
"Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. "
http://www.accountingcoach.com/terms/C/cash-basis-of-accounting
"An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid)."
Its like he is somewhat accruing the profits of the firms and using cash basis for the savings of the households....
E. K-H,
"Accounting is an elementary form of mathematics."
You need to listen to Scott Fullwiler starting at minute 38:15 here. At least the first two/half-to-three minutes, because it doesn't appear to me that you could answer Fullwiler's accounting challenge correctly either. I think you should watch Fullwiler's full presentation, up to you. The slides link is in the description.
https://www.youtube.com/watch?v=PadIPCEsbGA
Mathematics, arithmatic, are USED in accounting. Accounting isn't a subset, or form, of mathemetics. Accounting is recording events AFTER the fact: accounting for . . . a series of actions already taken. Higher mathematics is giving form to that which is yet unknown. Higher mathematics, not the mundane kind, brings unknown things or worlds into manifestation. Accounting, whether numerical or verbal/aural (aka, history), is always always after the fact. Therein, understanding the correct order of the transactions is key to recording the event. Higher mathematics, on the other hand, can define the world we don't yet know, and give it form. E=mc^2.
Also, I think you might be interested in Paul Davidson's explanation of how everyone is utterly confused about Keynes and his belief in or acceptance of axioms. Keynes rejected axioms; he did not believe you could foretell the future economy on the probability distributions of the past, and create a model that would predict it. Paul Samuelson wanted axioms--and made them up--because he wanted economics to be a science, a hard science like physics or astronomy. It was the only way Samuelson felt he, and the profession, could become respectable in 1947. You can expand from this Davidson link to find other sources, if interested. The Appendix in Davidson's book is a hoot describing this history...devastating.
https://www.youtube.com/watch?v=31wjPE-mUb4
"This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid)."
Inferior? Why? Under what circumstances is it inferior? When I finish work today, should I race home and update my checkbook register to reflect the money I earned today, even though that money isn't in my bank account?
Cash based accounting reflects reality, other methods may well be a form of subterfuge.
Maybe we could mark the entire economy to market each day?
I too prefer Cash Basis Six but I could be biased in this via my STEM training....
Also as everyone knows, CPA stands for Constant Pain (in the) Ass....
I vote for taxing away all USD balances at 5:00pm on the 30th thus balancing the budget for the month and then crediting it all back at 8:00am the next morning just to shut the Peterson morons up once and for all and then just let the competent people do what they do for the rest of the month....
"When I finish work today, should I race home and update my checkbook register to reflect the money I earned today"
No but you could enter it on your personal statements as "Wages Receivable" as an asset under accrual...
People typically run their checkbooks as "Cash Basis"...
Mike uses the Daily Treasury Statement to do his MMT Trader reports which the DTS is Cash Basis... while the Monthly Treasury Statement that most people refer to when they talk about "the deficit!" is a Modified Accrual Basis...
http://www.investopedia.com/terms/m/modified-accrual-accounting.asp
"Modified accrual accounting is an accounting method commonly used by government agencies that combines accrual-basis accounting with cash-basis accounting. Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred. A modified accrual accounting system can also divide available funds into separate entities within the organization to ensure that the money is being spent where it was intended."
So you can see how the Peterson people can get their panties all in a bind.... they dont accrue taxes/fees receivable while they DO accrue all liabilities....
AXEC / E.K-H,
Why don't you open your blog for comments? That could be interesting. People like this kind of discussion, I guess.
Unfortunately, I'm unable to discuss because I can't follow your logic.
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth").
That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G.
The "after tax profit", or A, is, by definition A = Y - T.
The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C.
So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that.
So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
Brian Romanchuk,
"The root of the problem is that he has confused cash flow for profits". I don't understand what you are saying too. I would like to understand.
"For example, a business can pay a $1000 dividend to its owner, and the dividend is saved in the bank. The household sector has $1000 in savings, and there is no effect on business sector profits."
Well, you are just employing a very restricted meaning for the word "profit". E.K-H is employing a broader meaning.
If a business pay $1000 dividend to its owner, then the business will lose $1000 in equity. That's an economic loss to the company. It will not be recorded as an accounting loss, but as an accounting withdraw of capital reserves or something. Nonetheless, the effect is the same: decrease in equity and economic loss to the business. But I'm not sure if that's your point...
Well... I guess there is some kind of bug, my another comment disappeared. So here it is again:
AXEC / E.K-H,
Why don't you open your blog for comments? That could be interesting. People like this kind of discussion, I guess.
Unfortunately, I'm unable to discuss because I can't follow your logic.
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth").
That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G.
The "after tax profit", or A, is, by definition A = Y - T.
The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C.
So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that.
So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah.
Bob
You parrot only Econ 101 micro stuff. Take notice that the micro definition is subject to the fallacy of composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Matt Franko
Stick to the well-defined proof and refute it if you can. All else comes latter.
Brian Romanchuk
Which part of Qm=-Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).
Matthew Franko
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.
MRW
Take notice that Keynes has been refuted. See ‘How Keynes got macro wrong and Allais got it right’
http://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
Take also notice that Davidson has been refuted. See ‘Why Post Keynesianism Is Not Yet a Science’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438
Take finally notice that Samuelson has been refuted. See ‘Samuelson or Who is the smartest smartie?’
http://axecorg.blogspot.de/2016/08/samuelson-or-who-is-smartest-smartie.html
Economists got profit wrong and because of this economics is a failed science. MMT is no exception.
Egmont Kakarot-Handtke
Andre there is standard terminology in Accounting... its not like Economics with words like "money!" and "inflation!" etc...
Here is how the transaction is done or you go to jail for fraud or lose your CPA license:
"How do you record a dividend payment to stockholders?
A dividend to stockholders or shareholders involves two entries. The first entry occurs on the date that the board of directors declares the dividend. In this entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid. Retained Earnings is a stockholders' equity account and Dividends Payable is a current liability account. Some corporations debit a temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividends account is closed to Retained Earnings.
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited."
http://www.accountingcoach.com/blog/recording-dividend-payment
There are TWO entries required.... this example is using Accrual Basis as this firm has a "Dividends Payable" account in their Chart of Accounts which gets an entry when it is declared and not when they actually pay it... ie Accrual...
http://www.accountingcoach.com/chart-of-accounts/explanation
"Retained Earnings is debited"
Ok. So, correcting myself: when dividens are paid, there is actually an accounting loss. If Matt is right, then the claim "there is no effect on business sector profits" does not hold.
Now I can understand even less of what Brian Romanchuk said.
---
"Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah."
You are not working with elementary accounting equations. You are working with a model that's in your head. I'm trying to understand what's going on into your head, because that may lead to a very interesting discussion.
Until now, I'm having trouble in understading your model. I tried to post something, but the comment simply gets deleted. I think it's a bug, I don't know.
But here I go and I will try again:
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth").
That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
In GDP accounting, the total "profit" of the household + business sector is the GDP (also called Y), which includes real assets. We can decompose the "profit" in a lot of different ways. For example, we can decompose depending on the origins of the profit. If we ignore imports/exports, we can separate "profit" like this: (i) profit earned by manufacturing and selling consumption goods, C, (ii) non consumption goods, I, or (iii) manufacturing and selling to the government, G. So we have Y = C + I + G.
The "after tax profit", or A, is, by definition A = Y - T.
The "after tax and after consumption profit", or S, is, by definition, S = Y - T - C.
So we have S = (C + I + G) - T - C. Or we can write (S-I) = (G-T).
I will try to read the "The tiny little problem with economics" post and try to understand you model.
In the (S-I) = (G-T) there is no model. You can't say what will happen with one variable (say S) when other variable change (say G). There is nothing forcing any kind of law here. But if someone says "I claim that S is proportional do G", then you have a model - but I don't see MMTers saying that.
So I don't see much meaning in this equation, but nonetheless, I can't say it's wrong.
"Retained Earnings is debited"
Ok. So, correcting myself: when dividens are paid, there is actually an accounting loss. If Matt is right, then the claim "there is no effect on business sector profits" does not hold.
Now I can understand even less of what Brian Romanchuk said.
"Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah."
You are not working with elementary accounting equations. You are working with a model that's in your head. There is no accounting model like the one you are describing, so I think you're talking another language. Maybe it's a better language than the one used today, but I can't even tell. I'm trying to understand what's going on into your head, because it may lead to a very interesting discussion.
Until now, I'm having trouble in understading your model. I tried to post something, but the comment simply gets deleted. I think it's a bug, I don't know.
But here I go. I will try once more:
Suppose you have an economy that consists only of one person and one commodity: apples. There is also an unit of account, and each apple is worth 3 units of account (UA).
A person remembers that she has an apple tree in her backyard. So she decides to gather an apple. After gathering 1 apple, the person will recognize an asset in her balance sheet, called "apple", worth 3 UA, against equity (or "net worth").
That means she will have a balance sheet of 3 UA in the asset side and 3 UA in the equity (or "net worth") side. She will have profit (change in equity) of 3 UA for each apple gathered.
So I can't follow when you say that profit must sum to zero. She had a profit, and there is no business or wage in my example. "Profits must sum zero" is true when you are talking about financial assets, but not true when you are talking about real assets. That's how accounting works. Maybe you are doing some accounting only with financial assets, but then it's not comparable to the MMT equation, that considers real assets too.
"Which part of Qm=-Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit)."
That's simply not true. As I said, a person that gathers an apple from a tree does create value. It's a value addition ("profit") of 3 units of account, if you followed my previous example. And this value addition ("profit") does not remove value from anyone else.
If the person kept the apple for herself, then there was no practical way that the Statistics Authority could account for the value addition ("profit"). But in theory, it should be accounted.
But then that person A actually sells the apple to another person B. Now the Statistics Authority can and do account this transaction. It will be included in the GDP.
The transaction itself actually did not add any value. The value was added when the apple was gathered, not when was sold. So the transaction does not affect anymore the balance sheet of the person A. It also does not affect the balance sheet of person B, who only changed one kind of asset to another: he exchanged the apple for an orange. He gave up one orange that was worth 3 units of account for one apple with the same value, so no "losses" here.
And just one more thing: MMT is about fiat currency, state chartalist theory and "tax drives money" approach. I don't understand exacly how you could "prove that the formal foundations of MMT are inconsistent" if you did not say anything about these fundamentals.
But maybe you did "disprove" MMT or maybe put a good challenge to it, and I'm avid to understand what you are trying to say.
EKH: I am curious. How does one prove "the formal foundations of MMT are inconsistent" - when nobody, including yourself, has formally axiomatized the theory? Writing one's own list of axioms and calling it "axioms of MMT" (or anything else) is not axiomatizing a theory.
I do not think you understand MMT well enough to axiomatize it, or even recognize a semi-formal axiomatization. You certainly don't appear to understand what is most fundamental to the theory - the definition of money. It doesn't appear to me that you have looked at the basic texts and books. The core of the theory is rather more subtle and simple and philosophical than it may look like to many at first; even those at MMT blogs.
I agree with a substantial amount of what you say at RWER, but you usually go rather too far. I would be happy to help you learn MMT, but it is hard to learn anything if one is wrongly convinced they understand it already.understand it already.
You parrot only Econ 101 micro stuff. Take notice that the micro definition is subject to the fallacy of composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Add the tax receipts (and write offs) if you wish to know the overall profit of firms. Is that measurement important? Without looking at other indicators, what will "overall profit" tell us about the performance of the economy?
The macro economy is dominated by commodity production. Business plans are devised around the production and exchange of commodities for money. When hiring labour, the wage contract is most commonly used, which is based upon a profit model. There are of course other profit models, with their respective contracts.
A "theory" of profit should be able to make some predictions. Such a theory would be welcomed!
André,
He is free to make up whatever definition of "profit" he wants. I could define "profit" as a furry animal that purrs, and I could say that there is a "profit" on my lap. However, everybody else would decide that is crazy, and say that thing is actually a "cat".
There is no accepted school of accounting and economics that views dividend payments (or capital expenditures) as an expense that subtracts from profits. The whole point of creating a business is to make a profit, so that you can pay yourself a dividend!
The definition he is using is the net financial flow, which is not the same thing as profits. Everybody knows that net financial flows across all sectors in a currency area sum to zero.
Alright. So Net Financial Flows it is. As I understand, he just defined it with the wrong name, but no big deal. That fact by itself doesn't invalidate his theory. Payment of dividends does change the blance sheet, decreasing assets and equity.
MMT does say that financial instruments net to zero. A financial asset to someone is a financial liability to other, so that's actually in line with MMT.
What I believe is the problem of EKH's theory is that it doesn't acknowledge real assets.
When MMTers say that (S-I) = (G-T) + (X-N) it considers both real and financial assets, so you cannot compare that equation with other equation that considers only financial instruments.
Also, this equation is not a even a theory. It doesn't actually say much thing, despite the propaganda the MMT community makes. So I don't even know what has to be "disproved" here. If someone claims something like "S is always proportional to G by a factor of 2", then you have a model that may or may not be proved with evidence. But I don't think people claim such a thing.
But I'm not very sure if I undertood it right.
So we are talking about the same thing.
Here is how you reach net profit on a P&L (Profit & Loss) account:
Sales revenue = price (of product) × quantity sold
Gross profit = sales revenue − cost of sales and other direct costs
Operating profit = gross profit − overheads and other indirect costs
EBIT (earnings before interest and taxes) = operating profit + non-operating income
Pretax profit (EBT, earnings before taxes) = operating profit − one off items and redundancy payments, staff restructuring − interest payable
Net profit = Pre-tax profit − tax
Retained earnings = Profit after tax − dividends
— Wikipedia/Net_profit
November 1, 2016 at 11:22 PM
The above shows that profit of firms is an accounting residual, comparable to saving for households.
P= R - E
S- I - C
The RHS shows the flows as accounting entries, and P and S are remainders.
I beleive he's got stocks and flows horribly confused.
The accounting identity he sites is a flow. One of the derivable flows if profitability. However profit is not a stock. Positive profit increases the stock of equity for a business but it is not a stock.
In his example of the lady and the apple, she has the stock of one apple asset and a stock of equity equal to one apple. There is no profit because there has been no flow of expenditures!
So this is yet an other "discussion" on semantics? How not...
All this discussions end up being discussions about semantics "you do not understand what "profit" is" is the same as "you do not understand what "money" is".
There is no formalized proof whatsoever going on here... just an other debate about semantics: "with my definition of X you are wrong", well ok, that works the same for everything else.
This is the big problem with economics... fortunately accounting is not really economics as pointed above. And the definition of "profit", fortunately, isn't either rocket science (as it's really an accounting construct) and most people can stick to simple crystal clear definition of it.
Why people does want to make something more complicated than it REALLY is, to obfuscate?
Well Ignacio this is how people operate so you can see how things are so screwed up...
"to obfuscate?"
Noooooo... here is this guy who probably has never taken an Accounting course in his entire life and he is talking all about Accounting... he's simply unqualified...
Over here you have to take a test to become a CPA idk about Europe.. but here there are regulatory requirements and continuing education.... (I have sibling who is CPA...)
Look at the CVs of all of the Peterson people: PoliSci, Law, Econ, MBA, Marketing, no accounting people other than David Walker perhaps who has a BS ...
They use this whacky Modified Accrual in Federal govt here where the liabilities are accrued while the revenues are realized on cash basis so of course it looks bad... which btw who cares it is just accounting ex post as long as everybody is competent and understands the accounting differences it shouldnt matter...
I would bet that Walker doesnt even understand these differing principles between regular business Accrual and Federal Modified Accrual... he and the Peterson people are all looking at it as pure business Accrual (govt as household...)
So again it comes back to training and competency/qualifications and the most vocal morons out there you can see are all unqualified...
If you could get Walker on a show and ask him to briefly explain the differences between Accrual and Modified Accrual I would bet he would go "what is Aleppo?" on you... he wouldnt even know what you were talking about...
So no obfuscation... ie no "neo-liberal conspiracy!" ... they are all just stupid...
Andre,
Over here, there is this website Pinterest which has NO REVENUES ie NO PROFITS yet it has been given a value of $7B (Accrual) and they have never even left VC phase yet....
Matt, Wittgenstein got it right all together...
We are in a constant fight against deformed use of language which shapes flawed perception (although my argument is that many times is the other way around and language does not shape cognition but the other way around, is the deformed perception which deforms meaning and language to keep cognitive biases up, but this an other topic altogether).
Some people just want 'really hard' to the meaning of something be their way so they can be right, I don't mean like a conspiracy, for the simple fact that "I will be right if this is true". IMO we yet don't understand the strong limitations biases have on operations.
There is no back checking of axiomatic definitions against reality, this goes back to Lars post the other day on 'economics as applied math'. I define a concept however I want I can prove anything in an axiomatically closed mathematical system. This is like proving that the syntax of a language is right, but if the meaning is devoid of connection with reality it has no use as science.
There is a huge confusion between proving something right syntactically and proving it right semantically, ie: "with my definition of 'whatever' my proof is syntactically right", yes, but is your definition really right?
This is the real problem with economics.
I'm not able to decipher what part of MMT D.K-H is trying to deconstruct.
Is he trying to conflate the real economy with the monetary economy? Is he an unwitting sophist?
"Wittgenstein got it right all together.."
Yes he was definitely on to it....
"although my argument is that many times is the other way around and language does not shape cognition but the other way around,"
Yes I've seen you say that and it is very interesting... I have been studying that will get back to you on that at some point... Hebrew Scriptures have God scrambling our language at Babel post flood ... I've always assumed this was to slow us down at least a bit maybe to your point it is more than just a bit...
So pre-flood we had subsistence/equilibrium economy and efficient language... post flood we've had surplus economy BUT f-ed up language... (at least these differences...)
Matthew Franko
"Over here, there is this website Pinterest which has NO REVENUES ie NO PROFITS yet it has been given a value of $7B (Accrual) and they have never even left VC phase yet...."
I see. Technically it is wrong to say that "profit/loss" is the same thing as "change in equity". Ok, I took notes.
But for the present discussion, I don't think it's important to make a distinction between profit/loss and other kinds of changes in equity. It may be useful later for other discussions. But I believe we can ignore this kind of detail right now and move on to more important aspects of the discussion. I don't think that it's this detail in nomenclature that could invalidate EKH claims.
I want to understand the model behind EKH claims.
"although my argument is that many times is the other way around and language does not shape cognition but the other way around,"
I don't think LS would have any quarrel with that. He was knowledgeable about psych, anthropology and sociology. But he was not doing that. He was doing logical analysis.
His claim is that one can uncover what is going on with respect to confusion just by looking at how language operates.
This is very similar to the MMT position of starting with monetary operations to determine what is actually happening financially and economically.
LW pointed out that analyzing operations, in his case of the symbolism, is different from nominalism or pragmatism. It is unique and it is foundational.
The difference between LS and MMT is that language is a culture artifact while "money" is both a cultural artifact and an institutional artifact and presently the institutional arrangements make operational analysis very clear. LS is saying that while language use is not exactly institutional although there are established rules of surface grammar that change over time rather slowly.
LW sought to show that analysis of dictionary meaning and the rules of grammar is insufficient to reveal what is really happening at the level of what he called "deep grammar." LW's use of "deep grammar" is different from Chomsky's.
For LW the deep grammar (actual rules being adhered to in language use in particular situations) is contextual. A lot of confusion results from the assumption that similar words mean the same thing owing to identity of sign.
This is a big problem even in the scientific use of math. Variables are defined in terms of sets. The problem is that in ordinary language the actual use of a sign to indicate a set doesn't means that the boundaries of the set are as exact as assumed because the sign is applied with somewhat different rules in different contexts.
K ("capital") is an example in econ. "Capital" is a slippery term.
Another obvious example is "money." R & R presumed that it meant the same thing over a long historical period when the monetary system changed and with it the institutional arrangements establishing the operational rules along with it. So it was adding apples and oranges.
Greenspan famously said that that central banks act as if the world were still on a gold standard even thought that is no longer the case. So here analysis of the institutional arrangements would be misleading, since the policy makers weren't following those rules.
Why did they and do they do this. It seems clear that it is owing to some cognitive bias. It might be different for different bankers and banks. Germans might be cognitively biased toward "morality." Swiss toward thrift. The US and UK toward "sound finance." Some of this could be due to special interests. Central banks in emerging nations might just be conforming to "standard operations." Determining this would require a scientific investigation rather than a logical one. But a logical one would reveal that that the are all operating as if on a gold standard, although the reasons for it might be somewhat different.
"I don't think LS would have any quarrel with that. He was knowledgeable about psych, anthropology and sociology. " Should be LW (Ludwig Wittgenstein) rather than LS.
Matt Franko
For the proper handling of profit, distributed profit and retained profit see (2015a).
André
Accounting and economic theory are like hand and glove. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
It is a big mistake to play accounting against theory/model. At a deeper level they have a common formal core. For the basic model see (2015b).
Calgacus
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”
You are behind the curve, see ‘From Orthodoxy to Heterodoxy to Sysdoxy’
http://axecorg.blogspot.de/2016/03/from-orthodoxy-to-heterodoxy-to-sysdoxy.html
Bob
You are parroting a widely held misunderstanding about predictions. See ‘Science does NOT predict the future’
http://axecorg.blogspot.de/2016/08/science-does-not-predict-future.html
Brian Romanchuk
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details see on your blog
http://www.bondeconomics.com/2016/11/fun-with-accounting-identities.html?showComment=1478091221448#c2577717684502316735
Tom Hickey
The Wikipedia definition is micro, we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C-Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macro one arrives at micro by successive DIFFERENTIATION. Differentiation is top-down, aggregation is bottom up. The methodologically correct way is to start with macrofoundations and then to differentiate. Because of this the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable and as hard as any variable in physics. It is only economists’ brains that are mushy.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110
Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
Adam1, Ignacio
You say: “I believe he’s got stocks and flows horribly confused.”
It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and money.
The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the accuracy of two decimal places. The big problem in economics is not semantics but scientific incompetence, see ‘Feeble minds, shaky assumptions, and the inevitable failure of economics’.*
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL http://ssrn.com/abstract=1917012
* http://axecorg.blogspot.de/2016/07/feeble-minds-shaky-assumptions-and.html
@ EKH
"The MOST ELEMENTARY macro profit definition is Qm=C-Yw."
Sounds like Marx's surplus value = capitalists' profit. I am not offering this by way of criticism. Just inquiring about your view on it.
According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold— Wikipedia/Surplus_value
Egmont Kakarot-Handtke,
"Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory."
100% agreed. What I'm saying is that, when you claim "the business sector’s deficit (surplus) equals the household sector’s surplus (deficit)", you are not following accounting standards, national or not.
In my very simple apple example, that follows accounting rules, it is possible for both business and household sectors to have surplus at the same time. Actually, any individual may have a surplus alone, independent of other individuals. Unless you have some sort of assumption and simplification, which may be the case - I'm just not being able to understand which assumptions you made.
Also, it is not clear how your variables (Qm, C and Yw) relate to national accounting. You have a few mathematical equations that hold no direct relation to national accounting, so it's hard to compare.
But, for me, the most relevant aspect is that you do not talk about currency. You do not talk about currency creation and allocation. You just assume something that is not clear. Probably that the economy employs some sort of commodity currency, or maybe that there is no currency at all, so you are not even trying to challange MMT theory. You just assume away currency, and don't give a reason for it - but it is essential to explain why, if you are challanging MMT.
I mean, I could just say "MMT is wrong because I define it as wrong". That's not the way to discuss a theory. A better alternative would be "MMT is wrong because of evidences X, Y, and Z".
You are parroting a widely held misunderstanding about predictions. See ‘Science does NOT predict the future’
A 'theory of profit' that tells us something useful about the economy would allow for some predictions. There are several theories of profit that have been advanced, but they aren't useful. No predictions or policy prescriptions can be derived from them. The question is whether your Profit Law is useful.
Tom Hickey
Referring to the elementary macro profit definition Qm=C-Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provable false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301
"The difference between LS and MMT is that language is a culture artifact while "money" is both a cultural artifact and an institutional artifact and presently the institutional arrangements make operational analysis very clear. LS is saying that while language use is not exactly institutional although there are established rules of surface grammar that change over time rather slowly."
But Tom you can trace back the language in the documentary records and see where the word "money" came from in the first place which was a figure of speech derived from the name of the Roman temple that was over the numismatic system..... this is a reset t=0 point iow from that point on, ie from the time the word "money" appears, the institutional conditions changed .... so in this case the language can yield clues to what was going on institutionally...
Before that t=0, there was no such thing as the figure of speech "money" ... you can check the documentary records the word is not there....
the authorities would just use the actual name of the numismatic elements (silver, gold, copper) or the nomenclature of the coins (denarius, drachma, stater, etc...) there was not in existence a figure of speech that conflated these systems and f-ed up the terminology...
so which came first the figure of speech which led to the cognitive change in the institution or the cognitive change in the institution which led to the figure of speech?
I suppose could have been concurrent?
Bob
The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.
This said, the elementary Profit Law* indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy breaks down, see (2014).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578
* See Wikimedia https://commons.wikimedia.org/wiki/File:AXEC08.png
But Tom you can trace back the language in the documentary records and see where the word "money" came from in the first place which was a figure of speech derived from the name of the Roman temple that was over the numismatic system.
Etymology is minimally useful in analysis of the logic of language. Use of signs as symbols is everything that that is determined by the context. Terms (signs) are used in many different contexts to signify differently. When they do, the symbols are different even through the sign remains the same. Authors, even those using technical definitions, often do this in a single paper when the technically defined term is also an ordinary language term. To do this inadvertently is a mistake. To do it purposefully for persuasion is sophistry.
Money in ordinary language may signify a number of things. generally many if not most people use "money" and "cash" equivalently to denote their bank balance, for example. Another use of "money" is to denote a set of sets, such as, different currencies. There are many possible uses of the terms "money." LW would say that they are linked by a relationship similar to family resemblances rather than denoting essences. That is to say, there is no common link but rather a web of overlapping rules. Only analysis of a particular contexts will shows the rules that are in play in any particular use.
One of the difficulties is that the context is independent of language. This makes understanding and translation of historical works where the context is either lost or murky difficult to impossible. We may know what someone said, but what was meant by it can no longer be determined with accuracy because the context has to be recreated and there may be different ways of doing this.
There are further nuances. Speakers often know that their words will be interpreted differently within the same audience. This is how code words operate, for example, affording plausible deniability while conveying clear signals to those in the know. Winking is not even necessary.
Referring to the elementary macro profit definition Qm=C-Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provable false, see (2014).
Thanks.
Don’t forget that sound (speech) came first, and then was written down.
Speech (sound) carries its own power. Think of orators like Hitler for a ‘bad’ influence and Joan Sutherland for ‘good’.
Sound, articulated and intoned well, creates very clear thought-forms that are more easily transmissible, impressionable, from one mind to another; logic embedded in the thought-form as an aspect. They carry the understanding of one consciousness to another, mind being the medium. There is also direct communication, and an emerging power of telepathy.
It involves an element of ‘vision’. Consciousness, awareness, vision are synonyms – sound is a tool. The written word loses this power.
The most potent factor is ‘where the speaker is at’. Sound allows listeners to tune in and experience what the speaker is experiencing, and makes the thought-forms more transmissible and receivable. Their ‘truth’ is embedded in the speaker.
The speaker may create a very clear thought-form, but it must be received through the filter of another mind which may colour it beyond recognition.
This said, the elementary Profit Law* indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy breaks down, see (2014).
Excellent. Therein lies the basis for your prescription:
A reduction of the wage rate cannot eliminate loss because it is ρE < 1 that makes the loss. By consequence, the most flexible wage cutting cannot turn the economy around; only an increase of the expenditure ratio could. This does not happen if the household sector aims at full redemption. Note that full redemption is not an accident but a constitutive part of the households’ optimal consumption plans. All boils down to budget balancing over the very long haul. A balanced budget is the economic analogon to a physical conservation law.
I'm interested in what can be tested, and in the kinds of policies that may follow from it.
Theories that have zero utility are plentiful in economics. If you want your theory to distinguish itself outside of the academic community, it has to accomplish something tangible. In this case, better economic management.
André
You say “Also, it is not clear how your variables (Qm, C and Yw) relate to national accounting.” Simply follow the references, see (2012).
You say also “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).
You say finally “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blogpost. This is why references are given. If you follow the references you will find for example ‘Clueless about money and profit’* and when you enter money in the search field you will find much, much more.**
Do not tell I assume something away when you are too stupid to look things up.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL http://ssrn.com/abstract=1895268.
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL http://ssrn.com/abstract=2124415.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569663
* See http://axecorg.blogspot.de/2016/09/clueless-about-money-profit.html
** Google gives you 8300 hits for [“full name”+money]
jr all good points....
Ive talked to people who use sign language and they say you just cant bullshit people with that stuff...
Then there is the scripture that says what pollutes a man is not what goes in his mouth but what comes out of it, etc...
Then there is a scripture repeated 3 times that talks about "hearing but not understanding....observing but not perceiving...." etc...
The story goes that Alexander really cracked down on the Greek language once he took it all over...
"Do not tell I assume something away when you are too stupid to look things up."
Aggressiveness is not the way intelligent people discuss things.
I lost my interest in your theory.
Bye
EKH: Someone is behind the curve. To repeat- "Writing one's own list of axioms and calling it "axioms of MMT" (or anything else) is not axiomatizing a theory."
You have to take a sympathetic look at, make a generous interpretation of - and above all understand, (at least well enough to take a classroom test on it, say) - other people's work to prove it is inconsistent - a strong word, a strong claim. On the other hand, should one be surprised at not being listened to - if one doesn't listen to other people?
One could just as well "prove" your work is inconsistent by taking the axioms of any theory known to be inconsistent & calling that EKH theory. Your procedure is in principle wrong - your link, which I have looked at before, neither mentions nor cites MMT work. (Tómasson and Bezemer is the closest, but they provide no relevant exposition and their concerns are somewhat different, and you cite them with approval.)
From what I have read of your writing, some of which I do like, you still need to do some further reading of MMT in order to comment significantly on it. For one thing, probably unconsciously following Hilbert's good advice - which I think I've seen you quote - MMT considers "simple examples" which are rather simpler than what you call 'the simplest possible examples.' Take a look at John Henry's article on Ancient Egypt in the Alfred Mitchell-Innes MMT book for one that is simpler (and therefore more enlightening a la Hilbert) than any you have considered. What Keynes called "Babylonian madness" is very, very helpful for understanding.
Tom:
There are many possible uses of the terms "money." LW would say that they are linked by a relationship similar to family resemblances rather than denoting essences.
Not really. MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field. This is the sort of question - that such success is possible - that I think EKH (or the modern mainstreamers, the neoclassicals, for that matter) do not err about. He often rightly criticizes other people at RWER - fellow "heterodoxers" for asserting things are confused or impossible to know - when they aren't.
... that's a really good point too Matt: when someone points to their mouth repetitively and with a certain expression on their face, you know they’re hungry, in every language on the face of this earth!
It’s a pity we didn’t have some little green light that comes on our forehead when understanding is sinking in (and an orange one for lying).
Definitely the politicians should all have their mouths duct taped, and not be allowed to open them again until they have daily, sung half a dozen songs from Monty Python:
“So remember, when you're feeling very small and insecure, How amazingly unlikely is your birth, And pray that there's intelligent life somewhere up in space, 'Cause there's bugger all down here on Earth”.
The weird thing is, we have the intelligence, but just don’t use it. So we can hear, understand, observe, perceive etc – but allow greed, cruelty, and confusion??? That’s so wrong. Intelligence is not just SSRN papers (general observation) ....
Calgacus
It is pretty obvious that you do not understand the difference between science and sitcom. This sad fate you share with 99 percent of people who call themselves economists.
When the ancient Greeks invented science more than 2000 years ago they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994).
That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.
And this brings us back to the core issue of this thread. The core issue consists in the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical and eco-friendly.
The representative economist has not gotten the essential point of the scientific method and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms and economic policy advice is not different from poultry entrails reading.
As Popper said, science is conjecture and refutation. MMT has been logically refuted, therefore MMT is out of science. End of sitcom.
It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus, set a good example.
Egmont Kakarot-Handtke
MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field.
This only works if one says that anything that doesn't fit one's characterization is a misuse. That is a POV.
There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.
A single counterexample counters a universal claim.
Is Monopoly money, money or "money." Is stage money, or money or "money." It is obviously "money" in that sense that the term is used coherently in accordance with rules. But is it actually money? How would one decide this. Stage money is used as token for something real (cash) but doesn't actually function as such. On the other hand, Monopoly money is both a token for the real thing and is used in the same way. It was designed as a teaching tool. Would monopoly money be any different if the game were played on the board with actual cash Instead of play money.
Were temple coins money? They had only one use as a religious offering. It doesn't not appear that they had any economic use other than to transfer real goods or financial instuments to "money changers" that served like the tax collectors of the time.
Is there some essence somewhere that can be used as a template for comparison. The essence theory has been discredited in philosophy. It has been replaced by set theory. As far as I know, set theory has not been successfully extended to ordinary language. Nor has a propositional calculus to account for it. These apply to technical usage and specified rules. The rules of ordinary language have not been formalized.
"Money" is a term with broad use in ordinary language, which is a reason that is so tricky when used in technical fields. Even if such terms are defined technically, it is extremely easy to expand their use in the technical setting owing to the cognitive bias brought in from ordinary language use.
All one can do is bring in a definition. But what is the definition is disputed, including among experts in a field. Where is the criterion to decide whose criteria is the only correct one, or even prove that any of the definitions are the only correct one?
So we have one side arguing that only gold is money and another arguing that gold is not money. What is the logically and empirically compelling criterion independent of a POV that a perfectly object expert mediator could use standing outside both systems of rules.
I prefer the Innes view, but I don't find it either logically or empirically compelling either. It's an attempt at "best explanation." Some experts agree that it is, while others do not. Since I am not an expert in the field, what I happen to think is of little matter.
In my estimation, the Innes view of money arising from debt is counter-intuitive for many if not most people. That makes it difficult to argue that it captures the "essence" of what the term "money" denotes. A numeraire like gold makes much more sense to most people as the "essence" of money. This makes putting the debt-based view across as an uphill battle and defending it strikes many people as stretching, e.g., using the no-good-Scotsman argument.
E.K-H has "proven" that a description of monetary operations is incorrect via "proof" that includes both monetary operations and physical (non-monetary) operations.
EHK, you claim all sorts of stances and people have been "refuted" above. Keynes. Davidson.
Refuted by whom? You?
MRW
The links have already been given on Nov 1 under MRW.
Tom Hickey
You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”
This is a widespread misunderstanding among economists.* And the confusion is busily kept alive by political economists. Therefore, it is important to first of all keep in mind that there is political economics (= agenda pushing) and theoretical economics (= science).
Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis1982, p. 698]**
In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong, there is only materially/formally true/false.
Vague blather, untestable wish-wash, inconclusive either-or and storytelling has always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby to save their job has always been the apex of smartness of scientifically incompetent political economists.
So, there are the hard rocks of true and false and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, Austrians.***
It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.
Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits an pieces together in an orderly fashion.” (Schmiechen)
All this is known since more than 2000 years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Economists are either too stupid to understand this or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value since more than 200 years. MMT is no exception.
Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampie.
In sum: There ARE absolute universal criteria of scientific truth and they tell you that MMT is false.
Egmont Kakarot-Handtke
* See ‘Humpty Dumpty is back again’
http://axecorg.blogspot.de/2015/11/humpty-dumpty-is-back-again.html
** See also ‘Marshall and the Cambridge school of plain economic gibberish’
http://axecorg.blogspot.de/2016/09/marshall-and-cambridge-school-of-plain.html
*** See ‘Economic recommendations out of the swamp between true and false’
http://axecorg.blogspot.de/2016/04/economic-recommendations-out-of-swamp.html
"There ARE absolute universal criteria of scientific truth and they tell you that MMT is false."
Fercrissake, E K-H, MMT is about accounting, double-entry accounting. That's what the government uses. Well in fact it is quadruple-entry accounting, which Scott Fullfiler has pointed out that every accomplished accountants can't figure out (Link Above). Look at the Daily Treasury Statements. Various MMY-styled blogs infect it with politics or social engineering, but Warren Mosley has maintained from Day One that the accounting is separate from the politics of how it's used.
Warren Mosler. Goddam Autocorrect on iPad changes it to Mosley.
MRW
You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”
Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.
Accounting is elementary mathematics and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.
In the elementary consumption economy* three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i) wage income is assumed to be Ym=100 monetary units (e.g. trillion dollars) and consumption expenditures are assumed to be C=100 monetary units. Then the monetary saving of the household sector Sm=Yw-C is zero and the monetary profit of the business sector Qm=C-Yw, too, is zero.
In case (ii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=-10. The whole output is sold, i.e. O=X, and the market clearing price P is now lower than in case (i).
In case (iii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=-10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market clearing price P is now higher than in case (i).
It always holds (a) Qm+Sm=0 or Qm=-Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the MOST ELEMENTARY form of the PROFIT LAW for the economy as a WHOLE.
When government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T-Cg)=0 or Qm=-Sm+(Cg-T) or Qm+Sm=(Cg-T), that is, the red ink of the government sector (Cg-T) corresponds to the blank ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note, that in the last few years total household sector saving has been negative (-Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm=-Sm+(Cg-T).
Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (Cg-T) is equal to the business sectors monetary profit Qm, in other words government’s red ink is business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all times. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do NOT think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this due to the fact that economists in general and MMTers in particular are too stupid for the elementary mathematics of national accounting.**
Egmont Kakarot-Handtke
* The macrofoundations are given with three structural equation: 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 details see
‘Accounting basics’
http://axecorg.blogspot.de/2015/10/accounting-basics.html
Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (Cg-T) is equal to the business sectors monetary profit Qm, in other words government’s red ink is business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all times. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do NOT think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this due to the fact that economists in general and MMTers in particular are too stupid for the elementary mathematics of national accounting.**
Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation). I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent seeking behavior (as explored by Michael Hudson, for example).
If sectoral balance based-macro (which MMT is) and functional finance (which MMT recommends as policy) are to be used in addressing the balance of growth, employment and price level, using automatic stabilization with a buffer stock of employed by instituting an ELR, then skewed distribution owing to economic rent must also be addressed.
Warren Mosler has proposed addressing land rent with a land tax and other forms of economic rent with legislation and regulation.
But it is true that MMT-based policy being advanced is addressed at employment rather than distributional effects taking capital/labor share and economic rent into consideration. I think in their view, first things first and employment policy is the priority politically.
Tom Hickey
You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”
Take notice that Kalecki is wrong. See paper ‘What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845803
You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent seeking behavior (as explored by Michael Hudson, for example).”
Take notice that the concept of rent is false. See paper ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932119
Egmont Kakarot-Handtke
What is MNE?
What is MNE?
Mike Norman Economics
Of course! Thx
Typo in post MRW of Nov 6
In case (i) wage income is assumed to be Yw=100 (instead of Ym)
and so on in case (ii) and (iii).
Sorry!
It is pretty obvious that you do not understand the difference between science and sitcom.
Perhaps. But I am the straight man, the foil in this sitcom. :-)
These equations prove that the formal foundations of MMT are inconsistent.
What "formal foundations of MMT"? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them. Your "refutation" is founded on nothing but the rhetoric and doxa you purport to criticize. To refute a theory you have to discuss it, what the theory asserts, to actually cite some work of the theory. You simply don't bother.
Even if you were right, you are asking the reader to do 90+% of the work of the refutation, which would be to connect what you say (what you say MMT says) with what MMT does actually say, e.g. in a work labelled MMT - say something by Mosler, Wray, Mitchell, Fulwiller, Kelton, Forstater etc. So there just isn't any proof there. A (very insufficiently founded) claim of a proof or refutation is not the same thing as a proof or refutation. What you are doing just isn't how it has ever worked in any discipline - except in sitcom land, I guess.
I am mostly fine with your views about science etc. I've expressed my appreciation at RWER, against many there who have much more theoretically confused and defective views. The problem is that your work fails based on the (pretty good) criteria you present, on very simple and formal levels. If one doesn't do minimal things that would be very easy if one understood a theory enough to refute it, that are ALWAYS done in any refutation in any discipline, how can you expect anybody to take the "refutation" seriously, to even bother to read it? I for one haven't even tried to follow this "refutation."
(1/2) Me, Calgacus: MMT & some predecessors successfully define money, determining its unique essence, rather than observing a mere family resemblance about as well as anything has been defined that way in any field.
Tom: This only works if one says that anything that doesn't fit one's characterization is a misuse. That is a POV.
What if there just isn't anything that doesn't fit the characterization? That is my statement.
The meatiest thing below is: "A single counterexample counters a universal claim."
I agree. My statement is that there are no counterexamples. You haven't given any. At least not stated clearly, in a way that I understand. I can explain to you or anyone how stage money or Monopoly money, under ordinary interpretations, is money, as used in MMT. But one has to be careful as always: The money in a game of Monopoly is not the pieces of paper.
Is there some essence somewhere that can be used as a template for comparison. The essence theory has been discredited in philosophy. It has been replaced by set theory. As far as I know, set theory has not been successfully extended to ordinary language. Nor has a propositional calculus to account for it. These apply to technical usage and specified rules. The rules of ordinary language have not been formalized.
It is a distraction and a digression - and I will not say more about it, for this is one of my major points, to not get bogged down into a discussion of such impractical and not immediately relevant matters (like essences, language games, rules, Wittgenstein and family resemblances): but I disagree with everything above, and I contend that the movement all over philosophy has been against such extreme "analytic philosophy" for 40 to 50 years and more. Starting at least since the later Wittgenstein :).
Set Theory is a branch of mathematics with major foundational use in mathematics. There are more recently developed branches that are "better" foundations, more in line with a more classical, Aristotelian, retrospective conception of "foundation", than the dogmatic "ultimate basis" type of foundation that Set Theory along with First Order Logic purported to be for much of the 20th century, and which had some definite negative as well as positive effects on philosophy. As for discrediting, I follow Hegel: "No philosophy that deserves the name ever has been or can be refuted".
I am talking in practical terms. Anything people have ever called money anywhere fits the MMT definition just fine. Can't say that about any other definition. Modern philosophers, even some good ones, waste a lot of time that could be better spent IMHO talking about things like "Is water H2O?" I anticipated this kind of quibbling when I said "about as well as anything has been defined that way in any field." I am saying Money is a credit/debt relation a la Innes, MMT etc - is as good a definition as "Water is H2O". "Counterexamples" and quibbling is about as impractical and unimportant as the modern Water / H2O "debate". Some chemists once thought water was HO. They were wrong. Like the commodity theory of money, it may have a wee bit of truth in it, but it doesn't really work. Real, definite, true progress is possible.
Some arguments you are giving, like EKH's aren't really appropriate. They are too universal, too (in pretense) strong. They never come to grips with the matter, with what MMT actually says. They're just free-floating skepticism that could be directed at anything. Sure, if one wants to be skeptical for no definite reason, fine. But that is just a desire to not understand, not an argument.
(2/2)
All one can do is bring in a definition. But what is the definition is disputed, including among experts in a field.
I disagree that the MMT definition is disputed. It is simply ignored, and not heard of. The MMT definition isn't disputed seriously, mainly because it isn't understood. If one understands it, there is no way to conceive how to disagree seriously, to not be compelled. And there have been people who do understand it, but don't understand the consequences, don't understand how the creditary point of view makes everything so much simpler, makes so many consequences obvious. (Perhaps the accountant you know who got it instantly is one of these.) The problem is not that MMT etc is counterintuitive, but that it is hyperintuitive. The problem with the social sciences is not that there is so little knowledge, but that there is so much, so much that everyone finds social knowledge so easy that they have a hard time understanding what they know already. The problem is what was already in Hegel's time "the foolish modern prejudice" that social knowledge is impossible, only knowledge of nature is easy and possible. Many natural scientists form one the largest contingents to not hold this prejudice - they know how hard what they do is!
In my estimation, the Innes view of money arising from debt is counter-intuitive for many if not most people.
That is NOT the Innes / MMT view. Money doesn't "arise from debt." It is credit / debt. Water doesn't "arise from H2O." It is H2O. There are subtleties, but to get to serious arguments - I'm thinking of some I had (and never finished posting about) with Dan Kervick - "Refuting" Dan made me understand things much better- one has to stop making non-serious arguments. The non-serious, free-floating kind of arguments that chemists who really wanted to know just what compound of H and O water is never made. The ball is in EKH's court to explain how what he says has anything to do with MMT. The ball is in your court to give a specific concrete example of any problem with the MMT understanding of money that is intelligible to the man in the street.
Calgacus
You quote me “These equations prove that the formal foundations of MMT are inconsistent.” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”
False. I refer in my posts to the formal foundations that haven been presented at many places and that are COMMON knowledge. Either you do no follow the references or you are not familiar with the MMT accounting equations.
For the proof see my post on Bill Mitchell’s blog ‘Modern moronomic theory’
http://axecorg.blogspot.de/2015/08/modern-moronomic-theory.html
It reads:
“The fundamental flaw of your argument is to take national accounting at face value. With this, you unfortunately share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income an profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).
Already your first equation GDP = C + I + G + (X – M) is logically defective and by consequence the rest of your argument. This holds in particular for (I – S) + (G – T) + (X – M) = 0 which boils for the most elementary case down to Keynes's I=S (Keynes, 1973, p. 63).
...
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.
Because your profit theory is false your monetary theory, too, is false (2015, Sec. 7).”
One more time: The formal foundations of MMT are defective and because of this the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fulwiller, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.
Egmont Kakarot-Handtke
@ Calgacus
You are asserting a theory of money, one which I happen to agree with.
What you have said as I read it is that foundations are disputed and you that "know" your foundations are the correct ones based on reasoning and evidence you accept, but not all do.
Well, that is precisely the issue. Anti-foundationalism arises from the inability to establish foundations based on universal absolute criteria that unassailable.
Yes, a "philosophy" as the articulation of the foundations of a world view, or lack of foundations, can never be refuted if the view follows logically from the foundations — as long as the debaters agree on the logic, which is not always the case.
So Hegel with a dialectical view is one view, absolutisms of various types are other views, skepticism is another view, and relativism is another. They are all correct from a particular POV and they represent the multifarious facets of human "knowledge."
There are different ways of seeing "reality," which is even a knottier term than "money." One view is that these different POV's are different constructs, and that "reality" is social, that is, a social construct. Many social constructs of the same data (sense information) are possible. Owing to this different explanations arise. Shifts take place even in the same construct and nuance is common. "Reality" is not homogenous as a mirror image of the objective world in all subjects. The same "facts" can be interpreted differently.
If one begins with "commodities are exchanged in markets for commodities," then from this POV "money" is a commodity and labor power is also commodity.
If one begins with commodities are exchanged for money, which is not a commodity, and labor power is not a commodity either, then the first view cannot be correct.
Then there is the Mehrling "hierarchy of money" with gold at the apex in a fixed rate system in which money is redeemable for gold. If gold is not somehow "money," what is it doing in a hierarchy of "money."
continued
continued
An interesting example is block chain. What constitutes "money" is a legal question, and courts in different jurisdictions have ruled differently about block chain. In some jurisdictions it is "money" and in others it is "property," hence not money. In those various jurisdictions block chain is institutionally what the courts say it is.
I will believe that questions such as these are decidable definitively when decided definitively based on publicly available criteria that are compelling of assent. But that still leaves the question of whether mutual assent is agreement within a particular POV rather than based on supposed "real essences" that transcend all POV's as absolutes, like Platonic forms or Aristotle's formal causes of things that the active intellect apprehends though intellectual intuition and with which the passive intellect is informed.
So far, I haven't seem any commodity theory types persuaded to abandon their views based on opposition they accept. Rather the argument is driven back to mutually exclusive assumptions that are foundational. The arguments end politely with agreeing to disagree or in exchanging insults, as we have seen here at MNE on occasion.
My view is that theories are explanations, and the goal is best explanation rather than "final truth." What constitutes "best explanation" is controversial just like almost everything else where competing explanations are possible.
My view is that "best" explanations based on the criteria of correspondence, consistency, economy, and usefulness are tentative on a the possibility of better explanation forthcoming. This is especially relevant in the case of a complex adaptive systems in which emergence is a factor, like social systems, where finance and economics are artificial social constructs and subject to change.
I have concluded from my non-experts study that the MMT is the best explanation available. But the analysis is disputed in the Post Keynesian community, with which MMT is most closely associated.
Rather than being the definitive answer, the MMT view of money appears to me to be a disputed claim at this point. In my view, if that claim is accepted, then a lot of other things fall into place. As a best explanation is more comprehensive than other explanations, while also economical and useful, e.g., in macroeconomics and policy. Being accounting based, it is perfectly consistent, since all accounts must balance across the whole system. If this is the case, then the MMT can be expected to replace other views as more effective and efficient.
Calgacus
You complained: “What ‘formal foundations of MMT’? You just use the phrase.”
You can find the formal foundations also on Wikipedia. See my comment: ‘Wikipedia and the promotion of economists’ idiotism’
http://axecorg.blogspot.de/2016/11/wikipedia-and-promotion-of-economists.html
Egmont Kakarot-Handtke
What a brilliant discussion
Economics is hard enough but nothing is able to seep through the grey matter without reading things dozens and dozens of times...after reading MMT and AXEC for nearly two years now I am in agreement with AXEC, however I would prefer to explain it by re-labeling the business sector as that part of the household sector which owns businesses (those who receive passive income one way or another) compared to the rest of the household sector which does not.
Once the business sector is seen as being owned by a section of the household sector, then the net wealth of that part of the household sector is made up of government deficits and the dissavings of the rest of the household sector
The ratio of income received by the first class (passive) compared to the income earned by the rest (active), which is the profit ratio can only increase/decrease when the expenditure ratio (C-Y) also increases/decreases, and the expenditure ratio can only increase if govt deficits and household debts increase (+ exports). The passive incomes received by the upper classes depends solely on the expenditure ratio and nothing else.
As more and more people seek to establish and increase their ability to receive passive income (increased middle class), the profit ratio must increase and the real wages of the rest must decrease. No amount of increased employment fixes what the increase in profit ratio does to real wages or to the fact that govt deficits + household debts must also increase.
An illustration of the decline in real wages over the last 40 years
https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/1500/attachments/original/1497298286/Labour_Share_Hits_Record_Low.pdf
Please critique me if I have any of this wrong Egmont
Having just spent some hours attempting to tease anything of practical utility (meaning: anything which might inform criticism of the "rationale" for existing macroeconomic policies and go on to suggest an intellectually-plausible basis for alternative policies capable of improving upon the (IMO pretty disastrous) societal results they produce) out of E.K-H's posts, one shaft of light has - a bit belatedly - dawned. (A lot of wasted time would have been saved if it had occurred to me after the first one or two).
It is this:- that the strength of any protagonist's argument is inversely related to the quantity of gratuitous invective s/he finds her/himself obliged to use in "support" of it. Measured by that criterion, E.H-K's argument can be scientifically measured (I hereby promulgate) to be totally invalid.
His position boils down to:- "I have a monopoly of widom; therefore anyone who disputes my pronouncements must ipso facto either be a complete idiot or a charlatan". There's nothing whatever to be gained by engaging in discourse with any person taking such a position: effectively that person has chosen to isolate himself inside a hermetically-sealed chamber.
Post a Comment