Tuesday, December 6, 2016

Bill Mitchell — Our affect is driving us back to a need for continuous fiscal deficits

The field of psychology is usually ignored by mainstream economists, which, in its typically arrogant and closed practice, adopts a series of a priori assumptions about human behaviour – the so-called Homo economicus – where were are always rational and self-interested and, as a result, always make choices that maximise our present and future well-being based on available market signals. Real world forces that condition actual human behaviour, such as cognitive biases and irrationality, in general, as well as cooperative and collective behaviour is ignored by mainstream neo-classical (free market) economic theory, because admitting its dominance in human decision-making would void the entire edifice of that theory and scuttle the authority that is given to the on-going narratives about deregulation, small government, privatisation, pernicious cutting of income support, and the rest of the economic policies that have defined this dysfunctional neo-liberal era. But humans do not behave in the way economists suggest. We are a complex mass of irrationality, custom, habit, and affect. We certainly use cognitive processes in our decision making but often we take shortcuts based on affect. These tendencies are pushing our behaviour back to what was normal before the credit binge that led to the GFC. This shift in our behaviour is associated with stagnation and entrenched mass unemployment. But the reason for these parlous outcomes is not that we have returned to more normal spending behaviour but, rather, because governments have not realised that they had to return to more normal behaviour as well. Instead of promoting the benefits of austerity (in the face of all evidence to the contrary), governments should have been promoting the benefits of continuous fiscal deficits to support non-government saving desires and maintain better employment outcomes and stronger income growth.….
The problem is not with the model based on homo economicus but with the scope of its application. The conventional interpretation of the model assumes the scope of the model is sufficiently congruent with actual affairs to approximate reality closely enough to be the foundation for policy analysis and formulation. However, outcomes reveal that the restrictive assumptions on which such models are based limit the scope so much that the model is not as representational as assumed and so the models fail as a policy tool.

There is also the issue of scale. The assumption is that the microfoundations of the model underlie macro behavior and can be used to project macro behavior. However, this involves the fallacy of composition, when it is assumed that what is true of a part of the whole is true of the whole. It also fails to take into account synergy, that is, the whole is greater than the sum of its part owing to relationships, interaction, feedback and reflexivity.

Modeling that restrictively assumes homo economicus, methodological individualism and a representative agent for tractablity fail owing to both scope and scale. Simple is a feature. Simplistic is a bug.

Some of the reasons for this failure of models based on homo economicus as policy tools are found in the psychological factors that Bill calls to attention. These psychological factors strongly influence individual preference and behavior and also underlie sociological effects that strongly influence group behavior.

Bill Mitchell – billy blog
Our affect is driving us back to a need for continuous fiscal deficits
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

15 comments:

AXEC / E.K-H said...

Rethinking MMT
Comment on Bill Mitchell on ‘Our affect is driving us back to a need for continuous fiscal deficits’

Bill Mitchell is right: mainstream economics is a failed approach and irrecoverably lost in the parallel universe of error, inconsistency, feeble-mindedness and aberration.

Bill Mitchell is wrong in believing that MMT is on the right track.

MMT is caught in the PsySoc trap by maintaining that economics is about human behavior. The crucial point is that economics deals not primarily with individual human behavior or society at large.#1 This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera.

The first point to realize is that economics is about the behavior of the economic system. Economics is NOT a social science but a system science.

The second point to realize is that all variants of Keynesianism suffer from methodological self-delusion. Davidson maintains: “Post Keynesian models are designed specifically to deal with real-world problems.” And Mitchell adds: “In this tradition, MMT ... is not an imaginary approach that deals with imaginary problems. It is about the real world and starts with some basic macroeconomic principles like ― spending equals income.”

Time to wake up to the fact that this ‘principle’ is provable false since Keynes applied it in the General Theory (2011). Because of this, the whole analytical superstructure of Keynesianism, Post Keynesianism and MMT breaks apart. From this follows that policy guidance with regard to monetary and fiscal policy has no sound scientific foundation.

What Keynes and After-Keynesians never understood is profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

Because Keynesians/MMTers do not understand profit they do not understand what deficit spending really means: “When government is added to the pure consumption economy then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.”#2 In simple terms: government deficit = business profit.

Whatever Keynesians/MMTers argue about deficit spending is irrelevant. Because they do not understand the elementary economic relationship between deficit and profit, they de facto initiated the greatest profit boost in the history of humankind. The actual distributional problems are ultimately the handiwork of Keynes/Keynesians/MMTers.#3

The self-delusion of MMTers consists in the fact that they complain about the wedge between real wage and productivity and a perverse distribution of income/wealth while the fact of the matter is that all theses phenomena are the direct result of massive public deficit spending, which they propagate.

With regard to economic policy MMT is not part of the solution but part of the problem.

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL http://mpra.ub.uni-muenchen.de/20557/

#1 See ‘Economics is NOT a science of behavior’
http://axecorg.blogspot.de/2015/12/economics-is-not-science-of-behavior.html
#2 See ‘Wikipedia and the promotion of economists’ idiotism’
http://axecorg.blogspot.de/2016/11/wikipedia-and-promotion-of-economists.html
#3 See ‘Keynesianism as ultimate profit machine’
http://axecorg.blogspot.de/2015/07/keynesianism-as-ultimate-profit-machine.html

Bob said...

Have you tried posting this comment to his blog?

Matthew Franko said...

"MMT is caught in the PsySoc trap by maintaining that economics is about human behavior."

That's because theyve never been trained in material systems...

Take a look at the Roth post from a few days ago down-thread... these people dont even take basic Accounting 101... much less Chemistry, Physics, Material Science, Electricity/Electromagnetism, Nuclear Physics, 2 years of Calculus followed by 2 years of applied Calculus, etc...

They never get a multi-year immersion in a STEM discipline which is where you have to go to get any training in systems theory as there are no majors in General Systems Theory out there undergraduate...

And then most of the MMTers are left which is where the non-material people congregate politically so then they end up trying to teach the unqualified left so there is little chance of success with those people at all...

Calgacus said...

EKH: Genuine Keynesians since Keynes and Kalecki, like Lerner or MMTers have been well aware of the effect of deficit spending on profits. That's one reason they distinguish between good and bad deficits, and unlike hydraulic/bastard/neoclassical Keynesians, want targeted deficit spending, and observe that "functional finance is sounder than sound finance". Sound finance leads to "massive public deficit spending", not Keynes/FF/MMT. Good deficits are smaller than bad deficits.

As I have said, you don't seem to be too familiar with MMT, in particular with its foundations, which you misidentify. Surely you agree that not looking at what the members of a school say are its foundations (For MMT, read Mitchell-Innes & commentary above all) is not the way to make serious criticisms of its foundations? This has nothing to do with MMT, just ordinary scholarship.

Denying that economics is a "human science" or that "income = spending" in some sense, the usual senses (I am sure human creativity has come up with misinterpretations that make them untrue) is just nuts. Arguing with that is like arguing tactics at Waterloo with someone who insists he is Napoleon.

AXEC / E.K-H said...

Calacus

You are caught in a loop: “As I have said, you don’t seem to be too familiar with MMT, in particular with its foundations, which you misidentify.”

In my post, I quoted Mitchell verbatim: ”And Mitchell adds: ‘In this tradition, MMT ... is not an imaginary approach that deals with imaginary problems. It is about the real world and starts with some basic macroeconomic principles like ― spending equals income.’”

For everyone who can read, “spending equals income” is the foundation = basic macroeconomic principle of MMT.

It is pretty obvious that you cannot read, are not familiar with the foundations of MMT, and have severe troubles with elementary logic.

I have given the formal refutation of “spending equals income” elsewhere. Just follow the references.

In sum: Keynes, Post Keynesians like Kalecki, Davidson, Minsky etcetera*, all After-Keynesians except Allais, MMTers, and, of course, Calacus are scientifically incompetent. And this explains why economics is a failed science.

As Napoleon recognized long ago: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Egmont Kakarot-Handtke

* See ‘Heterodoxy, too, is scientific junk’
http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html

AXEC / E.K-H said...

Calgacus

Sorry for misspelling your name in the previous post.

EKH

AXEC / E.K-H said...

Calgacus

See also the related post ‘Why economists know nothing’
http://axecorg.blogspot.de/2016/12/why-economists-know-nothing.html


Bob

Your Q: Have you tried posting this comment to his blog?
My A: Yes.

Calgacus said...
This comment has been removed by the author.
Calgacus said...

EKH: I sketched an "informal" refutation of your "refutation" above. I will repeat it. Of course there are going to be some ways to in interpret any statement whatsoever to "refute" it. What is interesting is finding ways to agree, to not refute, to understand. If I have a store and you spend a dollar there, is this spending of yours equal to this income of mine? Yes or no? Are you saying there NO sense in which spending = income?

Some of the people I list below have criticized some of Keynes's use of identities in the General Theory, btw. But the practice in science and mathematics is not thinking of refutation as making a work worthless but - is the idea basically right? - are errors in the details fixable? - can you explain it in words, or at worst, writing on a napkin? :-) Bill Mitchell is not the most foundational of MMT thinkers (the Kansas City school is much more foundations oriented, as well as people like Geoffrey Gardiner, Geoffrey Ingham)

I can refute anybody I want by selective quotation and bad logic. That is not a recognized test of knowledge and understanding. It took a while for MMT to make sense to me, but some of the MMT guys have told me I understand the theory. That is good evidence that I am not "in a loop". Have any of them told you the same?

As I have earlier said, I have not looked at your stuff. That's because while you seem to be a smart guy, you don't seem to be following basic common sense scholarly norms, to not understand self-criticism and what you criticize, or napkins. So even if you have something right to say, there would be just too much work in extracting it.

AXEC / E.K-H said...

Calgacus

You have serious troubles with logic. You argue: “If I have a store and you spend a dollar there, is this spending of yours equal to this income of mine?”

NO. If I spend one dollar on a product that costs you 5 dollars you make a loss of four dollars. Loss is NOT income, profit is NOT income, only distributed profit is income. Economists in their hereditary stupidity have not figured this out in the last 200 years and this includes MMT and Calgacus.

The rest of your post is as crappy as your “refutation”.

Egmont Kakarot-Handtke

Calgacus said...

EKH, I am trying to say that if you give me a dollar and I get a dollar, that there is an equality there. The increase in dollars in my pocket can be said to be equal to the decrease in dollars in yours. Something utterly "trivial". Do you disagree? If I didn't explain that correctly, my bad.

I agree with you that most economics defines things atrociously, horrifying badly, and behaves in a ludicrous way towards questioning of this state of affairs. But MMT tries to be an exception. The point is that all the work is in the definitions; that is pretty much the viewpoint of modern mathematics: Define things right and everything becomes clear.

So if you want people to not ignore you, put the definitions you are using at the fore. The equations etc are just boring window dressing that can be reproduced by anybody with mathematical competence more quickly than it takes to read them. Again, if I am allowed to define things as I like, or keep them hidden, then I can "refute" anything. If you want to say everybody is wrong and you are right, then fine. You aren't going to get anywhere if you don't focus on areas of agreement and then build on that.

Another point: you seem focused on (monetary) profit. But surely the question of what money is is more basic? How can anyone hope to understand monetary profit if they don't understand money?

So what do you think money is?

MMT has a good, clear answer, following but simplifying the institutional/Keynesian tradition. Do you have an answer?


AXEC / E.K-H said...

Calgacus

When you tell me the sun goes up then I can readily agree to this trivial factual statement. This, though, is NOT the point at issue, because the point at issue is that your underlying theory of the movements of sun and earth is false. In other words, your problem is that you are a flat-earther.

Likewise, when you tell me that if you give me a dollar I have one dollar more in my pocket and you have one less. This is not trivial, this is brain dead. What is at issue in economics is the definition of the foundational concepts of income and profit.

If you give a beggar a dollar this is neither income nor profit but a transfer. An economist should know the difference between these concepts.

Again: For the economy as a whole (= macro) the statement spending equals income is FALSE.#1 This is the point at issue and NOT your silly one-dollar micro story.

Flat-earthers/commonsensers/imbeciles are a problem in all sciences but particularly in economics and John Stuart Mill said already all there is to say: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”

Needless to emphasize that the bigots of common sense did not grasp that what Mill told them was the polite version of Piss off!

One outstanding characteristic of the bigots of common sense is to maintain that definitions are more or less arbitrary.#2 This, of course, is NOT the case as scientists are well aware of. Economics, though, is NOT science but what Feynman famously called cargo cult science.

You give me the advice to “focus on areas of agreement and then build on that.” Note that there is NO area of agreement between a false and a true theory. Falsified theories are simply thrown into the waste basket.#3 This applies to MMT.

You ask me now: “So what do you think money is?” Above you said: “I have not looked at your stuff”. It seems that your attention span is that of a fruit fly. The point at issue is that the formal foundations of MMT are defective and NOT the entirely different issue what money is.#4

I said above that economists in their hereditary stupidity have not figured out the difference between profit and income in the last 200+ years.

I should have added “with the honorable exception of Allais.”#5 But this addition does not save economists from scientific hell because it proves that the intellectual Lumpenproletariat is not only unable to solve fundamental conceptual problems but does not even see the solution when it is written in an unassailable formula on the blackboard before their eyes.

The fact of the matter is (i) that Keynesianism/Post Keynesianism/MMT is based upon a set of foundational concepts that is PROVABLE false, and (ii), that the bigots of common sense have not realized this in the past 80 years.

The urgent problem of economics is how to get rid of the intellectual Lumpenproletariat/bigots of common sense/throng of superfluous economists and, last but not least, Calgacus.

Egmont Kakarot-Handtke

#1 See ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
#2 See ‘Humpty Dumpty is back again’
http://axecorg.blogspot.de/2015/11/humpty-dumpty-is-back-again.html
#3 See ‘Methodology 101, economic filibuster, and the mother of all excuses’
http://axecorg.blogspot.de/2016/12/methodology-101-economic-filibuster-and.html
#4 See ‘Reconstructing the Quantity Theory (I)’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1895268
#5 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

Calgacus said...

The point at issue is that the formal foundations of MMT are defective

MMT is based upon a set of foundational concepts that is PROVABLE false,

MMTers disagree with you about what the foundations of MMT are. What you are calling "the formal foundations" is not as important as you think. The definition of money is what is important to the MMTers. Is ignoring what the practitioners of any scientific theory say are the key points a sensible way of judging the theory?

One outstanding characteristic of the bigots of common sense is to maintain that definitions are more or less arbitrary.

Well, I could not disagree more with the bigots of common sense then. As I said above, the definitions are all important. They are usually very simple and make everything else simple and obvious too. But they are usually hard to attain. That is the viewpoint of modern mathematics.

What is at issue in economics is the definition of the foundational concepts of income and profit.

But don't you think this implies it is important to actually give the definitions? If you refrain from doing so, how is anyone to understand what you are saying? I looked up definitions of "income" - they seem to presuppose "money". So what definition of "income" or "profit" are you using? If they are based on "money", what definition of "money" are you using - and how could that not be relevant? If not based on money, I think my ignorance of your definitions is pardonable; and if it not based on money, why would one expect your definitions to be relevant to today's money using economies?

I appreciate the reference to Allais in paper #5 - doesn't seem to be available easily online though. Do you have any reference other than Les fondements comptables de la macro-économique?

By the way, I never claimed to be an economist.

Note that there is NO area of agreement between a false and a true theory. Falsified theories are simply thrown into the waste basket.#3 That isn't how it works in any science or in math. Everybody makes mistakes. Later generations build on their predecessors and get truer theories. Standards of rigor improve. Throwing a theory into a wastebasket is a pretty rare event.

AXEC / E.K-H said...

Calgacus

You say: “MMTers disagree with you about what the foundations of MMT are. What you are calling ‘the formal foundations’ is not as important as you think. The definition of money is what is important to the MMTers.”

You are wrong and it is easy to prove. Go to the top of this page to the section labeled Links and then click MMT Primer.#1 You get the TOC of Randy Wray’s book Modern Money Theory and, lo and behold, after the Introduction the next heading is The Basics of Macro Accounting.

And this is EXACTLY the topic of this thread. And here is the bottom line: The formal foundations = basics of macro accounting of MMT are PROVABLE false.

Your attempt to draw attention away from the pivotal point is ridiculous. Yes, MMTers have written about many other things but this is IRRELEVANT. Because when the formal foundations are false the rest of the argument is scientifically WORTHLESS although it may contain many commonsensical truths to which everybody can readily agree.

This applies also to Keynes who messed up the formal foundations of Keynesianism in a two-liner on page 63 of the General Theory.#2 This two-liner invalidates Keynesianism until this day.

Note that ALL false theories in the history of science have been very commonsensical, which, by the way, is the secret of their persistence. This starts with Aristotle’s theory of motion which is more commonsensical than Newton’s theory. Every bigot of common sense can immediately refute Newton’s First Law which states “an object either remains at rest or continues to move at a constant velocity” and corroborate Aristotle, who said that an object seeks its natural place of rest, by simply throwing a stone.

A theory can NEVER be judged by its commonsensical or ‘realistic’ elements. A theory is judged by the criteria of material and formal consistency. MMT is formally inconsistent.

Everybody can check the proof. This is how science works. Everybody who does their scientific homework agrees that the formal foundations of Keynesianism/Post Keynesianism/MMT are inconsistent. That MMTers do not agree shows only that they are incompetent scientists.

Or, as James Kwak put it on another occasion: “Economism is a logical fallacy ... Intelligent economists know this. Those who don’t realize it are unintelligent. So take your pick between liar and moron.” Or, even better, take both.

Egmont Kakarot-Handtke

#1 MMT Primer
http://neweconomicperspectives.org/modern-monetary-theory-primer.html
#2 See ‘What Keynes really meant but could not really prove’
http://axecorg.blogspot.de/2016/05/what-keynes-really-meant-but-could-not.html

AXEC / E.K-H said...

Calgacus

ICYMI Macro for dummies
Comment on heteconomist on ‘Short & Simple ― Total Spending Equals Total Income’
http://axecorg.blogspot.de/2016/12/macro-for-dummies.html

Egmont Kakarot-Handtke