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.
Where MMT got macro wrongComment on Bill Mitchell on ‘MMT is what is, not what might be’MMT consists of a political part and a theoretical part. The MMT developers “set out in the early 1990s to construct a better way of doing macroeconomics.” In the following, the exact point is located where MMT-macro went methodologically wrong. The political part of MMT is not adressed.Methodology demands to start with the most elementary economic configuration. In the beginning the economy consists only of the household and the business sector. No public sector, not foreign trade.MMT is right, microfoundations is the wrong approach. The correct approach is macrofoundations.#1,#2 The elementary version of the objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia:https://commons.wikimedia.org/wiki/File:AXEC62.pngFrom this equation follows:(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.(ii) Increasing investment expenditures I exert a positive influence on employment.(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R.Total monetary profit for the economy as a whole is given with Qm≡Yd+(I-Sm)+(G-T)+(X-M), which reduces to Qm≡I-Sm for Yd, G, T, X, M = 0. The reduced macroeconomic profit equation says that the monetary profit of the business sector Qm is equal to the difference between investment expenditures of the business sector I and monetary saving of the household sector Sm (or dissaving -Sm as the case may be).From the correct macrofoundations follows that the two statements of Bill Mitchell are provable false:― “The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.” Unemployment occurs when the expenditure ratio rhoE or/and the factor cost ratio rhoF is “too low”. Goverment spending/taxation can improve or worsen the situation.― “Net government spending is required to meet the private desire to save.” False. Given investment expenditures I, the private desire to save Sm determines monetary profit Qm.As a matter of principle, full employment can be achieved without private/public deficit spending, i.e. rhoE=1, via the price mechanism by increasing rhoF=W/PR.In methodological terms, MMT messed macro up because it got the elementary accounting equations wrong.#3Egmont Kakarot-Handtke#1 The macrofoundations approach starts with three SYSTEMIC axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#2 For the introduction of money see ‘Essentials of Constructive Heterodoxy: Money, Credit, Interest’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569663#3 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153218
"In the beginning the economy consists only of the household and the business sector. No public sector, not foreign trade.""As a matter of principle, full employment can be achieved without private/public deficit spending, i.e. rhoE=1, via the price mechanism by increasing rhoF=W/PR."so what are your policy prescriptions? get rid of government?Lol
hogYou ask: “so what are your policy prescriptions? get rid of government? Lol”I stated in the opening section: “MMT consists of a political part and a theoretical part. … The political part of MMT is not adressed.”The post is about the methodological blunders of MMT and NOT about silly policy presciptions.Can’t you read? Lol
Can’t you read? LolNot what you wrote. It’s opaque and arcane.
politics is an integral part of economics. your approach falls part at A0as stated your conclusion of:"As a matter of principle, full employment can be achieved without private/public deficit spending, i.e. rhoE=1, via the price mechanism by increasing rhoF=W/PR."amounts to rhofF = 0/0sure enough, without a currency system there is no employment as per definition
MRWThe line of the argument is as follows. MMT is right, orthodox/mainstream economics is false. This is what already Keynes knew. In technical terms, the lethal error/mistake resides in the microfoundations. Keynes switched to macrofoundations but got it wrong.#1 MMT switched also to macrofoundations but got it also wrong.#2The point is: when the foundations are false the whole analytical superstructure falls apart. The correct macrofoundations are given in the previous post.From the correct foundations follow the correct systemic relationships for employment and total profit.From the correct equations follows that there are basically two ways to arrive at full employment (i) deficit spending, (ii) to increase the wage rate faster than price and productivity, that is, to use the price mechanism.Deficit spending has negative effects on the income distribution.#3 In the actual situation, the economic policy recommendation is therefore (ii). This is the best way to get out of unemployment, deflation, and stagnation.To know how the monetary economy (i.e. the price and profit mechanism) works is the precondition for successful economic policy. The fact of the matter is that both microfounded mainstream and macrofounded MMT are provable false. Policy recommendations that lack sound scientific foundations are worthless or even counterproductive.Incompetent economists WORSEN the situation. This holds for Walrasians, Keynesians, MMTers, Marxians, Austrians.If this is too condensed, more details are to be found in the references. The economy is a complex system which does not fit in one short post.Egmont Kakarot-Handtke#1 See ‘Keynes saw the problems but did not solve them’http://axecorg.blogspot.de/2017/04/keynes-saw-problems-but-did-not-solve.html#2 See ‘The final implosion of MMT’http://axecorg.blogspot.de/2016/10/the-final-implosion-of-mmt.html#3 See ‘Austerity and the idiocy of political economists’http://axecorg.blogspot.de/2017/03/austerity-and-idiocy-of-political.html
just because you proclaim "The ... most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm." as "objectively given" doesn't make it so.
hogYou say: “sure enough, without a currency system there is no employment as per definition”The description of the monetary system is given in the reference #2 above.Learn reading. Lol
"When government is added then it holds under the condition of zero saving of the household sector Qm=Cg-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."what are you trying to say? there are no flows between the household and government sectors?
hogThe flow between the household and government sector is symbolized by T=Taxes.
the flow from the government sector to the household sector, and why by your assumptions it can't be greater than taxes.so your argument is what? that more money flows from the government sector to the business sector than to the household sector?neither of household and business sectors can sustainably run a deficit, hence without government neither can run a surplus in the first place.
Where's the usual claptrap about PROFIT, herr EKH?
hogYou ask: “the flow from the government sector to the household sector, and why by your assumptions it can’t be greater than taxes.”This flow is called transfers and it has been left out of the picture here.You ask: “so your argument is what? that more money flows from the government sector to the business sector than to the household sector?”The profit equation Qm≡Yd+(I-Sm)+(G-T)+(X-M) reduces to Qm=G-T if Yd, I, Sm, X, M is set to zero and then it says: if government expenditure G is greater than taxes T, i.e. if there is a public sector deficit, then then profit of the business sector as a whole is equal to the deficit. In the opposite case, if the government sector runs a surplus, i.e. if G is less than T, then the loss of the business sector is equal to the surplus of the government sector.The growing profits of the US economy in the past decades and the increasing ratio of profits to wage income are the mirror image of public deficit spending = growth of public sector debt (plus growth of household sector debt).*Egmont Kakarot-Handtke* See also ‘Austerity and the idiocy of political economists’http://axecorg.blogspot.de/2017/03/austerity-and-idiocy-of-political.html
so how does arbitrarily setting various parameters of the profit equation to 0 somehow disprove it?
hogYou ask: “so how does arbitrarily setting various parameters of the profit equation to 0 somehow disprove it?”The sole purpose of setting some variables initially to zero is to focus on the point at issue. The point at issue is here the relationship between public sector deficit/surplus and business sector profit/loss.The other relationships have been dealt with elsewhere.The rule of proper analysis is that one solves first the simple problems and then successively the more complex. As Morgenstern put it: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.”The crucial point is that MMTers do not even understand the most elementary case. Because of this, there is NOT NEED AT ALL to tackle the general case with the other variables of the profit equation different from zero.By the way, you can do the general analysis for yourself. It follows ALL almost by itself from the structural/systemic/macro axiom set, just like the whole of geometry follows from the Euclidean axioms.Egmont Kakarot-Handtke
1. it's not the elementary case.2. the equation does not violate it.“There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.”so please show how your approach is derived from quantum physics.
it's odd that you claim MMT is inaccurate because it supposedly does not follow a constructivist approach when your own model does not even address politics/sociology.in your own words: "The political part of MMT is not adressed."
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