Friday, August 11, 2017

Peter Cooper — Short & Simple 15 – The Sectoral Balances Identity

Stocks and flows at the macro level.

Short & Simple 15 – The Sectoral Balances Identity
Peter Cooper


AXEC / E.K-H said...

MMT and the magical profit disappearance
Comment on Peter Cooper on ‘Short & Simple 15 – The Sectoral Balances Identity’

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

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

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

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

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

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

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

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

The business sector’s monetary profit Qm is equal to the household sector’s dissaving and the government sector’s budget deficit.

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

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

Why does MMT make profit disappear with this accounting shell game? Let Sm be zero, that is, the household sector’s budget is balanced, then (ii) says that the business sector’s profit is equal to the government sector’s deficit. While (iii) says that the non-government balance is equal to the government sector’s deficit.

Why MMT “aggregates” the business and the household sector is at anybody’s guess. Formally it is inadmissible, that much is clear.

Egmont Kakarot-Handtke

#1 Economists: just too stupid for counting

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

Matt Franko said...

They aggregate the business and household sectors against the govt sector... business and households are aggregated into a non-govt sector

AXEC / E.K-H said...

Matt Franko

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

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

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

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

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

Egmont Kakarot-Handtke

#1 A tale of three accountants

#2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

#3 For the full-spectrum debunking of MMT see cross-references