Sunday, March 25, 2018

Bill Mitchell — My response to a German critic of MMT – Part 1

Makroskop is a relatively new media publication in Germany edited by Heiner Flassbeck and Paul Steinhardt. It brings some of the ideas from Modern Monetary Theory (MMT) and other analysis to German-language readers. It is not entirely sympathetic to MMT, differing on the importance of exchange rates. But it is mostly sympathetic. I declined to be a regular contributor when invited at the time they were starting the publication not because I objected to their mission (which I laud) but because their ‘business model’ was a subscription-based service and I consider my work to be open source and available to all, irrespective of whether one has the capacity or the willingness to pay. But I have agreed to contribute occasionally if the material is made open source, an exception to their usual material. Recently, the editors approached me to respond to an article they published from a German political scientist – Modern Monetary Theory: Einwände eines wohlwollenden Zweiflers or in English: Modern Monetary Theory – Questions from a benevolent doubter. The article constitutes the first serious engagement with MMT by German academics and thus warrants attention. Unfortunately the article is behind a paywall. I have asked the editors to make it open to all as a condition for allowing a translation of this response into German to be published on their site. If that doesn’t happen, you will still be able to glean what the main issues raised in the German article were by the way I have written the English response. The issues raised are of general interest and allow some key principles of MMT to be explicated, which explains why I have taken the time to write a two-part response. Today is Part 1....
Bill Mitchell – billy blog
My response to a German critic of MMT – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

15 comments:

Matt Franko said...

"Which means that the government chooses the unemployment rate."

Govt doesnt 'choose' it ... Govt DETERMINES it...


Matt Franko said...

"Imagine a nation (A) that imports good X from nation B, which uses $B.

Say that good X costs nation A, $B5 and the exchange rate is at parity ($A1 = $B1). That means good X costs $A5 per unit.

Then if the currency of A depreciates, say by 20 per cent, such that $A1.20 = $B1, then good X which still costs $B5 will now cost $A6, if the full impacts of the depreciation are included in the local import price."

Why would the currency "depreciate" ???? "Supply and Demand!"? That's Monetarist... I thought it was "about price not quantity!"..... Evolves from the apes by random chance mutation???

He's got it backwards... Should be: "If good x price is increased to $A1.20 by the seller of good x, THEN the exchange rate will depreciate such that $A1.20 = $B1 ...."

Matt Franko said...

Then he gets it here:

"So even with a massive exchange rate depreciation, which followed major declines in our terms of trade, "

Has the time domain description correct here ie the the trade terms decline FIRST ... THEN the exchange rates adjust...

Tom Hickey said...

The problem is that in a modern monetary production economy, economics and finance interact.

Economics deal with real goods and finance with financial goods.

Real goods are priced in markets in financial goods.

Economics operates on exchange of real goods, and finance on exchange of financial goods.

Real goods are considered in "real" terms of trade.

Exchange rate is based on relative valuation of financial goods.

Finance is time-sensitive and dynamic owing to expectations and risk.

Financial markets tend to anticipate real goods markets by discounting potential gains and imposing risk premia based on expectations.

The the simple "law of supply and demand" doesn't necessarily hold in a deterministic way, as often assumed. Because "animal spirits."

Tom Hickey said...

Oh, and I forgot to mention that central banks act in markets to "stabilize" their currency.

FX markets are far from "perfect" markets, which strict (deterministic) application of the "law" of supply and demand assumes.

AXEC / E.K-H said...

Non-lethal and lethal critique of MMT
Comment on Bill Mitchell on ‘My response to a German critic of MMT’

The friendly critic of MMT is more stupid than friendly because he remains on the surface and never gets to the fundamental error/fraud of MMT. Accordingly, the discussion degenerates immediately into wordplay about to what degree MMT is liberal/statist. This is way beside the point because the question is not political but scientific, that is, whether MMT is true or false, with truth well-defined as material/formal consistency. The rest of the discussion is then wasted on inconclusive blather about flexible exchange rates.

To make matters short, here is the lethal error/fraud of MMT: “‘All considerations of deficits and debts must be made from a balance-theoretic perspective’, which means in the language of MMT that context is everything. A government deficit (surplus) equals dollar-for-dollar a non-government surplus (deficit). This is the ‘balance-theoretic’ that Martin Höpner is referring to. The non-government sector is comprised of the external and private domestic sectors. If the external sector is in deficit and the private domestic sector desires to save overall, then the government sector has to be in deficit and national income changes will ensure that occurs.” (Bill Mitchell)

The blunder of MMT consists in misplaced consolidation, more specifically, the error/fraud lies in the words private domestic sector. There is NO such thing as the “private domestic sector”, there are TWO sectors, the business- and the household sector. And the business sector does NOT save. Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The pivotal economic phenomenon of macroeconomic profit, though, is conspicuously absent in all MMT analysis.#2

The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0, with profit Q and distributed profit Yd greater zero. In marked contrast, the false MMT balances equation reads (X−M)+(G−T)+(I−S)=0. Exactly at this point, MMT drops dead.

The Iron Rule of Methodology says: Every economic theory/model that does not explicitly contain the foundational magnitude profit is scientifically worthless. MMT falls squarely into this category. It does not matter much whether this scientific corpse is decorated with a liberal or any other political flag.

Egmont Kakarot-Handtke

#1 Bill Mitchell, MMT’s fake scientist
https://axecorg.blogspot.de/2018/03/bill-mitchell-mmts-fake-scientist.html

#2 MMT and the magical profit disappearance
https://axecorg.blogspot.de/2017/08/mmt-and-magical-profit-disappearance.html

Ralph Musgrave said...

According to EK-H, there is a fundamental difference between households and businesses: households allegedly save but do not make profits or losses, whereas businesses do.

Profit (loss) is the rise (fall) in an entity’s net assets over a period. It would be perfectly possible (contrary to EH-H’s suggestions) to construct a profit and loss account for a household, and no doubt a small percentage of households actually do that.

The fact that MMT concentrates on a fairly narrow range of assets (cash and government debt mainly) does not mean MMT does not provide useful insights.

E.g. if every business in the country decided it need to greatly increase the rate at which it wrote off its physical assets (buildings and machinery) that would wipe out many businesses’ profits which would have significant economic effects: effects ignored by MMT. But the liklihood of every business actually doing that is next to zero. Ergo MMT is justified in saying “let’s assume all else is equal and work out what happens when the government and central bank run a deficit”. That is a perfectly legitimate question to ask, and getting the answer right over the last few years would have meant millions more being in jobs than was actually the case.

AXEC / E.K-H said...

Ralph Musgrave

You say “According to EK-H, there is a fundamental difference between households and businesses: households allegedly save but do not make profits or losses, whereas businesses do. Profit (loss) is the rise (fall) in an entity’s net assets over a period. It would be perfectly possible (contrary to EK-H’s suggestions) to construct a profit and loss account for a household.”

Total profit consists of two components: monetary profit/loss Qm and nonmonetary profit/loss Qn. Monetary profit/loss Qm emerges in the production-consumption economy, nonmonetary profit/loss Qn stems from the revaluation of real and financial assets/liabilities. Depreciation of capital goods, for example, is part of nonmonetary profit/loss Qn.

Analogous for the household sector. Monetary saving/dissaving Sm relates to the flows of the production-consumption economy, nonmonetary saving/dissaving Sn stems from the revaluation of real and financial assets/liabilities of the household sector.

So, we have axiomatically Q=Qm+Qn and S=Sm+Sn.#1 The whole issue of nonmonetary profit/loss of the business sector and nonmonetary saving/dissaving of the household sector has been dealt with elsewhere.#2

The balances equations (AXEC=true=(X−M)+(G−T)+(I−S)−(Q−Yd)=0 and MMT=false=(X−M)+(G−T)+(I−S)=0) both relate to the flows of the production-consumption economy and therefore deal with monetary profit/loss. Clearly, nonmonetary profit/loss of the business sector and nonmonetary saving/dissaving of the household sector are NOT an issue at the first analytical stage.

The conclusion “Exactly at this point, MMT drops dead” is not affected by the later inclusion of nonmonetary variables. These extensions make MMT only more dead.

The balances equations consist of measurable variables and therefore are testable in principle. So, all that is needed at this point is an experimentum crucis. What is NOT needed is more confused blather of MMTers in general and you in particular.

Egmont Kakarot-Handtke

#1 Wikimedia, New Foundations of Economics
https://commons.wikimedia.org/wiki/File:AXEC137.png

#2 Primary and Secondary Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1917012

Ralph Musgrave said...

EK-H, What you call the MMT equation, (X−M)+(G−T)+(I−S)=0 is true by definition (and for that reason it’s not very interesting). “I” (investment) is irrelevant because it’s simply a transfer of funds/cash from one part of the private sector to another (e.g. when one firm buys machinery from another). That leaves (X−M)+(G−T) –S =0. That simply says that total flow of funds into the private sector, i.e. exports net of imports plus government spending net of tax equals the private sector’s accumulation of funds. Very boring. That’s just a statement of what the basic sectoral balance idea consists of.

In contrast there is the amazing new “AXEC” equation: (X−M)+(G−T)+(I−S)−(Q−Yd)=0. The flaw in that is that part of Q (Qm to be exact, i.e. monetary profit or loss) is already contained in X,M,G & T.

To illustrate the flaw with a simple example, if the business sector is up by $1bn over the year because government spending into that sector exceeds tax on businesses by $1bn, with exports and imports being in balance, and the household sector also being in balance, then (X-M)+(G-T) will equal $1bn as will S.

If for the sake of illustration there are no distributed profits (Yd) and no non-monetary profits (Qn), then your equation says that minus $1b=0, which is clearly nonsensical.

AXEC / E.K-H said...

Ralph Musgrave

You say “What you call the MMT equation, (X−M)+(G−T)+(I−S)=0 is true by definition (and for that reason it’s not very interesting).”

The question is NOT whether the MMT balances equation is “interesting” but whether it is true or false. Fact is that it is mathematically false just like 2+2=5 is mathematically false. This, in turn, proves, that MMTers are too stupid for the elementary mathematics of macroeconomic accounting.#1, #2

You take the axiomatically correct balances equation (X−M)+(G−T)+(I−S)−(Q−Yd)=0 and simplify by setting X, M, I, S, Yd=0. This gives (G−T)=Q, in plain English, if the budget deficit is $1bn the monetary profit of the business sector is $1bn.

You argue “then your equation says that minus $1b=0”. NO, this is your own brain-dead BS.

Because the foundational MMT balances equation is false the whole analytical superstructure of MMT is false.#3 And because the theory is false the policy recommendations are false.#4 More specifically, in their bottomless stupidity MMTers are a danger to their fellow citizens.

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting
https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html

#2 Down with idiocy!
http://axecorg.blogspot.de/2017/12/down-with-idiocy.html

#3 For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html

#4 Keynes, Lerner, MMT, Trump and exploding profit
http://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html

ANC Driver said...

"To illustrate the flaw with a simple example, if the business sector is up by $1bn over the year because government spending into that sector exceeds tax on businesses by $1bn, with exports and imports being in balance, and the household sector also being in balance, then (X-M)+(G-T) will equal $1bn as will S."

I'm not sure its possible for S to equal 1B if you've also stated households budget is balanced..shouldn't it read

[0-0]+[1B-0]+[0-0]-[1B-0]=0?

AXEC / E.K-H said...

Ralph Musgrave

You say “… the MMT equation is true by definition (and for that reason it’s not very interesting).”

Both parts of the assertion are incorrect. The equation is (i) provably false and (ii) central to any MMT presentation as you can see at Google images.#1, #2

The equation is so interesting that Warren Mosler has tattooed it on his forehead.

Egmont Kakarot-Handtke

#1 Google Images
https://www.google.de/search?rlz=1C1CHBF_deDE733DE733&biw=1600&bih=720&tbm=isch&sa=1&ei=7AlIWu7tCpDNkwXNg5KICw&q=MMT+Kelton+sectoral+balances&oq=MMT+Kelton+sectoral+balances&gs_l=psy-ab.3...67633.82223.0.82727.27.27.0.0.0.0.180.2036.24j3.27.0....0...1c.1.64.psy-ab..0.6.630...0j0i67k1j0i30k1j0i5i30k1j0i8i30k1.0.ghMwwj-DxPc#imgrc=_

#2 In particular
https://www.dropbox.com/s/d26yui8c19u76vt/MMT%20Warren_Matt_Washington_Sectoral%20Balances%20Equation.gif?dl=0

ANC Driver said...

"According to EK-H, there is a fundamental difference between households and businesses: households allegedly save but do not make profits or losses, whereas businesses do.
Profit (loss) is the rise (fall) in an entity’s net assets over a period. It would be perfectly possible (contrary to EH-H’s suggestions) to construct a profit and loss account for a household, and no doubt a small percentage of households actually do that. "

Not only 'is' there a fundamental difference between households and business, this difference exists by way of how the law treats them and this is all that matters. Business profits must by law have corresponding liabilities (equities), whereas households savings and wealth do not. What is not apparent in the minds of most in these debates is that the household sector is not 'one' sector but two - those who own property and those who do not. Those who own property own the business sector, those who do not own property are servants of the business sector and thus servants of the other section of the household sector. The profits generated by the business sector go only to that part of the household sector who owns the business sector.

Whilst there also significant debate on the difference between savings and profits, the real key is whether or not an economic act increases the overall stock of legal rights and liabilities in the system or whether the act merely swaps legal rights of equal magnitude. The origin of the term 'profit' is the 'right to take' which implies that one who is taking must be taking from another. As the only way the business sector as a whole can profit is if total sales exceeds total income then to fill the void either households or government must run deficits, which by implication increases the total stock of legal rights and legal liabilities; profits act on the stock of legal rights in the economy as a whole in the same way as does an increase in the balance sheet of a bank does when it creates money, i.e rights and liabilities expand together. Which means, if only that part of the household sector which owns the business sector are the beneficiaries of the profits, then by implication, as this section increases its wealth the other section is increasing its liabilities. The business sector is merely the tool used to effect this increase in wealth for that section of the household. You cannot model, analyze, or account for this unless you include business profits and distributed profits in your equations. So anyone making the claim that when the govt runs a deficit the 'household sector' as a whole benefits is either ignorant of the fact that none of this deficit goes to those who do not own property, or they are deliberately trying to mask this fact.

AXEC / E.K-H said...

ANC Driver

You say: “Not only ‘is’ there a fundamental difference between households and business, this difference exists by way of how the law treats them and this is all that matters.”

The difference between the business- and the household sector is as real as the difference between production and consumption and the law reflects the underlying reality of the monetary economy.

In order to see this, one has to go back to the most elementary economic configuration, that is, the pure production-consumption economy which consists of the household and the business sector.#1

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

• In case (i) 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. The product market is cleared, i.e. X=O in all three cases.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative. The market clearing price is lower than in (i).
• In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive. The market clearing price is higher than in (i).

It always holds Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s surplus = profit equals the household sector’s deficit = dissaving. And vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

In a pure fiat money economy, profit materializes as business sector’s deposits on the balance sheet of the central bank and dissaving materializes as household sector’s overdrafts. Both amounts are equal to the penny. The financial assets of the business sector are equal to the liabilities of the household sector. For the economy as a whole, NO real or financial net wealth is created.

Profit is a purely nominal magnitude: NO share of output O corresponds to it. Under the condition of market clearing, output always goes in full to the wage income receivers. The correspondence of profit is an increase of money on the business sector’s account, as every economist could know from Marx’s famous formula M-C-M’, which Keynes verbalized as “to end up with more money than it started with.”

Money, though, is a credit relationship and therefore more money = more deposits = more overdrafts = more liabilities.

If the household sector saves the business sector makes a loss. In this case, the households end up with financial assets and the business sector with liabilities. If this goes on for a while the business sector goes bankrupt and the economy breaks down.

The monetary economy is inherently unstable because C=Yw never happens. This explodes the idea of equilibrium which is at the axiomatic core of economics.

The conceptual point to grasp is that the balance of the business sector is called profit/loss and the balance of the household sector is called saving/dissaving. And NEVER makes the household sector a profit or a loss and NEVER does the business sector save/dissave. To muddle the two concepts is the Humpty Dumpty Fallacy or in simple words an idiocy. This idiocy lies at the heart of standard economics and MMT.

Needless to emphasize that all this is far beyond the ant horizon of Ralph Musgrave.

Egmont Kakarot-Handtke

#1 The elementary production-consumption economy is given by three macro axioms: (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.

ANC Driver said...

"Profit is a purely nominal magnitude: NO share of output O corresponds to it...."
"Money, though, is a credit relationship and therefore more money = more deposits = more overdrafts = more liabilities."

Considering that paid employment today requires profits to exist you'd think people would be more determined to get to the truth of what profit really is and its true source; maybe there are some underlying assumptions people are not willing to let go of?