In this and upcoming parts of the series, we will look in a little more detail at the ‘income-expenditure model’. The foundations of the model have been introduced in the previous two parts (here and here)….heteconomist
Short & Simple 18 – Income Determination in a Closed Economy
Peter Cooper
Debunking MMT’s hallucinatory income-expenditure model
ReplyDeleteComment on Peter Cooper on ‘Short & Simple 18 ― Income Determination in a Closed Economy’
Peter Cooper discusses income determination in a closed economy but, curiously, neither the word profit not distributed profit appears once in his article. But equilibrium appears which is known to be a NONENTITY. Hence the reality content of his standard MMT model is zero or even less.
In the following, a sketch of the formally and empirically correct price-, employment-, profit-, and income theory is given.* The most elementary version of the objective structural employment equation reads:
https://commons.wikimedia.org/wiki/File:AXEC62.png
From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 means dissaving=credit expansion, a ratio rhoE less than 1 means saving. The expenditure ratio fully replaces the consumption function.
(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 AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.
Item (i) and (ii) cover Keynes’s arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. THIS is the key to full employment policy.
The correct profit equation reads Qm≡I-Sm. Legend: Qm monetary profit, I: investment expenditure, Sm monetary saving/dissaving. Business sector’s investment expenditures and household sector’s saving/dissaving are completely independent and NEVER equal.
The profit equation gets a bit longer when distributed profit import/export and government is included.
Note that overall profit and by consequence, the income distribution has NOTHING to do with productivity or low wages or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Note also that Keynes, Marx, Kalecki, Keen, Minsky and other heterodox economists got profit PROVABLY wrong.#2
Keynes’s approach is macrofounded but incomplete because he had no deeper understanding of the profit and price mechanism. MMT builds on Keynes’s defective income and profit definitions and this yields, of course, a materially and formally inconsistent income-expenditure-equilibrium model.
Egmont Kakarot-Handtke
#1 For the comprehensive treatment see Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
#2 Heterodoxy, too, is scientific junk
http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html