We have seen that the ‘income-expenditure model’ combines key macro identities (introduced in parts 7 and 15) with particular behavioral assumptions to provide a theory of income determination (considered in parts 16 and 18). The behavioral assumptions relate to causation. The causation envisaged in the income-expenditure model has implications for the sectoral balances, some of which are the focus of the present post....heteconomist
Short & Simple 19 – Sectoral Balances in a Closed, Demand-Determined Economy
Peter Cooper
5 comments:
Something tells me Egmont isn't going to like this.
MMT: No sound scientific foundations
Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’
In economics, it is important to separate politics and science. While anybody can make a plausible and populistic economic policy proposal, the economist can NOT. What the economist says must be backed up by the true theory. The economist who lacks the true theory is at one level with the cranks that populate the political arena.
“A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties we had Major Douglas, and social credit — it can all be done with a fountain pen — and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Robinson)
Not much has changed since Joan Robinson. The only difference between the ordinary crank and the economist is that the latter has a diploma.
The policy MMT stands for is backed in the main by Keynesian macro. The thing about Keynesianism is that it is scientifically worthless since the General Theory, that is, provably false, that is, materially and formally inconsistent. The thing about MMTers is that they are mindlessly repeating Keynes’ awkward blunders.
Peter Cooper combines key Keynesian macro identities with particular behavioral assumptions to provide a theory of income determination. The behavioral equations add causation to the model. The starting point is given with the macro identity S + T = G + I.
When the goverment sector is taken out for a moment, i.e. G and T = 0, then the equation reduces to the formal core of the General Theory, i.e. to I=S. To recall: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)#1
All I=S/IS-LM models are false because Keynes’ premise “Income = value of output” is false.#2 Scientists know since Aristotle that if the premises are false the whole theoretical superstructure falls apart: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Because Peter Cooper starts from a false premise, i.e. the macro identity S + T = G + I, there is no use at all to add causal equations and then to derive economic policy conclusions. The only sensible thing to do is to throw this rubbish without further ado into the waste basket.
The proof has been given that Qm=-S in the pure consumption economy and Qm=I-Sm in the investment economy. In plain text, the proof says that saving and investment are NEVER equal.#3 So, Keynesianism and by implication MMT is refuted on all counts. #4
Note that not only Peter Cooper’s model is refuted but ALL models that contain I=S back to Wicksell and even further.#5
Egmont Kakarot-Handtke
#1 Keynesians ― terminally stupid or worse?
https://axecorg.blogspot.de/2017/08/keynesians-terminally-stupid-or-worse.html
#2 How Keynes got macro wrong and Allais got it right
https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
#3 For more details see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
#5 Going beyond Wicksell, Keynes, and MMT
http://axecorg.blogspot.de/2017/01/going-beyond-wicksell-keynes-and-mmt.html
Six lol!!!
Rectification of MMT macro accounting
Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’
MMTers and other incompetent economists apply this sectoral balances equation (S – I) + (T – G) = 0 which says that the non-government sector’s surplus, i.e. S-I greater zero, is equal to the government sector’s budget deficit G-T, respectively, that the non-government sector’s deficit, i.e. I-S greater zero, is equal to the government sector’s budget budget surplus T-G. This sectoral balances equation is used to demonstrate that a government deficit is advantageous for the non-goverment sector.
The MMT sectoral balance equation violates the rules of accounting.#1 What should be self-evident is that macroeconomic profit is entirely missing.
In the following, the correct relationships are derived by successively increasing the complexity. The pure consumption economy is the most elementary economic configuration and therefore the point to start from.
(i) Pure consumption economy,#2 two sectors, balances
Qm≡C-Yw i.e profit/loss Qm is household sector’s spending C minus wages Yw.
Sm≡Yw-C i.e saving/dissaving Sm is wage income Yw minus expenditures C.
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Qm+Sm=0 or Qm=-Sm
It always holds for the balances Qm+Sm=0 or Qm=-Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.
(ii) Pure consumption economy with government sector GS, three sectors, balances
Qm≡C+G-Yw profit Qm is HS and GS spending C+G minus wages Yw.
Sm≡(Yw-T)-C saving Sm is net income (Yw-T) minus expenditures C.
Bm≡T-G budget surplus/deficit Bm is taxes T minus government expenditures G.
_____________________
Qm+Sm+Bm=0 or Qm=-Sm-Bm
The business sector’s profit is equal to the household sector’s dissaving and the government sector’s budget deficit. Or, given the household sector’s saving/dissaving the business sector’s profit is equal to the government sector’s deficit.
(iii) Investment economy, two sectors with business sector differentiated, balances
Qmc≡C-Ywc profit of consumption good industry is spending C minus wages Ywc.
Qmi≡I-Ywi profit of investment good industry is investment minus wages Ywi.
Sm≡(Ywc+Ywi)-C saving/dissaving Sm is wage income minus expenditures C.
Äc≡-I change of the asset side of the consumption sector’s balance sheet.
_____________________
Qmc+Qmi+Sm+Äc=0
Qm≡Qmc+Qmi
Qm+Sm+Äc=0 or Qm=-Sm-Äc or Qm=-Sm+I
The business sector’s profit/loss is equal to the difference of business sector’s investment expenditures and household sector’s saving/dissaving.
See part 2
Part 2
(iv) Investment economy with government sector, three sectors with business sector differentiated, balances
Qmc≡C+G-Ywc profit of CGI is HS and GS spending C+G minus wages Ywc.
Qmi≡I-Ywi profit of IGI is investment expenditures minus wages Ywi.
Sm≡(Ywc+Ywi-T)-C saving Sm is net wage income minus expenditures C.
Bm≡T-G budget surplus/deficit Bm is taxes T minus government expenditures G.
Äc≡-I change of the asset side of the consumption sector’s balance sheet.
_____________________
Qmc+Qmi+Sm+Bm+Äc=0
Qm≡Qmc+Qmi
Qm+Sm+Bm+Äc=0 or Qm=-Sm-Bm-Äc or Qm=(I-Sm)+(G-T)
Given the difference between the business sector’s investment expenditures and the household sector’s saving/dissaving (I-Sm) the monetary profit of the business sector Qm is equal to the government sector’s deficit (G-T).
When macroeconomic profit is factored into the balance equations according to the elementary mathematics that underlies double-entry accounting then it becomes obvious that public and private deficit spending determines the overall profit of the business sector. More specifically, public deficits are always advantageous to the business sector.#3 Whether they have also a positive employment effect depends on the absence or presence of synchronous price increases.#4
Because the MMT sectoral balances equations are false the whole analytical superstructure vaporizes and therefore MMT policy guidance has no sound scientific core. MMT is brain-dead soap box economics, just like Walrasianism, Keynesianism, Marxianism, and Austrianism.
Egmont Kakarot-Handtke
#1 A tale of three accountants
https://axecorg.blogspot.de/2017/07/a-tale-of-three-accountants.html
#2 The pure consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C-Yw, monetary saving Sm≡Yw-C). For details see ‘How to restart economics’
https://axecorg.blogspot.de/2016/01/how-to-restart-economics.html
#3 Keynesianism as ultimate profit machine
http://axecorg.blogspot.de/2015/07/keynesianism-as-ultimate-profit-machine.html
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
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