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Charles Adams — The single most important piece of economics that everyone should know [sectoral balances]

*Sectoral balances may not sound like something you need to know, but if you will give me a moment I will try to convince you. It might change what you do....*

Progressive Pulse

The single most important piece of economics that everyone should knowCharles Adams | Professor of Physics at the University of Durham, where he teaches Optics and Econophysics

## 16 comments:

Sectoral balances: For a monetarily sovereign government, its deficit is the economy’s surplus. Its surplus is the economy’s deficit.

Neoliberals want the government to be in surplus, and the economy to be in deficit, so that average people are forced to take out more loans and thereby become slaves to bankers. This is represented by the red lines in the graph.

“Why is a government not like a household? The income of a household is time limited, whereas the state goes on forever (barring occupation by a foreign power). A government can simply roll over a debt ad infinitum.”Some governments

like households, e.g. Greece, which must borrow all its euros, since Greece has a trade deficit, and its government cannot create euros out of thin air.areBy contrast, a monetarily sovereign government creates its money out of thin air. The government’s debt in its own currency is not “rolled over.” Instead, the debt is simply paid off.

It works like this…

When you buy a treasury security, money is debited from your checking account, and is credited to your Fed savings account. When the security matures, your money is debited from your Fed savings account, and credited back to your regular checking account, plus interest.

T-securities work exactly the same as Certificates of Deposit at regular banks. You agree to leave a certain quantity of money with the bank for an agreed-to-time, for an agreed-to rate of interest. While your money is left in the bank, it is

on loanto the bank. When the CD matures, you take back your money, thereby clearing the bank’s debt to you.“The UK has debts that date back to the South Sea bubble of 1720, and it is only worth repaying them if interest rates fall below historical levels which for very old debt has become the case recently.”Huh? What debts are those? Private debts? Government debts? Who is the creditor? Who is the debtor? This section of the article is meaningless and unnecessary.

“Now let’s come to the household sector (you and me) which as we know operates on different time scales.’This is more meaningless gibberish. The question is not “time scales,” but who can create money out of thin air, and who cannot.

Such confusing nonsense is why most people are ignorant about economics.

MMT and the single most stupid physicist

Comment on Charles Adams on ‘The single most important piece of economics that everyone should know.’

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.” and “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In words, the public sectors deficit is the private sectors surplus or as vice versa, or as Stephanie Kelton puts it succinctly in this video, the governments red ink is our black ink.”

The physicist Charles Adams is obviously just as stupid or corrupt or both as the MMTer Stephanie Kelton.#1, #2 In fact, he is even worse because he has not realized that the MMT accounting identity/sectoral balances equation has already been refuted.#3, #4

To make matters short, here is the gist of the proof:

• The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.

• The elementary production-consumption economy is given with three axioms, two conditions, and two definitions, i.e. monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C. Legend: C consumption expenditures, Yw wage income.

• It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s monetary profit/loss Qm equals the household sector’s monetary dissaving/saving −Sm.

• For the more complex economy follows the axiomatically correct balances equation (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0, which reduces to Qm=G−T, that is Public Deficit = Private Profit.#6

• In marked contrast, the false MMT balances equation reads (X−M)+(G−T)+(I−S)=0, which reduces to S=G−T.

It is a curious fact that in Charles Adams’ ‘The single most important piece of economics that everyone should know’ the word profit does not appear once despite the fact that profit is the single most important variable in economics.#7

This tells one that Charles Adams has NO idea of what he is talking about.

Egmont Kakarot-Handtke

#1 Down with idiocy!

https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

#2 The Kelton-Fraud

https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

#3 Wikipedia and the promotion of economists’ idiotism (II)

https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html

#4 For the full-spectrum refutation of MMT see cross-references MMT

http://axecorg.blogspot.com/2017/07/mmt-cross-references.html

#5 MMT: How mathematical incompetence helps the Kelton-Fraud

https://axecorg.blogspot.com/2018/07/mmt-how-mathematical-incompetence-helps.html

#6 DSGE and profit―forget it! MMT and profit―forget it!

https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

#7 MMT and the magical profit disappearance

https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html

Charles Adams is bit misleading by confusing earnings (ie, "flow") transactions with balance transactions, but the result may be a more politically-acceptable presentation of MMT. (As for E-K-H, his so-called axioms don't even hold up to elementary common sense.)

Ed Zimmer

You say: “E.K-H’s so-called axioms don’t even hold up to elementary common sense.”

In the meantime, even the most retarded folks should have realized that common sense never has been and never will be a valid argument in a scientific debate.

About the relationship between common sense and science all has been said by the great methodologist J. S. Mill 150+ years ago: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” #1, #2, #3

Egmont Kakarot-Handtke

#1 Why J. S. Mill had no friendly word for the bigots and votaries of common sense

https://axecorg.blogspot.com/2015/01/why-j-s-mill-had-no-friendly-word-for.html

#2 The bigots of common sense

https://axecorg.blogspot.com/2016/10/the-bigots-of-common-sense.html

#3 Misled by ordinary intuition and common sense

https://axecorg.blogspot.com/2015/10/misled-by-ordinary-intuition-and-common.html

This knowledge of sectoral balances is almost worthless without having first trained in Accountjng Science to develop the general skills in Abstraction necessary to adequately understand its relevance...

Anyone can regurgitate an accounting identity... that doesn’t mean they understand it...

Matt Franko

Charles Adams states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity.”

You say: “Anyone can regurgitate an accounting identity.”

I say: “The axiomatically correct accounting identity reads in the most elementary case Qm+Sm=0 and the MMT identity is provably false.”#1, #2

Can you now write down your accounting identity? This is the precondition for determining which one is true.

After all, we are dealing with ‘The single most important piece of economics that everyone should know.’

Egmont Kakarot-Handtke

#1 Wikipedia and the promotion of economists’ idiotism (I)

https://axecorg.blogspot.com/2016/11/wikipedia-and-promotion-of-economists.html

#2 Wikipedia and the promotion of economists’ idiotism (II)

https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html

E-K-H's basic error is believing an "identity" (3-bar symbol) is different than an "equality" (2-bar symbol), which is simply not the case for numerical variables (as any competent mathematician will confirm). (It looks like Wikipedia may have recently called him on that also.)

Here is my understanding.

In both identity and equality, the numerical values of the LHS and the RHS are the same (equal), but the symbols have different meaning in context, which is a reason that different symbols are employed.

1. Identity signifies a priori (syntactical) truth, which always applies if the rules are followed, no evidence necessary. No causality is implied or can be deduced from the expression of identity.

Accounting identities are like this. It just means that the books always balance in the sense that the LHS and RHS are always equal numerically if the rules of double-entry have been followed correctly.

For instance in the income expenditure model, total prices paid is evidently the same as total prices earned, which the consolidate books show wrt to ledger entries if the bookkeeping is correct. If they are not identical, then the presumption is that the recording was incorrect. The solution is to correct the bookkeeping.

2. Equations are used in science to construct causal models using functions, where changes in value of the independent variable determine corresponding values of the dependent variable in accordance with the rule that the function symbolizes, e.g., Y=f(x) = ax^2+bx+c. Equations that are interpreted causally either fit the facts or don't, and this can be checked against evidence. If the expression doesn't fit the facts, then the solution is to change the equation.

3. Accounting identities reveal the system boundaries, but say nothing in themselves about causality.

4. Imposing causal interpretation on identities goes beyond the identity itself into theory, the implications of which can only be determined a posteriori, although the identity remains true a priori, e.g., owing the rules of double-entry.

Example: MV= PQ (or PT) is an accounting identity, but Friedman's monetarism interprets the expression causally. This interpretation has been shown to be incorrect, but the accounting identity stands.

So, while accounting identities are always true if the rules are followed, equations can be used to make claims about relationships of values that can be tested against evidence.

Accounting identities can be interpreted causally, but then the interpretation must be corroborated against evidence.

The blue cat swims through the conical aperture to balance equation (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0,

whichreduces to Qm=G−T[to]chocolate insteadofplutonium. The hairy MMT time equation reads (X−M)+(G−T)+(I−S)=0, which inverts to S=G−T. )w_14.@8*% Qm+Sm=0 or Qm=−Sm. Med. and Large.Hedgehog Carrot-top Hankie

Ed Zimmer, Tom Hickey

The axiomatically correct accounting identity reads in the most elementary case Qm+Sm=0 or Qm=−Sm, in words, macroeconomic profit/loss is the complementary of dissaving/saving, or, as Charles Adams put it in general terms “the sum of all sectors is zero”. The number of sectors is two, to begin with. This is the irreducible minimalist configuration. Analytically, this is the correct starting point.

The 3-bar symbol indicates a definition. A definition introduces a new variable that is composed of the axiomatically given variables which are connected by mathematical operators. This technicality has been explained elsewhere and is of no importance in the present context.

The decisive point is that monetary profit for the business sector as a whole Qm depends alone on the dissaving of the household sector as a whole −Sm and NOT on productivity, the wage rate, exploitation, monopoly, market power, union strength, greed, profit maximization, etcetera which, in turn, means that the familiar microeconomic explanations of profit are false for 200+ years. And this, in turn, means that Distribution Theory is false. And this, in turn, means that economics is proto-scientific garbage from the founding fathers onward to MMT.#1

For the complex economy with more than two sectors follows the axiomatically correct balances equation (X−M)+(G−T)+(I−Sm)−(Qm−Yd)=0#2 which is obviously different from the false MMT balances equation (X−M)+(G−T)+(I−S)=0.#3

The bottom line is that MMTers got the macroeconomic accounting identity wrong. This is a mathematical fact.#4 It tells the world that economists in general and MMTers, in particular, are too stupid for the elementary mathematics that underlies macroeconomic accounting.#5 It is a grave state of affairs when the elementary equation Qm+Sm=0 is beyond the understanding of academics.

Egmont Kakarot-Handtke

#1 Ricardo, too, got profit theory wrong. Sad!

https://axecorg.blogspot.com/2018/02/ricardo-too-got-profit-theory-wrong-sad.html

#2 Go! ― test the Profit and Employment Law

https://axecorg.blogspot.com/2018/09/go-test-profit-and-employment-law.html

#3 Rectification of MMT macro accounting

https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#4 Wikipedia and the promotion of economists’ idiotism (II)

https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html

#5 For details of the big picture see cross-references Accounting

http://axecorg.blogspot.com/2016/12/accounting-cross-references.html

Good stuff Tom....

Probably 1% of people could care or understand it though... much easier to think “we’re out of money!!!” for the 99%...

Tom Hickey, Matt Franko

Charles Adams deals with ‘The single most important piece of economics that everyone should know.’

Charles Adams correctly states: “There are few things in economics that are true so when we find one we should cling on to that. Something that is true is that the sum of all sectors is zero. This is a simple accounting identity. Basically, someone (or sector) can only be in surplus because someone else (or another sector) has lent them the money.”

Up to this point, all is fine in general terms.

In concrete terms, it holds for the two-sector economy (business, household) Qm+Sm=0 or Qm=−Sm (i).

For the three-sector economy (business, household, government) holds Qm+Sm−(G−T)=0 or Qm+Sm=(G−T) (ii), i.e. business sector’s profit Qm plus household sector’s saving Sm is equal to government sector’s deficit (G−T).#1

Up to this point, all is fine in accounting terms. But now comes the MMT blunder/fraud. Charles Adams says: “If we aggregate all the sectors into only just two, public and private, then it follows summing to zero means that when we plot their respective surpluses or deficits they will be a mirror image of one another. In words, the public sectors deficit is the private sectors surplus or as vice versa, or as Stephanie Kelton puts it succinctly in this video, the governments red ink is our black ink.”

The sleight of hand consists in the tacit introduction of an additional/redundant definition S≡Qm+Sm, i.e. private sector surplus S is the sum of business sector’s profit Qm and household sector’s saving Sm.

So, eq. (ii) Qm+Sm=(G−T) becomes S=(G−T) (iii), i.e. “our” black ink S is government’s red ink (G−T). The MMT fraud consists of lumping “their” profit Qm and “our” saving Sm together to “our” black ink.#2 Hokuspokus Simsalabim, profit is gone and then is heard no more when MMTers climb on a soapbox or advise Bernie Sanders and straightforwardly push their Wall Street/City of London agenda of deficit spending (G−T)>0, which results in “their” profit Qm for any given amount of “our” saving Sm.

Outside academic economics, to let profit disappear is called an accounting fraud and accountants are sent to jail for it. This is ‘The single most important piece of economics that everyone should know.’

Egmont Kakarot-Handtke

#1 Rectification of MMT macro accounting

https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

#2 The Kelton-Fraud

https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

Ok, this is probably just a waste of time but... What I'm seeing in E-K-R is classic economist behavior with classic economist arrogance. There's an unwillingness or inability to correct an error or re-think a model even when the error is clear and pointed out. (Why this is so common among economists and not other philosophers, I don't understand.)

In the #3 paper E-K-R pointed to in his first post here, 16th paragraph, first line, you'll see the faulty assertion from which his whole thesis is derived:

"From the definition (≡) of the balance of the business sector Qm≡C−Yw follows that to write down the identity Qm+Yw=C is INADMISSIBLE."This is a gross misunderstanding and misuse of the "identity" principle.If the variables in that equation are numeric (ie, measured or measurable), the assertion is simply WRONG (and if the variables are not numeric, the expression is meaningless). He could have clearly seen this from Wikipedia's description of the "identity" principle (or simply asked an engineering student to explain it to him) - but for reasons of his own, chose not to.

So... there is no PROFIT variable in the flow of federal funds. MMT (at least in its fundamentals) gives a clear and realistic view of our economy - and E-K-R's charges of MMT "stupidity" and "fraud" are much more applicable to him.

Ed Zimmer

You say: “E.K-H’s basic error is believing an ‘identity’ (3-bar symbol) is different than an ‘equality’ (2-bar symbol), which is simply not the case for numerical variables …”

The elementary production-consumption economy is given by three macroeconomic 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.

The axiom set consists of 4 real variables L, R, O, X and 4 nominal variables Yw, W, C, P.

From these variables only a subset reappears in macroeconomic accounting, viz. the nominal flows C and Yw.

Now, two new variables are introduced. Monetary profit of the business sector Qm is defined as Qm≡C−Yw (i) and monetary saving of the household sector Sm as Sm≡Yw−C (ii).

The 3-bar symbol ≡ means in the given context “is defined as”.#1

It obviously holds Qm+Sm=0 when (i) and (ii) is inserted. In the words of Charles Adams, “Something that is true is that the sum of all sectors is zero.”#2

This statement follows logically from the axioms (A1) to (A3) and the definitions (i) and (ii).

Egmont Kakarot-Handtke

#1 Wikipedia, List of mathematical symbols

https://en.wikipedia.org/wiki/List_of_mathematical_symbols

#2 In the comment section, Adams refers explicitly back to Stützel, see also Keenonomics, aggregate demand/change of debt, and some misleading critique

https://axecorg.blogspot.com/2015/06/keenonomics-aggregate-demandchange-of.html

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