Friday, January 25, 2019

Robert P. Murphy — The Upside-Down World of MMT


I give Robert Murphy an "A" for at least trying to understand MMT assumptions and definitions, but it seems to me (I am not an economist) that he has not yet grasped the MMT understanding of the economic concept of saving.

I use "economic concept" to distinguish it from the ordinary language meaning. They are different and also have different meanings in different contexts, e.g., economic schools. The ordinary language meaning doesn't sufficiently distinguish portfolio as financial and real assets such as equities and real estate, and saving as a result of "income not spent," that is, cash in the bank.

Saving and what saving entails is a contentious area in economics, with each school having its own views. What Robert Murphy is saying is that if one accepts the Austrian view, then the MMT view fails in that its model is improperly constructed. 

Of course, no one view is accepted by all, which is not surprising since there no one view of practically anything, and even if there were, unanimity is no guarantee of truth.

In science, theories make predications — assumptions generate theorems — that can be formulated as hypotheses and tested empirically. This is difficult in the case of social science owing to the scope and scale involved and also ethical issues involving human experimentation, especially at the societal level. So one must appeal to history but history presents its own problems.

So while I applaud Robert Murphy's attempting to address this issue, it seems to be to remain on the level of pitting one system as a set of assumptions and definitions against another.

However, I see this as a healthy direction for the debate to heading since it is getting down to the nitty-gritty of looking at different models and their construction, and assessing them on their merits. 

A key requirement that MMT economists impose, which is one that most scientists do, is to operationalize terminology. The involves examining institutional arrangements. Money and finance are largely institutional creations.

Richard Murphy states what he takes as obvious based on the barter model that he presents and which lies at the heart of Austrian, classical and neoclassical models, but which Keynes rejected. Neo-Keynesians are neoclassicals.
The whole benefit of private saving is that it allows for more private investment. 
For Keynes and those that follow this analysis, investment causes saving instead of the other way around. Many of the arguments in economics are over the direction of causality. 

Correct imputation of causality is based on sound analysis of operations involved. Here, this involves a different view of money and finance than the other schools hold, such as loanable funds and money neutrality. This "endogenous" view has been elaborated by Post Keynesian and MMT economists. But that is beyond the scope of this undertaking.

 Mises Daily
The Upside-Down World of MMT
Robert P. Murphy

9 comments:

Andrew Anderson said...

The whole benefit of private saving is that it allows for more private investment. Robert P. Murphy

Except why should anyone invest when they might obtain a real gain by simply hoarding their fiat risk-free?

So a fixed money supply or one that does not grow fast enough to prevent price deflation is anti-progress because it is anti-investment.

The real issue with fiat then is the ethics of its distribution and use - which should promote the general welfare, not that of special interests such as the banks; the most so-called "credit worthy", the rich; and additionally, in the case of the Austrians, gold owners and fiat hoarders.

AXEC / E.K-H said...

Both Austrianism and MMT is proto-scientific garbage
Comment on Robert Murphy on ‘The Upside-Down World of MMT’*

For his refutation of MMT, Robert Murphy takes the MMT balances equation as the analytical starting point.

“That is the three balances have to sum to zero. The sectoral balances derived are:
• The private domestic balance (I−S)
• The Budget Deficit (G−T)
• The Current Account balance (X−M).
A simplification is to add (I−S)+(X−M) and call it the non-government sector. Then you get the basic result that the government balance equals exactly $-for-$ … the non-government balance (the sum of the private domestic and external balances). This is also a basic rule derived from the national accounts and has to apply at all times.”

“So … we derive this equation: G−T=S−I. That is, the amount of government spending minus total tax revenue, is necessarily equal to private saving minus private investment. The MMTers might succinctly express this relationship in words: Government Budget Deficit = Net Private Saving.”

After this first demonstration of his scientific incompetence, Robert Murphy goes on: “This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. Let’s look again at the equation causing so much confusion: G−T=S−I. As a free-market economist, I don’t need to run from this tautology. I can use it to underscore the familiar ‘crowding out’ critique of government deficit spending.”

No, the fact of the matter is that the so-called “macro-accounting tautologies” are provably false because economists are too stupid for the elementary mathematics that underlies macroeconomic accounting.#1

To make a long story short, the correct macroeconomic relations are given as follows:#2
(1) Q=−S in the elementary production-consumption economy,
(2) Q=I−S in the elementary investment economy,
(3) Q=Yd+I−S in the investment economy with profit distribution,
(4) Q=Yd+(I−S)+(G−T)+(X−M) in the general case with government in an open economy.
Legend: Q profit, S saving, I investment, Yd distributed profit, G government expenditure, T taxes, X/M foreign trade.

The simplification of (4) yields Q=(I−S)+(G−T) (i) and this compares to Robert Murphy’s (G−T)=(S−I) resp. 0=(I−S)+(G−T) (ii).

The upshot is that (ii) implies that macroeconomic profit Q is zero. And this is plain analytical idiocy because a zero-profit economy does NOT exist. All this proves that Robert Murphy does not understand how the market economy works. The word profit does not appear once in Robert Murphy’s post. Austrianism is the failed attempt of explaining the market economy without ever mentioning the foundational economic concept profit which is objectively given with the precision of two decimal places.

Robert Murphy’s “Government Budget Deficit = Net Private Saving” has to be corrected to “Public Deficit = Private Profit”. And this correct formula tells everyone that MMT is a political fraud.#3

Robert Murphy, of course, does not realize anything. Austrians, in general, are not very smart. Because of this, Austrianism has never been anything else than vacuous proto-scientific blather.

Egmont Kakarot-Handtke

* Mises Institute
https://mises.org/library/upside-down-world-mmt

#1 Wikipedia and the promotion of economists’ idiotism
https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html

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

#3 Stephanie Kelton’s legendary Plain-Sight-Ink-Trick
https://axecorg.blogspot.com/2019/01/stephanie-keltons-legendary-plain-sight.html

Bob Roddis said...

Egmont: I hadn't realized the Major Freedom has already sliced, diced and eviscerated you years ago.

https://www.themoneyillusion.com/fiscal-multiplier-studies-its-far-worse-than-i-thought/#comment-627844

Bob Roddis said...

Investment causes savings. Right. What do have to invest if you haven't saved it?

The upside down world.....

AXEC / E.K-H said...

Bob Roddis

“Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Austrians are a political sect. Hayek’s Road to Serfdom is a political pamphlet with zero scientific content. What comes in the garb of economic theory is thinly veiled agenda pushing.

The foundational tenet ― markets never fail if left alone ― has no empirical content. It is only good for blaming any crisis on some random interventionist. The very characteristic of Austrians is circular reasoning. Circular reasoning is irrefutable and Austrians advertise this as strength ignoring the well-known methodological fact that a theory that is non-refutable is not scientific.

The foundational tenet of Austrianism has been refuted. The market system is inherently unstable because the relationship between wage rate and employment constitutes a positive feedback loop. When the foundational premise is false all the rest is scientifically worthless.

Robert Murphy’s discussion of the MMT sectoral balances equation proves that he does not understand elementary algebra and never realizes that the equation represents a zero-profit economy.

Austrians are simply too stupid for science. From von Mises onward to Hayek to Robert Murphy to Bob Roddis they are active as useful idiots in the political Circus Maximus.

Egmont Kakarot-Handtke

AXEC / E.K-H said...

Bob Roddis

You ask rhetorically: “Investment causes savings. Right. What do have to invest if you haven’t saved it?”

The relation between saving and investment is not well understood for 200+ years. This is disqualifying for the whole profession of academic economists.

Above, Robert Murphy tries to “explain the importance of saving and investment in a barter economy” and concludes “This is an admittedly simple story, but it gets across the basic concepts of income, consumption, saving, investment, and economic growth.”

No, not at all. Real models have always been garbage. A barter economy is a NONENTITY. The subject matter of economics is, as Keynes put it, the “monetary theory of production”. Starting with the right foot, however, Keynes messed up macroeconomics and ended up with I=S.

I=S is provably false. Keynesianism is refuted.#1

The correct relationship is given in the most elementary case as Q=I−S, Legend: Q business sector’s monetary profit, I business sector’s investment expenditures, S household sector’s monetary saving. All variables are measurable with the precision of two decimal places.

The equation tells one that the household sector’s saving and the business sector’s investment are independent and that their difference determines profit/loss of the business sector as a whole.

In a fiat money system, saving S ends up as deposits at the central bank (if private banks are taken out of the picture for a moment). Investment I is financed by the central bank through credit creation and ends up as long-term debt on the asset side of the central bank’s balance sheet. Profit Q ends up as deposits on the liability side. Needless to emphasize that the central bank’s balance is balanced. However, the term structure of both sides is not congruent. The liability side of the central bank, i.e. the household’s and business sector’s deposits, constitutes money.

The households can, in a second step, either keep their deposits or buy the business sector’s stocks/bonds on issuance. This destroys money and shortens the central bank’s balance sheet.

Both, the Austrian idea that saving is the precondition of investment and the Keynesian idea that investment creates saving via the income multiplier is nonsense. In a fiat money system, saving S and investment I are independent. There is no causality, no equality, no equilibrium. This is what Q=I−S tells those who can read a simple macroeconomic equation.

Egmont Kakarot-Handtke

#1 Cross-references Refutation of I=S
http://axecorg.blogspot.com/2015/01/is-cross-references.html

Bob Roddis said...

Egmont: Real models have always been garbage. A barter economy is a NONENTITY.

Actually, David Graeber, of all people, helped to improve and clarify the basic story because there was never a barter economy. Graeber showed that there was a “you owe me a favor later” economy which is much more consistent with basic Austrian School analysis which itself is based upon pure individual subjective value.

Specifically, Graeber points out that barter spot transactions would really only be necessary between strangers who might not see each other again. In contrast, neighbors could engage in credit transactions even before the use of money had developed. For example, if one farmer had eggs to sell, while his neighbor didn’t have anything he wanted at the time, then the first farmer could simply give them to his neighbor, saying, “You owe me.”

https://www.theamericanconservative.com/articles/origin-of-the-specie/

There is obviously no “law of profit” in a “you owe me a favor later” economy (or systemic unemployment, for that matter). Adding money to the mix does not change that at all. There is no “law of profit”.

Calgacus said...

Bob Roddis: Graeber showed that there was a “you owe me a favor later” economy which is much more consistent with basic Austrian School analysis which itself is based upon pure individual subjective value.

Good, continuing on this path you might go from Austrian to MMT economics, as some others have.

Bob Roddis: Investment causes savings. Right. What do have to invest if you haven't saved it?

The upside down world.....


The Keynesian, MMT point - and the clear but little read and understood explanation - is probably more solely due to Keynes than anyone else and than much else of Keynesian / Kaleckian economics is the frontwards, common sense way - of course with I=S Keynes is speaking of a very simplified economy without government spending etc - rather simpler than EKH's overcomplicated "simplest case."

Where did that savings come from if not from decided-on-prior investment - From somebody receiving an expenditure and not spending it on consumption? The savings that loanable funds, Bob Roddis, Austrians etc conceive of as the origin of some investment - already has had an origin in prior investment. This saving has already been matched with investment. It is double counting to think that S ---> I is possible, is consistent with the normal direction of time.

The I --> S direction is just a case of the fact that expenditure causes income, because they are two facets of the same thing. Your income which is saved and which purportedly financed investment expenditure came from somebody else's spending. I mean, do you think that the fact that you get a paycheck is what causes your employer to pay you? That a business's receipts cause the customer spending?

As Wray said, mainstream economics gets everything backward. It is classical, Austrian economics that lives in a backwards world. Things can appear backward even in the physical world if you don't take a close enough look. Look at a rotating wheel- if it goes fast enough, it appears to be moving in the other direction - but that is an optical illusion, just like savings preceding investment.

AXEC / E.K-H said...

Bob Roddis

Robert Murphy writes: “To explain the importance of saving and investment in a barter economy, I walk through a simple numerical example where Crusoe can gather ten coconuts per day with his bare hands.”

I respond: “A barter economy is a NONENTITY.”

You respond: “Actually, David Graeber, of all people, helped to improve and clarify the basic story because there was never a barter economy.”

So, we agree that Robert Murphy’s story about saving and investment is as silly as can be.

The real economy is NOT the ‘real’ barter economy but the monetary economy.#1 The economy constitutes itself through the interaction of real and nominal variables.

This interaction is defined with this set of macroeconomic axioms: (A0) 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.

Under the conditions of market clearing X=O and budget balancing C=Yw, the price is given by P=W/R. This is the macroeconomic Law of Supply and Demand.

Profit for the economy as a whole is defined as Q≡C−Yw and saving as S≡Yw−C. It always holds Q+S=0 or Q=−S, i.e. the business sector’s profit is equal to the household sector’s dissaving and the business sector’s loss is equal to the household sector’s saving. Under the initial condition of budget balancing, profit is zero.

So, the counterpart of household sector’s saving is business sector’s loss AND NOT INVESTMENT! Get it Austrians, we are living in a monetary economy and saving is NOT some non-consumed coconuts but money in the bank.

Austrianism is dead since about 1900. Now, rest in peace Bob Roddis and the Mises Institute.

Egmont Kakarot-Handtke

#1 The irreparable unreality of all ‘real’ models
https://axecorg.blogspot.com/2015/11/the-irreparable-unreality-of-all-real.html