Ha ha. Noah Smith criticizes an MMT formal model expressed in words rather than equations (which he thinks is OK as a formal method and as a logician, I agree) based on, wait for it, unrealistic assumptions, which is exactly the same thing that heterodox economists accuse conventional economists of doing, that is, if one considered John Maynard Keynes himself to be a heterodox economist.
MMT economists should not fall into the trap of trying to mimics the mainstream in creating formal models, even conceptual ones, that mimic the mainstream. It is a failed methodology, and it won't work for MMT either, for all the reasons that Keynes gave in his criticism of Tinbergen's econometric approach and more.
If you are into modeling, this may be a useful read. Otherwise, forget it.
Oh, and Noah Smith picks up on Brad DeLong's low ball criticism of MMT as guru-based economics. It seems that Noah and Brad have a mutually appreciation affair going on. They deserve each other.
BTW, the "debate" between MMT and economists critical of MMT is becoming more personal and is descending into mud-slinging. Unprofessional to say the least. The excuse is readily available, however. Macroeconomics as a "policy science" is more about politics than economics, and politics is inherently a dirty business.
Noahpinion
Examining an MMT model in detail
Noah Smith
8 comments:
I didn't know that Tcherneva paper. It seems related to a paper by Mathew Forstater ("Taxation and Primitive Accumulation: The Case of Colonial Africa") which I always recommend Marxists to read.
See here
https://aussiemagpie.blogspot.com/p/marx-and-mmt.html
As maliciously sanctimonious as it is (in a style reminiscent of "Lord Keynes", btw), I really think Noah Smith's post deserves a reply by an MMTer (ideally, Tcherneva herself, but Forstater or even Bill Mitchell would be well placed to reply).
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Incidentally, you are not the first to notice Noah Smith and Brad DeLong's bromance. In fact, it's widely suspected that Noah is B.O.B.'s surrogate for dirty jobs (a bit what Australian politicians call a "head kicker").
Personally, I despise both the pig and his attack poodle, and this time they (?) bit more than they can chew. Frankly, as much as I would like to stay away from this MMT v everybody fight, I'm feeling tempted to reply myself.
MMT vs Mainstream: examining proto-scientific garbage in detail
Comment on Noah Smith on ‘Examining an MMT model in detail’
MMT claims that mainstream economics is defective. MMT is right. Noah Smith, in turn, claims that MMT is defective. Noah Smith is right. The scientific fact of the matter is that the major approaches ― Walrasianism, Keynesianism/MMT, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and that all get the foundational concept of the subject matter ― profit ― wrong. Economics is a failed science. By consequence, any discussion between Mainstream and MMT never gets above the level of moronic blather.
Noah Smith becomes concrete and debunks an MMT model of Pavlina Tcherneva. However, he messes up the debunking. Generally speaking, the blunder of MMT lies in the macroeconomic foundations. Noah Smith, though, gets stuck with criticizing this assumption: “The economy produces one service only, fighting fires.”
To make matter short here. The lethal blunder of MMT lies in the macroeconomic accounting identity G+I=T+S (i). Written as sectoral balances equation this gives (I−S)+(G−T)=0 (ii) or I=S (iii) for the elementary case of G, T=0.
I=S is provably false since Keynes’ General Theory (p. 63) but neither MMTers nor Mainstreamers like Noah Smith have realized it to this day.#1, #2 The reason is that economists are too stupid for the elementary mathematics that underlies macroeconomics.
The correct sectoral balances equation reads (I−S)+(G−T)−(Q−Yd)=0 (iv) with Q as macroeconomic profit and Yd as distributed profit. Curiously, the word profit does NOT appear in MMT models. Curiously, Noah Smith does not realize this. Without realizing it, the whole MMT vs Mainstream discussion goes about a zero profit economy. As long as this planet exists there NEVER was a zero profit economy. Macroeconomics is false since Keynes.
When the theory is false the policy guidance is false. Equation (iv) can be reduced to the limiting case Q=(G−T) (v) which says in plain words Public Deficit = Private Profit. In even plainer words, the MMT policy of permanent deficit-spending/money-creation is a permanent free-lunch for the Oligarchy. The empirical result is the somewhat biased distribution of income and financial wealth that most people find somewhat irritating. MMTers, though, sell their proto-scientific garbage as a benefit for the ninety-nine-percenters.
It holds with mathematical certainty: MMT is a scientific/social/political fraud ― just like the Mainstream.
Egmont Kakarot-Handtke
#1 Wikipedia and the promotion of economists’ idiotism
https://axecorg.blogspot.com/2018/07/wikipedia-and-promotion-of-economists.html
#2 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html
Don't feed the troll. No names mentioned.
MMT isn't a "formal" model (whatever that means) AND it isn't guru based.
[It is a formal model with loads of people who fancy themselves gurus on the specifics]
It is almost as if Noah is ignoring the whole conceptual framework of the model.
MMT and the canonical macroeconomic model
Comment on Noah Smith on ‘Examining an MMT model in detail’
Under the heading Formal Models vs. Guru-Based Theories Noah Smith demands: “These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don’t have to go ask Mike Woodford what New Keynesian theory says. You don’t have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own. MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT’s policy recommendations. But that’s different than having a formal model of the economy.” and “I want to be able to read a concrete, formal, well-specified model like the Tcherneva model above, and answer these questions myself.”
The problem with economics is this: microfoundations are false and because of this, ALL microeconomic models are false. Supply-demand-equilibrium is proto-scientific garbage. However, macrofoundations are also false and because of this, ALL macroeconomic models are false since Keynes, including MMT. Proofs have been given elsewhere.
However, critique of Mainstream or MMT has run its course: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)
From the overall failure of economics follows that a new theory has to be macrofounded but not Keynesian because Keynes messed things up. What is required is the Paradigm Shift from false microfoundations and false Keynesian macrofoundations to true macrofoundations.
So, let us forget methodological individualism and kick-off the “concrete, formal, well-specified” macrofounded approach. The elementary production-consumption economy 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 in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The elementary production-consumption economy is shown on Wikimedia.#1
What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.
Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.
For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the Central Bank over the course of one period is shown on Wikimedia.#2
See part 2
Part 2
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern.
If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium. Money is endogenous and neutral.
The general price level P can be anchored by setting the wage rate W. In order to avoid both inflation and deflation, the rate of change of W has always to be equal to the rate of change of R. The Quantity Theory is dead because M is not a price determinant.
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e. the real wage is always equal to the productivity no matter how the wage rate W is set.
Ramifications: (i) The State is needed for the institutional setup of the monetary order, (ii) the State is NOT needed for injecting money into the economy, (iii) what is needed is an accommodative Central Bank, (iv) neither the State nor the Central Bank interferes with the autonomous transactions of the household and business sector, (v) money is a generalized IOU, (vi) money is created and destroyed by the transactions between the household and the business sector, (vii) the value of money is given by W/P=R (1b), i.e. is equal to the productivity, (viii) the value of money does NOT depend on the (average) stock of money M, (ix) the functionality of monetary institutions and the value of money does NOT depend on the taxing power of the State.
The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget balancing, i.e. C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q+S=0 or Q=−S.
The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q=−S is the elementary version of the macroeconomic Profit Law.
Ramifications: (i) Because the mirror image of saving is loss Keynes’ I=S is false, (ii) ALL IS-LM models are false, (iii) Post-Keynesianism in ALL variants is false.
See part 3
Part 3
Now, additional sectors can be introduced. The complete macroeconomic Profit Law is given by Q=Yd+(I−S)+(G−T)+(X−M). #3, #4 In order to focus on the interactions between household, business, and government sector, it is here reduced to Q=−S+(G−T). Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes, (G−T)>0 government deficit.
If the government’s budget is balanced, i.e. G=T, and if the households dissave then the business sector makes a profit, i.e. Q is positive.
If the government’s budget is balanced and the households save, i.e. S≡Yw−C>0, then the business sector makes a loss, i.e. Q is negative.
If the government’s budget deficit, i.e. (G−T)>0, is equal to the household sector’s saving, i.e. (G−T)=S, then macroeconomic profit Q is zero.
If the government’s deficit is greater than household sector saving, then the business sector makes a profit.
If the household sector’s saving is zero, i.e. S=0, and the government deficit is greater than zero, i.e. (G−T)>0, then it holds Q=(G−T), i.e. the business sector’s profit equals the government sector’s deficit. So, if the State deficit-spends in the elementary production-consumption economy it follows (i) a one-off price hike (NO inflation) under the condition of market clearing, (ii) Public Deficit = Private Profit. Bringing money into the economy by public deficit spending is NOT distributionally neutral, just the opposite: it is a free lunch for the Oligarchy.
MMT’s sectoral balances equation is false. Because of this, the whole analytical superstructure is false. MMT policy guidance has no sound scientific foundations and is harmful to the ninety-nine-percenters. MMT is refuted on all counts.
Any model that lacks true macrofoundations is scientifically worthless. Axioms (A0) to (A3) define the canonical macroeconomic model. The rest of microfounded and macrofounded economics goes down the scientific drain.
Egmont Kakarot-Handtke
#1 Wikimedia, Elementary production-consumption economy
https://commons.wikimedia.org/wiki/File:AXEC31.png
#2 Wikimedia, Idealized transaction pattern
https://commons.wikimedia.org/wiki/File:AXEC98.png
#3 The Profit Law yields the correct macroeconomic sectoral balances equation (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which compares to the false MMT equation (I−S)+(G−T)+(X−M)=0. The equations are testable with the precision of two decimal places.
#4 Refuting MMT’s new Macroeconomics Textbook
https://axecorg.blogspot.com/2019/03/refuting-mmts-new-macroeconomics.html
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