Thursday, August 29, 2019

Bill Mitchell — Spending equals income whether it comes from government or non-government

It is now clear that to most observers that the use of monetary policy to stimulate major changes in economic activity in either direction is fraught. Central bankers in many nations have been pulling all sorts of policy ‘rabbits’ out of the hat over the last decade or more and their targets have not moved as much or in many cases in the direction they had hoped. Not only has this shown up the lack of credibility of mainstream macroeconomics but it is now leading to a major shift in policy thinking, which will tear down the neoliberal shibboleths that the use of fiscal policy as a counter-stabilisation tool is undesirable and ineffective. In effect, there is a realignment going on between policy responsibility and democratic accountability, something that the neoliberal forces worked hard to breach by placing primary responsibility onto the decisions of unelected and unaccountable monetary policy committees. And this shift is bringing new players to the fore who are intent on denying that even fiscal policy can stave off major downturns in non-government spending. These sort of attacks from a mainstream are unsurprising given its credibility is in tatters. But they are also coming from the self-proclaimed Left, who seem opposed to a reliance on nation states, and in the British context, this debate is caught up in the Brexit matter, where the Europhile Left are pulling any argument they can write down quickly enough to try to prevent Britain leaving the EU, as it appears it now will (and that couldn’t come quickly enough).
Bill addresses the charge from the Left that MMT is not Marxian enough.
I would also say that my career in economics has been inspired by the basic insights about Capitalism provided by Karl Marx (and Friedrich Engels) and the writers that followed in that tradition.
But I would also be sure to disagree with Michael Roberts assertion that “MMTers deny the validity and relevance of Marx’s key contribution to understanding the capitalist system: that is it is a system of production for profit; and profits emerge from the exploitation of labour power – where value and surplus value arises” (Source).
As one of the developers of MMT, I have always made it explicit that Marx’s ideas on class and exploitation lie at the basis of Capitalist dynamics and should be the starting point for a progressive understanding.
So it is hard at times to know what being ‘Marxist’ means, which is especially the case when we consider the post-modern distractions that made ‘Marxism’ appear recondite, to say the least....
Longish and detailed, but one of Bill most significant posts on political economy. Necessary to understand nuances of MMT from a left perspective, and MMT is now being attacked from both right and left.

Bill Mitchell – billy blog
Spending equals income whether it comes from government or non-government
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia


Matt Franko said...

"but it is now leading to a major shift in policy thinking, "


AXEC / E.K-H said...

Bill Mitchell’s dishonorable discharge from the sciences
Comment on Bill Mitchell on ‘Spending equals income whether it comes from government or non-government’

The well-known problem of economics is that it is a failed/fake science. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all have gotten the foundational economic concept of profit wrong.

Bill Mitchell is right in summarizing that not only the credibility of the mainstream is “in tatters” but also that of the “self-proclaimed Left”. How does MMT fit into this picture of overall academic failure/fake/fraud?

MMT, too, has no sound scientific foundations and therefore MMT’s economic policy guidance, too, is nothing but brain-dead agenda-pushing. From the scientific standpoint, MMT is not qualitatively different from mainstream garbage. MMT shares the lethal methodological blunder with the rest of economics.

Bill Mitchell enumerates the basics of MMT as follows:

“1. Aggregate demand is total spending in the economy.

2. Given the way we measure economic activity (as an aggregate of output and income produced per period), nominal (money) values of spending must equal income as an accounting statement.

3. If inflation is stable, then increased spending equals increased real income.

4. …”

The blunder is in “nominal (money) values of spending must equal income as an accounting statement.” NO! Economists are too stupid for the elementary math that underlies macroeconomic accounting. Keynes is the most prominent example. He wrote in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

Income is NEVER equal to the “nominal (money) values of spending”. Here is the proof.

1. Premises: 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 expenditures C is equal to price P times quantity bought/sold X.

2. Logical implications: In the elementary production-consumption economy, THREE configurations are logically possible:

(i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
• In case (i) the monetary saving of the household sector S≡Yw−C is zero and the monetary profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases. For a start, the market-clearing price as the dependent variable is given by P=C/X=W/R for any employment level.
• In case (ii) saving S is positive and the business sector makes a loss, i.e. Q is negative. The market-clearing price P is less than W/R.
• In case (iii) saving S is negative and the business sector makes a profit, i.e. Q is positive.

It always holds Q+S=0 or Q=−S, in other words, the balances of the business and the household sector always add up to zero. This is the Fundamental Law of Macroeconomic Accounting.#1

See part 2

AXEC / E.K-H said...

Part 2

In other words, the business sector’s loss is equal to the household sector’s saving. Vice versa, the business sector’s profit is equal to the household sector’s dissaving, i.e. the growth of the household sector’s debt. The non-equality of “nominal (money) values of spending” and wage income is the very cause of profit/loss. Profit/loss is the difference of flows and not a flow like wage income. Wage income and profit are NOT two different forms of income. So the lethal methodological blunder of the representative economist consists of confusing a balance with a flow.

3. Conclusion: Elementary algebra tells one that the premise of macroeconomics, i.e. “nominal (money) values of spending must equal income as an accounting statement”, is provably false since Keynes.

Because MMTers in general and Bill Mitchell, in particular, are too stupid for simple math they have to be expelled from the sciences just like their mainstream colleagues. Economics, including MMT, is failure/fake/fraud from the curriculum to the peer-review of journals to the faux Nobel Prize.

Egmont Kakarot-Handtke

#1 Macro for dummies (II)