Monday, February 15, 2021

Bill Mitchell — The income-expenditure relationship in macroeconomics – graphic treatment

We have been doing a lot of work developing the MOOC at the University of Newcastle which will also mark the first – MMTed material. We will follow up the MOOC with more detailed learning options in subsequent months. Tomorrow, we will be filming some more material for the MOOC and I think you will enjoy what we have planned when the MOOC begins on March 3, 2021. As part of the planning I have been thinking of simplified frameworks for teaching rather complicated concepts and relationships. Here is an example of that sort of thinking.…
Free MMT course. Pass it on.

What follows is a short graphic presentation of sectoral balances in place of the algebraic one.
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...

Govt would already have to be in deficit for firms and households to be in equilibrium in step 1...

Matt Franko said...

Interesting choice of a ballot box icon to represent the govt institution...

Looks like people are sending munnie to influence/rig the election ...

AXEC / E.K-H said...

Proving Bill Mitchell wrong ― burying MMT for good
Comment on Bill Mitchell on ‘The income-expenditure relationship in macroeconomics ― graphic treatment’*

Bill Mitchell introduces his macroeconomic approach: “Over the last several months by way of advancing Modern Monetary Theory (MMT) education initiatives, we have been involved in development a MOOC, i.e. Modern Monetary Theory: Economics for the 21st Century.” and “As part of the planning I have been thinking of simplified frameworks for teaching rather complicated concepts and relationships.”

In his course material, Bill Mitchell deals with nominal flows only, real flows and connecting variables like wage rate, price, productivity are left out of the picture. This ends up in a lethal mistake that invalidates the whole of MMT.

Here is the proof.

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) Ec=PX consumption expenditure Ec is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing Ec=Yw in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown on Wikimedia AXEC31a.#1

This graph is a bit more complex but with regard to nominal flows absolutely identical with Bill Mitchell's graph which simply says Yw=Ec.#2

So the starting point for the analysis of nominal flows is absolutely identical.

For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget-balancing, i.e. Ec=Yw, is now skipped. The resulting monetary saving/dissaving of the household sector is defined as S≡Yw−Ec. The monetary profit/loss of the business sector is defined as Q≡Ec−Yw. So, the balances of the two sectors are complementary, i.e. Q≡−S. In other words, the balances add up to zero, just as they are supposed to do according to the rules of accounting.

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. So, Q≡−S is the elementary version of the macroeconomic Profit Law.

Macroeconomic profit, though, is entirely missing in Bill Mitchell's presentation of the income-expenditure relationships. Now, any presentation of the elementary economic system that does not contain the foundational economic variable profit is scientifically worthless. From the fact that the conceptional foundations of macroeconomics are provably false follows that the whole analytic superstructure of MMT is false.#3-#6 This is all one needs to know about Bill Mitchell and MMT.

Egmont Kakarot-Handtke

* Billy Blog

#1 Wikimedia AXEC31a

#2 Income-expenditure flows

#3 The GDP-death-blow for the economics profession

#4 Wikipedia, economics, scientific knowledge, or political agenda pushing?

#5 Controlled demolition of MMT ― an exercise in elementary logic

#6 Refuting MMT’s new Macroeconomics Textbook