October 16, 2017

Proof of the inherent instability of the market economy

Comment on Simon Wren-Lewis on ‘How Neoliberals weaponise the concept of an ideal market’

Blog-Reference and Blog-Reference and Blog-Reference on Oct 17

The foundational tenet of economics is that the interaction of free markets tends, in principle, to produce an inherently stable optimal outcome with all factors fully employed or, with regard to labor, at worst ‘naturally’ unemployed.

This tenet has NEVER been proven. General Equilibrium Theory is known to be a methodological disaster and economics is known to be in need of a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

As a result, economic policy guidance in ALL variants between outer right-wing and outer left-wing has no sound scientific foundations since 200+ years. It can be proved that the market economy is inherently unstable.

Economics is a system science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1 The elementary version of the objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.


From this equation follows:
(i) An increase of the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio ρF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the macroeconomic price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R and vice versa. This is the OPPOSITE of what microfounded economics teaches.

“We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

This is false: a reduction of the average wage rate W in the situation of unemployment INCREASES unemployment. In general terms: at the heart of the market economy is a positive feedback loop, i.e. the very OPPOSITE of what is required for a self-stabilizing system.

The lethal methodological blunder of the microfounded market theory consists in the Fallacy of Composition, i.e. the illegitimate generalization of truths that hold for one firm/market for the economy as a whole.

The free market system is neither efficient, nor self-correcting, nor stable. Neoliberalism has no sound scientific foundations.

Egmont Kakarot-Handtke

#1 New Economic Thinking: the 10 crucial points

October 14, 2017

Why does Heterodoxy not abolish the fake Nobel?

Comment on Lars Syll on ‘Thaler and behavioural economics — some critical perspectives’

Blog-Reference and Blog-Reference on Oct 15

The core message of Heterodoxy is that Orthodoxy has failed on all theoretical and empirical counts and that New Economic Thinking is required. Heterodoxy claims to be the living example of New Thinking which, however, has NOT produced the true economic theory but the pluralism of provably false theories. Worse, Heterodoxy argues that the criteria of science do not literally apply to economics as a social science and that to insist on the well-defined standards of material and formal consistency is merely physics envy.

While it is true that Orthodoxy has abysmally failed, it is important to stress that Heterodoxy, too, has achieved nothing of scientific value.#1 The simple reason is that orthodox and heterodox economists share the same mental handicap: they do not understand what science is all about. What we have underneath the conspicuous hick-hack of the diverse schools is the grand unity and solidarity of the scientifically incompetent.#2 Well knowing that economics is not a science, no economics school puts the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” in earnest into question.

What the Bank of Sweden does, though, is either (i) a self-delusional overreach, (ii) an arrogation of scientific competence, (iii) an arrogation of legitimacy, or/and (iv), a deception of the general public.

The question is, why have heterodox economists never made a serious attempt to abolish the fake Nobel which makes the ridiculous claim that economics is science[s]. There is a blatant contradiction between reality and what the Bank of Sweden declares.

The Bank of Sweden has no legitimacy whatsoever to elevate a proto-science to the status of a science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent. Economists do not even understand the foundational concept of their subject matter, that is, macroeconomic profit. Economics is not a science, and economists are not scientists.

What neither orthodox nor heterodox economists have realized until this day is that economics is NOT a science of behavior. Behavioral Economics from Adam Smith’s Theory of Moral Sentiment, to homo economicus, to bounded rationality, to game theory, to Richard Thaler’s nudge is not economics at all but the very subject matter of sociology, psychology, anthropology, Political Science, history, etcetera. The subject matter of economics is the economic system.

Lars Syll entirely misses the point with his patronizing critique: “So — although it is good that people like Kahneman and Thaler are rewarded ‘Nobel prizes’ and that much of their research has vastly undermined the lure of axiomatic-deductive mainstream economics, there is still a long way to go before economics has become a truly empirical science.”

There is no other way to go for failed/fake scientists than to apply for immediate retirement. This, of course, includes the misdirected methodologist, confused blatherer, and clueless heterodox prophet Lars Syll.#3

Egmont Kakarot-Handtke

#1 Economics: 200+ years of scientific incompetence and fraud
#2 For details see cross-references Scientific incompetence
#3 The stupidity of Heterodoxy is the life insurance of Orthodoxy


Related 'The economics Cargo Cult Prize' and 'A social science is NOT a science but a sitcom' and 'Schizonomics' and 'There is NO such thing as an economic expert' and 'The economist as standup comedian'. For details of the big picture see cross-references Not a science of behavior and cross-references Heterodoxy

October 12, 2017

The economics Cargo Cult Prize

Comment on Barkley Rosser on ‘On Richard Thaler Receiving The Nobel Prize’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference

Economics is a failed science and because of this the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is an absurdity ― or worse.#1 The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

Today’s economics is nothing but the pluralism of provably false theories or, in Feynman’s words, cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#2

What economists have not realized until this day is that economics is NOT a science of behavior.#3, #4 Behavioral Economics from Adam Smith’s Theory of Moral Sentiment, to homo economicus, to bounded rationality, to game theory, to rational expectations, to Richard Thaler’s nudge is not economics at all but the very subject matter of sociology, psychology, anthropology, Political Science, history, etcetera.#5 The subject matter of economics is the economic system.

The lethal defect of economics is that it is microfounded, i.e. based on behavioral axioms. Now it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the second-guessing of Human Nature/motives/behavior/action to the explanation of how the economic system works.

After 200+ years of behavioral economics, economists still have no idea of how the market economy works. It is common knowledge that all profit theories are defective: “A satisfactory theory of profits is still elusive.”#6

This means, to this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian cargo cultic sect can tell what macroeconomic profit is.#7 Hence, they all fail to capture the essence of the market economy. This is not exactly a noteworthy scientific achievement of the economics profession.#8

Does the world expect from economists to find out how people behave? No, this is the very job of psychology, sociology, anthropology, etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, psychologist, biologist, or sociologist will ever try to figure this out.

Have economists done their proper job? No. Do economists know what profit is? No. Does behavioral economics help to find out what profit is? No.

It is not the task of economists to dabble in the so-called social sciences. The subject matter of economics is the economy. Economics is a system science and has to be based on macrofoundations. Economists are still caught in a cargo cultic paradigm. They do not deserve any prizes but to be thrown out of science.

Egmont Kakarot-Handtke

#1 Economics: 200+ years of scientific incompetence and fraud
#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#3 Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
#4 For details see cross-references Not a science of behavior
#5 PsySoc — the scourge of economics
#6 Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online
#7 You are fired!
#8 The real problem with the economics Nobel


Related 'A social science is NOT a science but a sitcom'

***
REPLY to Barkley Rosser on Oct 12

You are way behind the curve. For a quick Hudík-check see my 2013 post ‘Economics is NOT a science of behavior

***

REPLY to Barkley Rosser on Oct 16

Economics is NOT about human behavior but about the behavior of the economic system. The lethal blunder of economics is methodological individualism which comes in many psycho-sociological flavors and constitutes as the axiom of constrained optimization the core of Orthodoxy.

Science is well-defined since 2000+ years but economists somehow did not get it: “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)

Only certain knowledge (= materially/formally consistent) can be admitted to the corpus of science. And here is the crux of the so-called social sciences: “By having a vague theory it is possible to get either result. … It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman)

So, to begin with, economics cannot be built upon a behavioral axiom like constrained optimization or any other psycho-sociological premise.

This is the current state of economics: PsySoc-economists do NOT know how the economy works. Economists have not realized until this day that they are in a research program that has already been dead in the cradle: “Indeed, Alexander Rosenberg maintains that there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman)

What has economists contributed to the trash heap of the so-called social sciences? Utility maximization, bounded rationality, game theory, rational expectations, and so on until Behavioral Economics.

What the blathering dilettantes of PsySoc and soapbox economics cannot and do not grasp is: if it isn’t macro-axiomatized, it isn’t economics. And because of this proven incompetence they have to be expelled from the sciences.

October 8, 2017

A social science is NOT a science but a sitcom

Comment on David B. Feldman on ‘Is Psychology Really a Science?

Blog-Reference

The so-called social sciences have been identified by Feynman as cargo cult sciences: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is the true theory, with scientific truth well-defined as material and formal consistency. The problem is this, psychologists, for example, know that they do not satisfy scientific standards but they insist nonetheless on the title social science. It has immediately been obvious that Freud’s storytelling and adoption of Greek myth had not much to do with science (for example to Popper) but more with a modern alternative to religion/superstition and with a new format for the entertainment industry. The similarity of a therapy setting and a sitcom simply cannot be overlooked.

All problems would end immediately if the social sciences could stop calling themselves sciences. For whatever reason, they cannot. And because science relies on self-government and the voluntary adherence to scientific ethics and because there is no such thing as a science police who expels cargo cult sciences and jails fake scientists the so-called social sciences continue with what is in commonplace terms a fraud, i.e. with pretending what they not are.

As far as economics defines itself as a social science, the same untenable situation prevails. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. It is fraudulent to present this indefensible proto-scientific rubbish as science.#2

Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith/Karl Marx. In order to become a science, economics needs a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to true systemic macrofoundations. Economics is NOT a social science but a system science.

The simple reason why economics is a failed science is that both orthodox and heterodox economists share the foundational self-delusion that economics is a social science.

Until this day, economists have NOT gotten the foundational concepts of their subject matter, i.e. profit and income, right. This is like medieval physics before the foundational concept of energy was properly understood.#3

When economists are told that economics does not satisfy the scientific standards of material and formal consistency they invariably fall back on J. S. Mill’s slogan of economics as ‘inexact and separate science’. This, of course, is merely one of economists’ numerous unacceptable excuses.#4 There is NO such thing as an inexact and separate science. There is only science and non-science respectively cargo cult science. The so-called social sciences and economics fall into the latter category.

Egmont Kakarot-Handtke

#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 The real problem with the economics Nobel
#3 Economists’ three-layered scientific incompetence
#4 Failed economics: The losers’ long list of lame excuses


Related 'Economics is NOT a social science' and 'Still on the wrong track' and 'PsySoc — the scourge of economics' and 'The stupidity of Heterodoxy is the life insurance of Orthodoxy'. For details of the big picture see cross-references Not a Science of Behavior

***
REPLY to Matt Franko on Oct 8

You say: “Economics and some of these other unsuccessful disciplines dont attract the best people...”

In order to understand the obvious lack of scientific success it is crucial to realize that there is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) has been body-snatched by political economists (= agenda pushers). Indeed, it is a fact that political economics does NOT attract the best people. Political economics has achieved NOTHING of scientific value in the past 200+ years. Political economics attracts people that are stupid or corrupt or both.

Science consists of two essential elements: “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) Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Science is well-defined since 2000+ years. Economics is a failed science because economists are incompetent scientists. This applies to both Orthodoxy and Heterodoxy.#1 MMT is part of the mess.

What has been proven is that the formal foundations, i.e. the balances equations, of MMT are false.#2 Because of this, the whole analytical superstructure of MMT is false.

So, how MMTer in general and Stephanie Kelton, in particular, think and op-ed about the deficit is mostly wrong.#3 Obviously, MMT attracts the wrong folks. These underperformers and storytellers do not even get the elementary math of National Accounting right.

#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#2 Rectification of MMT macro accounting
#3 MMT: Redistribution as wellness program

***
REPLY to Ignacio on Oct 9

You ask “Is psychology a science?!?!?!" = ‘is gold money?!?!?!’ something can be analyzed by ‘the scientific method’ but it may be just a figure of speech to say something IS a ‘science’.”

Psychology is NOT a science, neither is economics. Science is well-defined since 2000+ years by material and formal consistency. Neither psychology nor economics satisfies these criteria. Because of this, they are cargo cult sciences: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman)

The problem with economics is that each year the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is awarded.#1 In order NOT to mislead the general public, the word ‘sciences’ has to be deleted from the title.#2

#1 The real problem with the economics Nobel
#2 Economics is NOT a science of behavior

***
REPLY to Tom Hickey on Oct 9

Every layperson who is confronted with the statement: Mr. A has been murdered and you are the murderer, understands immediately the concept of scientific truth. Truth is (i) binary true/false with NOTHING in between, and (ii), truth is objective, that is provable in principle, and (iii), that it is worth every effort to find out the truth even if we cannot be absolutely sure that we will be successful. As Popper put it “Although nowadays we have given up the idea of absolutely certain knowledge, we have not by any means given up the idea of the search for truth. (Popper)

Admitting that there is no absolute certain knowledge is compatible with the assertion that the Law of the Lever represents certain knowledge. In fact, science is defined as the body of certain knowledge.

While genuine scientists have no problem with the idea of certain knowledge philosophers, who are known for having produced blather instead of knowledge throughout recorded history, desperately try to keep things in the morass between true and false where ‘nothing is clear and everything is possible’ (Keynes). This insistence on inconclusiveness is a survival strategy of incompetent scientists and political agenda pushers, in other words, of failed and fake scientists. Needless to emphasize that these folks are the most enthusiastic followers of Feyerabend and tireless proponents of anything-goes.

Philosophers, social scientists, and economists are the traditional clientele of political clowns like the younger Feyerabend. How can science keep these folks at bay?

Let us make a thought experiment. There are two aircraft called PHI and SCI waiting on the maneuvering area. PHI has been designed/constructed by philosophers, psychologists, economists, and other fake scientists. SCI has been designed/constructed by folks who subscribe to the methodology of material/formal consistency as explained in the foreword of every physics textbook. Which aircraft will the fake scientists try to board? Clearly, in order to get rid of these folks, one has to make sure that they risk their lives with their own crappy constructs.

Of course, there is certain truth in economics but after 200+ years economists still have no idea what it looks like. The four main approaches ― Walrasianism, Keynesianism/MMT, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got profit wrong.

October 6, 2017

MMT: Redistribution as wellness program

Comment on Stephanie Kelton/Op-Ed on ‘How We Think About the Deficit Is Mostly Wrong’

Blog-Reference

What the layperson and most economists cannot see is that MMT has NO sound scientific foundations. The MMT models are based on Keynesian macro which has been refuted long ago.#1 As a rule of thumb, economic policy proposals of MMTers cannot be taken seriously.

First of all, the false MMT macrofoundations have to be fully replaced. As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of 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=C/X=W/R (1), i.e. the market clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#2

From (1) follows that the real wage is equal to productivity, i.e. W/P=R (2). The wage income receivers get the whole product.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Now, the sovereign government decides, following Stephanie Kelton, that every American shall get a pony for free, or in more abstract terms, that a part of output shall be redistributed. This measure is intended to increases employment and output and to improve the distribution of output.

It is assumed for simplicity that in the next period the business sector doubles initial employment L0, i.e. L1=2L0. The wage rate W remains unchanged and therefore total wage income doubles, i.e. Yw1=W2L0. Under the condition of budget balancing, the household sector’s consumption expenditures, too, double Ch1=Yw1=2WL0.

The market clearing price is again P=W/R and since neither wage rate W nor productivity R change the price, too, remains unchanged, i.e. P1=P0. So does the real wage (2). Again, the wage income receivers get the whole product.

However, if government expenditures in period 1 are Cg1 and taxes are zero then things change. Total expenditures are now C1=Ch1+Cg1=2Ch0+Cg1, that is, are more than double the expenditures in the initial period. On the other hand, output exactly doubles O1=RL1=R2L0. The market clearing price is now P1=C1/X1=(2Ch0+Cg1)/2X0=P0+Cg1/2X0, that is, the market clearing price rises compared to the situation with no government deficit spending. This is a one-shot increase and has NOTHING to do with inflation.#3 The price increase effects the redistribution of output O first between the household and the government sector and ultimately within the household sector. The real wage of the wage income receivers is now lower, i.e. W/P1 instead of W/P with P1 higher than P. The wage income receivers no longer get the whole product. Part of output is transferred via the government to other households. What happens in effect is a redistribution of output without taxation. The wage income receivers are taxed via the price increase.

The government runs a deficit, i.e. Cg is greater zero and T is zero. The money comes from the central bank, i.e. is created out of nothing.

The profit of the business sector Qm was zero in the initial period, because of C=Yw, and is now positive, i.e. Qm=Cg1, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit.

This can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of money rising continuously and with the redistribution of output going on continuously and without inflation.

MMT has no valid scientific foundations#4 but achieves four stunning feats of shell-game economics, (i) real redistribution among the households a.k.a. working class via the anonymous price mechanism instead of taxation, and (ii), a profit boost for the business sector, and (iii), safe interest revenues for the business sector in subsequent periods if profits are invested in government bonds which are supposed to consolidate the government’s debt, and (iv), a deflation of indefinite length because of government’s tax-financed interest payments.#3

The thing Stephanie Kelton and MMTers are really good at is economic policy marketing for the one-percenters.

Egmont Kakarot-Handtke

#1 How Keynes got macro wrong and Allais got it right
#2 Wikimedia, Pure production-consumption economy
#3 MMT was right all along: Gov-Deficits do NOT cause inflation
#4 For the full-spectrum refutation of MMT see cross-references


Related 'MMT: Just political heat, no scientific light' and 'Why is MMT so false?' and 'Profit and the collective failure of economists' and 'A social science is NOT a science but a sitcom'

***
REPLY to Tom Hickey on Oct 6

(i) You maintain “I think that Keynes would likely agree with the MMT position that automatic stabilization results in the fiscal balance expanding and contracting counter-cyclically, but that stimulus could be required in certain situations, in which case it would be diminished and withdrawn as conditions indicate.”

This is fruitless speculation. Fact is that Keynes got macro wrong and, after 80+ years, Post Keynesians and MMTers are still behind the curve.#1

(ii) Stephanie Kelton says: “Perhaps no one is more skilled in the dark art of deficit deception than Representative Paul Ryan, the House speaker.”

In fact, Stephanie Kelton is second to none. In the Pavlovian exchange of worn-out arguments, she avoids carefully to mention the pivotal economic concept profit.

• “Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses.”

False, their minuses become the pluses of the business sector = overall macro profit.

• “And since many Americans are missing it, too, they end up applauding efforts to balance the budget, even though it would mean erasing the surplus in the private sector.”

For private sector read business sector.

• “When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.”

Right, a certain part of the accumulated = non-distributed profit is used for bond buying and getting riskless additional interest revenues courtesy of government’s taxing power. That’s benefit squared for the business sector: profit plus interest on non-distributed profit.

• “… the math always adds up.”

True, it holds Qm =(I−Sm )+(G−T) or Public Deficit = Private Profit.#2

MMTer are the perfect example of ‘How We Think About the Deficit Is Mostly Wrong’.#3

#1 Keynesians ― terminally stupid or worse?
#2 Rectification of MMT macro accounting
#3 For the full-spectrum refutation see cross-references MMT

***
REPLY to Matt Franko on Oct 7

Thank you for the numbers. You say “so the main part of earnings isn’t put into bonds by firms anyway.”

You probably overlook two things
• accumulated profit means NOT the total profit per period (= flow) but the sum of non-distributed profits = retained profits (= stock),
• so the number under discussion is the ratio of the stock of bonds to sum of retained profits for the business sector as a whole.

The comparison of the business sector’s retained profits per period to the total stock of bonds makes no sense. This stock is mainly held by foreigners, pension funds, insurance companies, banks, etc.

I have clarified the sentence thus “a certain part of the accumulated = non-distributed profit is used for bond buying …”

***
COMMENT on Neil Wilson on Oct 7

Keynes got the paradigm shift from microfoundations to macrofoundations wrong. His methodological blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)#1, #2

Keynes NEVER grasped what macroeconomic profit is. That is disqualifying for an economist.

The axiomatically correct relationships are:
Qm=−Sm                               in the case of the pure production-consumption economy,
Qm=I−Sm                              in the case of the investment economy,
Qm=(I−Sm)+Yd+(G−T)+(X−M)  in the general case.
Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.

Therefore, all I=S and IS-LM models are provably false#3, Post Keynesianism and MMT, too, is false. Macroeconomics is proto-scientific rubbish since Keynes. Macro policy guidance is based upon materially and formally inconsistent economic theory.

#1 How Keynes got macro wrong and Allais got it right
#2 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#3 For the details of the bigger picture see cross-references Refutation of I=S

***
REPLY to André on Oct 8

You say: “I don’t listen people who make bold claims that are not backed by some kind of empirical evidence.”

Obviously, you have never heard that bold claims are the very essence of science.

Take notice that economics is about how the economy works and NOT in need of silly announcements to whom a retarded blogosphere blatherer prefers to listen.

***
REPLY André on Oct 8

You say: “Guess what? I will not waste my time reading your references.”

That’s OK. But why do you waste so much time parading as moron in the economics blogosphere?

Science consists of two essential elements: “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) Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Because BOTH logical AND empirical consistency is needed it is sufficient for a refutation to prove EITHER logical OR empirical inconsistency.

What has been proven is that the formal foundations, i.e. the balances equations, of MMT are false.#1 Because of this, the whole analytical superstructure of MMT is false.

This is the big claim: “Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they all fail to capture the essence of the market economy.” (see also Palgrave Dictionary, Profit, Dessai, 2008)

Guess what, you do neither understand the significance of this claim nor can you refute it.#2 And this brings us back to the point at issue: How Stephanie Kelton and the rest of MMT thinks about the deficit is mostly wrong because they, too, got profit wrong. For the proof see the cross-references.#3

#1 Rectification of MMT macro accounting
#2 10 steps to leave cargo cult economics behind for good
#3 Cross-references Profit

***
REPLY to André on Oct 9

You say: “As I said before, I will not waste my time reading #1, #2 or #3, because there is nothing there, just big claims without any real content.”

MMT is a scientific failure because MMTers are incompetent. And you are one of the worst examples of the absence of logic and the lack of scientific standards.

The proof that the MMT balances equations are false has been given here #1 and at some other places #2. Because you do not waste time reading references you missed it. You do not read the proofs, not to speak of understanding them, you just idiotically repeat that proofs have not been given.

The proof that the Keynesian macro equations, on which MMT is based, are false has already been given by Allais (Nobel Prize 1988).#3 Because you do not waste time reading references you missed it.

The proof that economists in general are too stupid to get the foundational concept of profit right has been given here #4. Because you do not waste time reading references you missed it.

That the profit theory is false since Adam Smith is plainly stated in the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai, 2008). Because you do not waste time reading references you missed it.

Because you can neither read nor think you do not understand anything. You say “I can also add that I and everyone that have discussed with you around here knows that ‘the formal foundations, i.e. the balances equations, of MMT’ are not ‘false’ as you claim.” This tells you only that your MMT buddies are just as far behind the curve as you are.

That the foundational MMT equations are false is not a claim but a mathematical proof. And neither you nor any other MMTer has refuted the proof. If you had more than MMT-buddy-blah-blah you would certainly present it, wouldn’t you?

The question of the empirical proof of the objective macroeconomic axioms has been dealt with elsewhere at length.#5 Because you do not waste time reading references you missed it.

MMTer are not only too stupid to understand a plain mathematical proof but violate scientific standards by not properly responding to it: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)

The issue has been decided: the MMT balances equations are formally refuted. MMT is scientifically dead. Whether you realize, understand, or accept it is a matter of indifference. People who do not ‘waste time’ following references and take notice of an indisputable refutation are the worst possible advocates of MMT. The living proof of the failure of MMT is MMTers.

#1 Rectification of MMT macro accounting
#2 For the full-spectrum refutation of MMT see cross-references
#3 How Keynes got macro wrong and Allais got it right
#4 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#5 Just make a search run with ‘testable’ on the AXEC blog

***
REPLY to André on Oct 8

You do not waste your time reading references and taking notice of proofs, perhaps you can waste a minute on reading your own stuff.

You will realize that in your filibuster there is NOT ONE iota of the point at issue, i.e. that Stephanie Kelton’s policy proposals are based on provably false balances equations.

No living soul is interested in what you have read once and why you disliked it. Like/dislike is for the gossip on Facebook, true/false is the sole criterion in an economics debate.

Either you can demonstrate that the elementary Law of Profit Qm=−Sm as derived from the objective-systemic axiom set is false or you cannot. Obviously, you cannot, therefore the refutation of Stephanie Kelton’s soapbox economics is final. In sum:
• MMT’s sectoral balances equations are mathematically FALSE,
• MMT’s policy proposal have NO sound scientific foundations,
• MMTer are scientifically INCOMPETENT.

***
COMMENT on Salsabob on Oct 12

Inflation is a pseudo-issue, see ‘MMT was right all along: Gov-Deficits do NOT cause inflation

October 5, 2017

Saving NEVER equals investment

Comment on Anonymous on ‘Why is MMT so popular?’

Blog-Reference

Yous say “the real story is savings equals investment plus net production.”

THIS is the real story: Keynes got the paradigm shift from microfoundations to macrofoundations wrong. His methodological blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)#1, #2

The axiomatically correct macro relationships are:
Qm=−Sm                                 in the case of the pure production-consumption economy,
Qm=I−Sm                                in the case of the investment economy,
Qm=(I−Sm)+Yd+(G−T)+(X−M)    in the general case.
Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.

All I=S and IS-LM models are provably false.#3

Egmont Kakarot-Handtke

#1 How Keynes got macro wrong and Allais got it right
#2 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#3 For the details of the bigger picture see cross-references Refutation of I=S


Immediately preceding 'Why is MMT so false?'

October 4, 2017

MMT was right all along: Gov-Deficits do NOT cause inflation

Comment on Simon Wren-Lewis on ‘Why is MMT so popular?’

Blog-Reference

The quasi-automatic Pavlovian argument against MMT is that ‘sustained reliance on printing money to finance deficits can lead to escalating price inflation’.#1 This view is based on the commonplace Quantity Theory, which is provably false.#2

MMT has gone to great lengths to demonstrate that the inflation fear is unfounded. What the layperson cannot see, though, is that not only Orthodoxy but MMT, too, has NO sound scientific foundations. The MMT policy proposals are based on Keynesian macro which has been refuted long ago.#3, #4 Both Walrasian microfoundations and Keynesian macrofoundations are provably false and have to be fully replaced.

As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of 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=C/X=W/R, i.e. the market clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#5

The market clearing price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Now, the sovereign government decides to run a budget deficit in the next period. Government spending is given with Cg and taxes T are initially zero. Total expenditures is now C1=Ch+Cg and this yields a price hike: P1=C1/X=(Ch+Cg)/X=P0+Cg/X with market clearing X=O. If deficit spending is exactly repeated period after period the price remains on the elevated level but there is NO inflation. No matter how long the government sector’s debt increases by Cg, there is NO further price increase.

Monetary profit for the economy as a whole is now given by Qm1≡(Ch+Cg)−Yw. Because of the household sector’s budget balancing, i.e. Ch=Yw, profit is Qm1=Cg. It always holds Public Deficit = Private Profit.

The amount Cg = government budget deficit comes from the central bank, i.e. is created out of nothing. The two sides of the central bank’s balance sheet, overdrafts and deposits, rise by the same amount. The combined transaction pattern of the household and government sector is shown in Figure 2.#6
Through deficit spending, the business sector’s pile of money rises continuously and is, at the end of the period, equal to profit which in turn is equal to the deficit Cg. The newly created money ends in the ‘cash box’ of the business sector, i.e. government sector’s overdrafts = business sector’s deposits.

This can go on for an indefinite time with the quantity of money = deposits at the central bank rising continuously ― but with no further price increase.

It is assumed now that the government consolidates its overdrafts by selling bonds to the business sector. The quantity of money in Figure 2 drops back to zero exactly at period end. Thus, the newly created money = deposits of the business sector is mopped up. The government sector’s debt rises period after period and the business sector’s stock of bonds, too, as an exact mirror image. This can go on for an indefinite time with no inflation.

The problem arises at another corner. The bonds bear interest and in order to pay the interest, the government has to raise taxes. For simplicity, it is assumed that taxes T are exactly equal to total interest and interest payments start in period 2.

The net income of the wage income receivers is Yw−T. Under the condition of budget balancing, consumption expenditure fall, i.e. Ch2=Yw−T. This causes the market clearing price to fall, i.e. P2=C2/X=(Ch2+Cg)/X=(Yw−T+Cg)/X. The tax T has a deflationary effect under the condition that employment is kept constant for a while.

The profit of the business sector was zero in the initial period, i.e. Qm=C−Yw=0 because of C=Yw, and is now Qm2=C2+T−Yw. The business sector now receives interest which is here equal to the household sector’s taxes T. Because of C2=(Yw−T)+Yg this yields again Qm=Yg. So, total profit remains unchanged but profit from selling the output goes down. This effect of the falling price is exactly compensated by interest revenues. This can go on for a while. Problems arise when the profit from normal business operations approaches zero and total profit consists alone of interest revenues.

This, in turn, depends on the development of the interest rate. If it is constant interest payments on bonds increase with the continuously growing public sector’s debt. The necessary increase of taxes eventually drives profit from normal production to zero. This, in conjunction with deflation, is the real hazard of a growing public debt and NOT inflation. It is no wild guess to assume that business will react to falling operating profit with curtailing employment. The problems can be pushed into the indefinite future with a parallel reduction of the interest rate on the public debt, preferably to zero. The central bank can support this process by buying bonds and thus increasing the liquidity in the system. This has NO effect on the price P.

As long as the debt is revolved, all is fine. Interest for the public debt is taken from the household sector via taxes and transferred to the bond holding business/banking sector. The ensuing deflation and the decline of profit from consumption good production ― NOT inflation ― is the real damage of MMT economic policy. The orthodox critique has always been way beside the point. There is nothing to choose, both Orthodoxy and MMT are failed approaches.

Egmont Kakarot-Handtke

#1 Cited from Scott T. Fullwiler, Interest Rates and Fiscal Sustainability, p. 3
#2 Forget Friedman, forget the Quantity Theory
#3 How Keynes got macro wrong and Allais got it right
#4 For the full-spectrum refutation of MMT see cross-references
#5 Figure 1, Wikimedia, Pure production-consumption economy
#6 Figure 2, Wikimedia, Transaction pattern


Immediately following 'MMT: Redistribution as wellness program'
Immediately preceding 'Why is MMT so false?'

Related 'MMT: Just political heat, no scientific light' and 'MMT: Money-making for the one-percenters' and 'The profit effect of a Job Guarantee' and 'NAIRU and economists’ lethal swampiness' and 'Forget Friedman, forget the Quantity Theory' and 'How MMT got inflation wrong' and 'Inflation: back to basics'.

***
REPLY to Salsabob on Oct 5

(i) You say: “What you do get correct is the potential consequence of price increases from increased deficit spending. Congratulations, you have discovered MMT’s inflationary constraint …”

There is NO such thing as an inflationary constraint. Both Orthodoxy AND MMT get the inflation issue wrong.#1 Both Orthodoxy AND MMT is proto-scientific garbage. Both Orthodoxy AND MMT is refuted according to the scientific standards of material and formal consistency.

(ii) You say: “Every MMTer will spend substantial energy chastising federal debt/deficit hysteria and the budget constraint mythology, but give only lip service to the inflationary constraint…. What most will say is that they are just economists, or that MMT needs to be pure, an operational description, a school of economic thought; must remain aloof of policy and politics …”

There is political economics and theoretical economics. The main differences are: (a) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (b) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.#2

Theoretical economics (= science) has been body-snatched by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the past 200+ years. MMT is part of political economics. More precisely, MMT advances the cause of the one-percenters under various populist social pretexts of which Stephanie Kelton’s ‘Pony for every American’ is the most recent example. MMT policy proposals have NO scientific foundations at all.#2

(iii) MMT is scientifically unacceptable. MMTers are scientifically incompetent. MMT is refuted on all counts.#3 The only thing MMTers can do for human progress is to get out of the way.

#1 MMT was right all along: Gov-Deficits do NOT cause inflation
#2 MMT: scientific incompetence or political fraud?
#3 For details see cross-references MMT

***
REPLY to Salsabob on Oct 6

You cite me: "MMT has gone to great lengths to demonstrate that the inflation fear is unfounded."

You say: “Can you provide an actual quote from an actual well-known MMTer (or actually any MMTer) that inflation is NOT the penultimate constraint to their basic notion that there could be much more central government spending?”

In his multi-part series ‘Modern monetary theory and inflation’ Bill Mitchell concludes: “First, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.”*

By and large, MMT says, as long as there is unemployment, inflation is not a problem. It may become eventually the penultimate constraint. But this is not the burning issue.

So, perhaps I should have been more explicit: “… that the inflation fear is unfounded under the prevailing conditions.”