Senexx writes: “As a matter of accounting between the government and non-government sectors, a government budget deficit adds net financial assets ... available to the private sector and a budget surplus has the opposite effect.” and “While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity — the government deficit (surplus) equals the non-government surplus (deficit).”*
Accounting is an elementary form of mathematics. The curious fact is that economists get it habitually wrong and the MMTers are no exception.
The fatal accounting error/mistake is obfuscated by the fact that government and non-government are juxtaposed. Thus, the crucial differentiation between business sector and household sector gets lost. This, in turn, has the effect that the most important magnitude of economics — profit — gets also lost. In order to see this one has to go back to the most elementary configuration, that is, the pure consumption economy which consists only of the household and business sector.**
In this elementary 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 Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.
It always holds (a) Qm+Sm=0 or Qm=−Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the profit definition Qm=C−Yw and the definition of household sector saving.***
When government is added then it holds under the condition of zero saving of the household sector Qm=Cg−T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus. As always, the sector balances add up to zero, i.e. (b) Qm+Sm+(T−Cg)=0, and THIS is the correct accounting identity. It says that budget deficits (Cg greater T) and household sector dissaving (−Sm) are the two sources of overall monetary profit in a closed economy.
The defective accounting equations of the MMT approach are replaced by the correct accounting equations (a) and (b). With this, the whole analytical superstructure of MMT implodes.
* See the MMM post ‘Budget surpluses are not national saving’
** For details see ‘The tiny little problem with economics’
*** For national accounting see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
Related 'Modern moronomic theory' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Economists’ perennial trouble with accounting' and 'Where MMT got macro wrong'
You ask ‘What is the profit theory?’ For the comprehensive answer see ‘The profit theory is false since Adam Smith’
This means in concrete terms: 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 fail to capture the essence of the market economy.
It should be obvious: who cannot tell what profit is has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.
The profit theory is the pivot of all of economics and it is false since more than 200 years. As every economist knows from the Palgrave “A satisfactory theory of profits is still elusive.” (Desai, 2008)
Accordingly, the rectification of profit theory affects not only MMT but the four major approaches Walrasianism, Keynesianism, Marxianism, and Austrianism.*
You say “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”
Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides the confirmation.
Profit distribution has been dealt with in the paper mentioned above (see eq. 1) and elsewhere.**
* For more details of the big picture see cross-references
** See working papers on SSRN
I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah.
You are parroting Econ 101 micro stuff. Take notice that the micro definition is subject to the fallacy of composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.
Stick to the well-defined proof and refute it if you can. All else comes later.
Which part of Qm=−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.
Take notice that Keynes has been refuted. See ‘How Keynes got macro wrong and Allais got it right’
Take also notice that Davidson has been refuted. See ‘Why Post Keynesianism Is Not Yet a Science’
Take finally notice that Samuelson has been refuted. See ‘Samuelson or Who is the smartest smartie?’
Economists got profit wrong and because of this economics is a failed science. MMT is no exception.
You say: “The epicentre of this confusion is the identity: I = S”
That is correct. The I=S mess can be traced back to Keynes and has its ultimate cause in Keynes’s scientific incompetence: “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., 2010, p. 12)
MMT shares the profit blunder with Keynes. For details of the big picture see cross-references Refutation of I=S.
No fun, only ignorance
Comment on Brian Romanchuk on ‘Fun With Accounting Identities’
You quote my derivation of the elementary accounting equation and conclude: “The root of the problem is that he has confused cash flow for profits. In a two-sector economy, if one sector has a financial surplus, the other sector has to have a corresponding deficit, since the sum of financial flows has to equal zero. ... However, a financial flow is not the same thing as profits. For an economy divided between a household sector and a business sector ... there are two main cash flows out of businesses that are not expenses, and which create a wedge between cash flow and profits. 1. Dividend payments ... 2. Capital expenditures.”
If you had followed the references that back up my argument you would have realized:
(i) That I do NOT confuse cash flows with profits. In fact, there are two types of profit in the axiom set, viz. monetary Qm and nonmonetary Qn (2011a).
(ii) That dividends are in the axiom set (2014).
(iii) That investment expenditures and depreciation have been dealt with elsewhere (2011b).
In case you sincerely want to get out from behind the curve study the working papers on SSRN.
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Jamie summarized her post: “Nevertheless, the lack of clarity on the definitions in these identities gives an outsider the impression of an entire profession lost in a confusion of its own making.” This is not only an impression but an incontrovertible fact (2013).
Economists are scientifically incompetent blatherers. Their very first error is to think that they are free to define whatever pleases them. This is the Humpty Dumpty delusion.* The first thing to understand in science is that the foundational concepts have to be consistently defined.
It is a remarkable fact that physicists have defined their foundational concepts mass, force, energy, velocity, acceleration etcetera very carefully (see Newton’s axioms) and economists can until this day not even tell the difference between the measurable variables profit and income. Does it come as a surprise that economists have not figured out how the monetary economy works and that they have not achieved anything of scientific value in the past 200 years? In methodological terms, the failure of economics is ultimately caused by the inconsistent axiomatic foundations. This applies to Walrasianism, Keynesianism, Marxianism, Austrianism and, of course, to MMT.
The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
The current state of economics is that national accounting is provably false (2012) and that economic theory is axiomatically defective and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain dead blathering.
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
* See ‘Humpty Dumpty is back again’
For the proper handling of profit, distributed profit and retained profit see (2015a).
Accounting and economic theory are like hand and glove. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.
It is a big mistake to play accounting against theory/model. At a deeper level, they have a common formal core. For the basic model see (2015b).
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”
You are behind the curve, see ‘From Orthodoxy to Heterodoxy to Sysdoxy’
You are parroting a widely held misunderstanding about predictions. See ‘Science does NOT predict the future’
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details see my comment on your blog.
The Wikipedia definition is micro, we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C−Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macro one arrives at micro by successive DIFFERENTIATION. Differentiation is top-down, aggregation is bottom-up. The methodologically correct way is to start with macrofoundations and then to differentiate. Because of this the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable and as hard as any variable in physics. It is only economists’ brains that are mushy.
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
You say: “I believe he’s got stocks and flows horribly confused.”
It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and the stock of money.
The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the accuracy of two decimal places. The big problem in economics is not semantics but scientific incompetence, see ‘Feeble minds, shaky assumptions, and the inevitable failure of economics’.
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Referring to the elementary macro profit definition Qm=C−Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provably false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism, and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.
This said, the elementary Profit Law indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy breaks down, see (2014).
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
You say “Also, it is not clear how your variables (Qm, C, and Yw) relate to national accounting.” Simply follow the references, see (2012).
You say also “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).
You say finally “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blog post. This is why references are given. If you follow the references you will find for example ‘Clueless about money and profit’ and when you enter money in the search field you will find much, much more.*
Do not tell I assume something away when you are too stupid to look things up.
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
* Google gives you 8300 hits for [“Egmont Kakarot-Handtke” money]
It is pretty obvious that you do not understand the difference between science and sitcom. This sad fate you share with 99 percent of people who call themselves economists.
When the ancient Greeks invented science more than 2000 years ago they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling, and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “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, 1994).
That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.
And this brings us back to the core issue of this thread. The core issue consists in the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical and eco-friendly.
The representative economist has not realized the essential point of the scientific method and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms and economic policy advice is not different from poultry entrails reading.
As Popper said, science is conjecture and refutation. MMT has been logically refuted, therefore MMT is out of science. End of the sitcom.
It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus, set a good example.
You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”
This is a widespread misunderstanding among economists.* And the confusion is busily kept alive by political economists. Therefore, it is important to, first of all, keep in mind that there is political economics (= agenda pushing) and theoretical economics (= science).
Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis, 1982, p. 698]**
In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong, there is only materially/formally true/false.
Vague blather, untestable wish-wash, inconclusive either-or and storytelling has always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby to save their jobs has always been the apex of smartness of scientifically incompetent political economists.
So, there are the hard rocks of true and false and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, Austrians.***
It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.
Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen)
All this is known since more than 2000 years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Economists are either too stupid to understand this or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value since more than 200 years. MMT is no exception.
Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampy.
In sum: There ARE absolute universal criteria of scientific truth and they tell you that MMT is false.
* See ‘Humpty Dumpty is back again’
** See also ‘Marshall and the Cambridge school of plain economic gibberish’
*** See ‘Economic recommendations out of the swamp between true and false’
You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”
Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.
Accounting is elementary mathematics and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.
In the elementary consumption economy* three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i) wage income is assumed to be Yw=100 monetary units (e.g. trillion dollars, euros, yen etc.) and consumption expenditures are assumed to be C=100 monetary units per year. Then, the monetary saving of the household sector Sm=Yw−C is zero, and the monetary profit of the business sector Qm=C-Yw, too, is zero.
In case (ii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=−10. The whole output is sold, i.e. O=X, and the market clearing price P is now lower than in case (i).
In case (iii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=−10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market clearing price P is now higher than in case (i).
It always holds (a) Qm+Sm=0 or Qm=−Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the MOST ELEMENTARY form of the PROFIT LAW for the economy as a WHOLE.
When government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T−Cg)=0 or Qm=−Sm+(Cg−T) or Qm+Sm=(Cg−T), that is, the red ink of the government sector (Cg−T) corresponds to the black ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note, that in the last few years total household sector saving has been negative (−Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm=−Sm+(Cg−T), that is, both deficit-spenders are on the right side of the accounting equation.
Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (Cg−T) is equal to the business sectors monetary profit Qm, in other words, government’s red ink is business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all times. So, nobody should be surprised and complain about a perversely skewed income distribution.
I do NOT think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this unintended effect is due to the fact that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of national accounting.**
* The correct macrofoundations are given with three systemic equations: (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.
** For more details see
'A new episode of one of the worst blunders of economics'
'Macrofoundations, too, are defective'
'Economists’ perennial trouble with accounting'
‘End of confusion’
‘Accounting for dummies’
You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”
Take notice that Kalecki is wrong. See paper ‘What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example’
You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent-seeking behavior (as explored by Michael Hudson, for example).”
Take notice that the concept of rent is false. See paper ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’
You quote me “These equations prove that the formal foundations of MMT are inconsistent.” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”
False. I refer in my posts to the formal foundations that have been presented at many places and that are COMMON knowledge. Either you do not follow the references or you are not familiar with the MMT accounting equations.
For the proof see my post on Bill Mitchell’s blog titled ‘Modern moronomic theory’
“The fundamental flaw of your argument is to take national accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income an profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).
Already your first equation GDP=C+I+G+(X−M) is logically defective and by consequence the rest of your argument. This holds in particular for (I−S)+(G−T)+(X−M)=0 which boils for the most elementary case down to Keynes' I=S (Keynes, 1973, p. 63).
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.
Because your profit theory is false your monetary theory, too, is false (2015, Sec. 7).”
One more time: The formal foundations of MMT are defective and because of this the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fullwiler, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.
Related 'Economists cannot do the simple math of profit — better keep them out of politics'
You complained: “What ‘formal foundations of MMT’? You just use the phrase.”
You can find the formal foundations also on Wikipedia. See my comment: ‘Wikipedia and the promotion of economists’ idiotism’