Comment on Wikipedia on ‘Sectoral balances’#1

The sectoral balances description is given with two equations:

(1) Y = C + I + G + (X – M)

(2) Y = C + S + T

Legend: Y is GDP (expenditure), C is consumption spending, I is private investment spending, G is government spending, X is exports, M is imports, S is total saving and T is total taxation.

This gives the interrelation of balances:

(3) (S – I) = (G – T) + (X – M)

When foreign trade is taken out of the picture, i.e. X=0, M=0, then (3) reduces to:

(4) (S – I) = (G – T)

Conclusion: “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).”#2

The error/mistake/blunder of this approach is in the definition of the non-governmental sector and in the definition of total saving and in the absence of total profit and distributed profit.#3

The accounting error/mistake/blunder 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 the business sector.#4, #5

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 Sm≡Yw-C.

When government is added then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-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.

The balances of the business sector, the household sector and the government sector add up to zero, i.e. (b) Qm+Sm+(T-G)=0 (if I=0), and THIS is the correct accounting identity. It says that budget deficits (G greater T) and household sector dissaving (-Sm) are the two sources of overall monetary profit in a closed economy without business sector investment.

In other words: deficit spending of the government and household sector is the source of total profit in the market economy (with zero distributed profit). Total profit has NOTHING to do with efficiency or exploitation or monopoly or the smartness of CEOs. These factors only influence the DISTRIBUTION of total profit, which is given by Qm=G-T-Sm, BETWEEN the firms that constitute the business sector.

The entry Sectoral balances is the proof that economists — after more than 200 years — still do not understand profit which is the pivotal magnitude of their subject matter. From this follows that ALL OTHER Wikipedia entries about economics are false or incomplete.#6

Egmont Kakarot-Handtke

#1 Wikipedia

#2 See the MMM post ‘Budget surpluses are not national saving’

#3 For details see ‘Keynes’s Missing Axioms’ Sec. 14-18 and ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’

#4 See ‘The tiny little problem with economics’

#5 The elementary consumption economy is given by three systemic 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 expenditure C is equal to price P times quantity bought/sold X.

#6 See for example ‘The final implosion of MMT’