July 31, 2017

After-Keynesian zombie interbreeding

Comment on Roger Farmer on ‘Post-Keynesians and New-Keynesians: A Lesson From Evolutionary Biology’

Blog-Reference and Blog-Reference

Roger Farmer waves the flag of hope: “Post-Keynesian finches and their New Keynesian cousins have avoided each other for far too long. Just as the arrival of El Niño in the Galapagos Islands allowed diverging species to once more merge, it is my hope that the shock of the Great Recession will catalyse interbreeding between New Keynesian and heterodox economists.”

This, of course, is a misleading metaphor. The fact on the economic Galapagos island is that the four sub-approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. No amount of interbreeding will result in anything else than just another scientific zombie. The simple reason is that the genetic code = the set of axioms of the four sub-approaches is defective.

Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (GT, p. 63)

This elementary two-liner is conceptually and logically untenable.#1 Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al.). As a result of this unidentified inheritable blunder, the whole After-Keynesian population is imbecile.

The Walrasian axioms are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). As a result of this inheritable axiomatic blunder, the whole After-Walrasian population is imbecile.

In Samuelson’s interbreeding, a.k.a. synthesis, the defective Walrasian microfoundations, and the defective Keynesian macrofoundations were cobbled together. Needless to emphasize that both approaches did not logically fit together then and do not fit together now and will not in the future.

Roger Farmer’s attempt to combine the rotten genetic material of Keynesianism and Walrasianism is doomed to failure. Economics needs a paradigm shift, nothing less than an entirely new creation will do.#3

Egmont Kakarot-Handtke

#1 For details see ‘Post Keynesianism, science, and universal idiocy
#2 For detail see ‘The father of modern economics and his imbecile kids
#3 See ‘First Lecture in New Economic Thinking


For the big picture see cross-references Keynesianism

Economists: just too stupid for counting

Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’

Blog-Reference and Blog-Reference

The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward arithmetic of accounting.

Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.

Nobody could be more down to earth and historically accurate than Mr. A and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) National accounts, pure production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.

The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, i.e., every single transaction in the period under consideration, accurately.

At the end of the second period, they meet again and compare their numbers. This time they have:
(b) National accounts, consumption expenditures greater than wage income, C > Yw.


The accountants are again pleased that their respective numbers are exactly equal but this time their accounts show balances.

Says Mr. B, I call my balance profit or loss, as the case may be, more specifically I define monetary profit as Qm≡C-Yw.

Well, says Mrs. H, I call my balance saving or dissaving, as the case may be, more specifically I define monetary saving as Sm≡Yw-C.

Then they calculate their respective balances and find out, to nobody’s, surprise that Qm=-Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real-world transaction.

Next day, the two accountants hand their numbers = Figure (b) over to the economist. Says the economist, hmm, for my purposes I have to rearrange the accounts, after all, profit has to be treated as the income of capital analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:


The economist now says to himself, obviously, Gross Domestic Income GDI is ‘equal’ to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C-Yw ergo GDI≡C. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures and investment expenditures, i.e. GDP≡C+I. Then we have GDI≡GDP by definition, more precisely, by FALSE definition. This, Gross Domestic Income is ‘equal’ to Gross Domestic Product, is the so-called fundamental macroeconomic accounting identity ― the supposedly unassailable quantitative/empirical bedrock of economics.

The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e. the household sector’s increase of debt. Income is a flow and profit is a balance of flows and to lump the two together is sheer stupidity.

From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? 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

Because economists ― Keynes, Keynesians, Post Keynesians, Anti-Keynesians and all the rest ― cannot even do the elementary mathematics of accounting the profit theory is false since Adam Smith.#2 This means because economists are too stupid for simple math ALL of economics is proto-scientific rubbish.

Egmont Kakarot-Handtke

#1 See also ‘Economists do not solve problems, they are the problem
#2 For more details see cross-references Accounting and cross-references Profit and cross-references Incompetence

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REPLY to Neil Wilson on Jul 31

Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses#1 like these:

“In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”

“Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.”#2

“What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)

“Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)

All this sounds plausible but demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a system science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined.#3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other peoples’ motives and behavior but cannot tell since 200+ years what profit is.

#1Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 The Economics God Equation



July 30, 2017

The ultimate ― analytical ― origin of money

Comment on Peter Cooper on ‘Self-Imposed Constraints as an Obfuscating Factor’

Blog-Reference

Methodologically it holds: “Questions of origin are ‘how and why’ questions. They are comparatively unimportant theoretically and usually have only a specific historical interest. (Popper) So, monetary theory deals not with the historical origin of money in a nation state but with the logical origin.

Suppose the business sector consists initially of one giant fully integrated firm. There is no central bank and no sovereign political entity. The firm fixes the wage rate W arbitrarily at 1 dollar per hour. We then have a unit of account but nothing that looks like money. In principle, it suffices that the firm’s accountant keeps track of wage payments and the purchases of each employee at the firm’s store. We then have a nominal but not yet a monetary economy.#1

In the next step, the firm pays the monthly wages with a standardized IOU and declares that this conveniently denominated title will be unconditionally accepted at the firm’s store. The employees accept that the IOUs discharge their wage claim against the firm. Since the household sector’s budget is balanced by the initial condition C = Yw, whatever the firm issues returns until the end of the period under consideration. The firm creates IOUs and destroys them again within a given time span. No IOUs are carried over to the next period and therefore the IOU is not suited as a store of value. The firm’s IOU is a pure transaction medium.

We now split the business sector into two identical halves. Firm A’s wage rate remains unchanged at 1 dollar but firm B pays a wage rate of two bancor per hour and issues its own IOUs for the payment of wages. Now the question arises whether store A could accept the IOUs of firm B and vice versa. Technically there is no problem to fix an exchange rate between the IOUs. The advantage for the households consists in no longer being restricted to buy their firm’s product in their firm’s store. This increase of the number of buying locations, though, is not so impressive because both firms produce an identical output and sell at the same price in dollar or bancor. At the end of the period under consideration firm B presents firm A’s IOUs and gets its own IOUs in return. Under the given ideal conditions the mutual claims cancel out exactly.

One important element of a functioning IOU economy is the unconditional mutual acceptance of IOUs and the final clearing of balances between the different issuers of IOUs.

IOUs have a time dimension, a duration. Because the duration between creation and destruction is relatively short, IOUs are only suited as transaction medium but not as a store of value. This duration, though, is enough to explode General Equilibrium Theory: “… it is generally acknowledged that no kind of exchange intermediary or, in common parlance, ‘money’ can be introduced into conventional general equilibrium theory without violating its logical underpinnings …”. (Clower) Equilibrium theory cannot handle duration because it is formally predicated on simultaneity.

As the number of firms increases the number of exchange rates multiplies by n(n-1)/2 and the handling of privately issued IOUs becomes obviously more and more cumbersome even under the ideal condition that each firm’s store voluntarily accepts all other IOUs, that all households fully spend their incomes in the period under consideration, and, above all, that all participants honor their obligations. A host of practical problems arises when people start gaming the system, e.g. by counterfeiting or over-issuing IOUs.

The final step on the way to money proper consists of the introduction of the central bank and of the definition of the means of payment. Instead of issuing their own IOUs, the firms now become the debtors of the central bank in the form of overdrafts and get deposits in return. These deposits are then used for wage payments and subsequently for the households’ purchases of the consumption goods. Thus, the firms’ overdrafts are eventually reduced again to zero. There is no constant quantity of money in the economic system. This idea is the fundamental blunder of the Quantity Theory.

In marked contrast to private IOUs central bank money = deposits has no built-in short term duration. This means that central bank money morphs from a pure transaction medium into a store of value.

The fact that deposits can at any time take the form of bank notes and vice versa in no way affects the characteristics of money but means that the central bank loses sight of that part of transactions that are carried out with cash. This feature is a precondition for the use of money in the black economy.

In the pure production-consumption economy money starts as an IOU of the single firm. The transaction medium is created out of nothing for wage payments and is destroyed when the households spend their income by buying the firm’s output. In the case of multiple firms, this leads to many different IOUs. The multiplicity of private IOUs, which becomes exponentially impractical as the number of firms increases, is finally replaced by the central bank’s generalized public IOU which is money in the proper sense.

The ultimate rationale for central bank money is the enormous productivity gain for the economy as a whole that comes from the replacement of private IOUs. Central bank money is the most efficient transaction medium and it has the additional property of a store of value.

Because the central bank is an institution that has to be established by the legal authority of a nation state money is, as the MMTers do not get tired of emphasizing, ultimately a creation of ‘the state’. This does not mean, though, that the government is needed to endow the economy with money.#2 This is the basic function of the central bank.

Egmont Kakarot-Handtke

#1 The pure production-consumption economy is for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C).
#2 See cross-references 'Refutation of MMT: all proofs and arguments you ever need'


Related 'Money and time' and 'Money: from silly stories to the true theory'. For more details of the big picture see cross-references MMT

July 29, 2017

Money and time

Comment on Peter Cooper on ‘Self-Imposed Constraints as an Obfuscating Factor’

Blog-Reference

Peter Cooper describes how money comes into the world: “From inception of a monetary economy with a government-issued currency, it is clear that government spending must come before tax payments …. The order of requirements is basically: (i) government defines its monetary unit of account; (ii) government imposes taxes and other obligations that can only finally be settled in that currency; (iii) government spends its currency into existence; (iv) non-government can now obtain the currency and, among other things, pay its taxes and purchase government debt.”

From this follows for the time sequence of spending and taxation: “Since the destruction of something cannot logically occur prior to its creation, clearly government spending (which creates government money) logically precedes tax payments (which destroy government money).”

This suggests that money comes into the world through deficits. This is true in principle but from this does not follow a rationale for ever-expanding government debt.

To see this one has to start with the basics, i.e. with the time pattern of transactions and the emergence of deficits. The pure production-consumption economy is for a start clearly defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C).#1

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legitimate sovereign which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw.

Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

The two transaction sequences for the case of a balanced budget C=Yw are combined in Figure 1 which shows the deposits/overdrafts of the household sector at the central bank over the course of one period.
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money = deposits is continually created and destroyed during the period under consideration.

As a matter of principle, the time sequence ― spending before income or income before spending ― is NOT an issue at all. The central bank can handle EVERY transaction pattern. What matters is whether the budget is balanced at the end of the period or not, i.e. whether C=Yw.

So we have two cases. First case, the household sector’s spending C is greater than wage income Yw. The transaction pattern in the case of continuous dissaving is shown in Figure 2.
The household sector ends up with overdrafts. As a mirror image, the business sector ends up with deposits. The household sector’s debt increases through dissaving. It holds -Sm = Qm.

The transaction pattern in the case of saving, i.e. C is less than wage income Yw, is shown in Figure 3.
In both cases, the quantity of money = deposits at the central bank increases. In the first case the additional money is in the hands of the business sector (= profit), in the second case the additional money is in the hands of the household sector (= saving).

Now, exactly the SAME holds when government is included. Whether government spending comes before taxes or vice versa is a matter of INDIFFERENCE. It is merely a technical issue and the central bank can handle it without difficulties.

The all-important question is whether the government ends up with a deficit or a surplus. If government spending G is greater than taxes T then government debt increases ― analogous to Figure 2 ― and this has NOTHING to do with whether spending comes before taxes or whether taxes come before spending.

Peter Cooper confounds the question of the time sequence of transactions with the question of government deficits/surpluses. The deficit ceiling of the US government refers to the accumulated debt and NOT to short-term overdrafts which are only a minor cash management problem as long as G=T.

Egmont Kakarot-Handtke

#1 For the detailed verbal description see ‘How money emerges out of nothing ― the functional account


Related 'Money: from silly stories to the true theory' and 'A tale of three accountants' and 'The ultimate ― analytical ― origin of money' and 'Refutation of MMT: all proofs and arguments you ever need'

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REPLY to Neil Wilson, Matt Franko on Jul 29

Neil Wilson maintains: “Accounting is an historic convention. You tot up *after* the date.”

This is an old cliche from the pre-computer era and it is downright false with regard to money. Money in our days is, in the most elementary case, deposits at the central bank which is nothing else than the debit side of the central bank’s balance sheet. In the general case of a differentiated banking system, this translates into the consolidated balance sheet of the banking sector (= central bank + commercial banks).

So, when the firm wants to pay its workers it orders the central bank to transfer the amount x. The initial deposits of the firm are zero. Then the central bank makes a book entry: firm’s overdrafts -x and worker’s deposits +x. The balance sheet of the central bank lengthens. Thus, money is created out of nothing BY accounting, or UNO ACTU with the book entry, in real time and NOT ‘after the date’.

Money = information, and creation/destruction of money = accounting at the CB.

The problem of economists is that they are storytellers and when it comes to doing the elementary mathematics of accounting, that is, to simply write down effective real world monetary transactions and to eventually sum them up, one-half of their two brain cells burn through.#1

The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward arithmetic of accounting.#2

The whole intellectual misery of economics reveals itself when somebody says “It’s only an accounting identity”.#3

#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 A tale of three accountants
#3 For details see cross-references Accounting

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REPLY to Matt Franko on Jul 29

You say: “You are redefining "G" as under the NIA, "G" does not include transfer payments.”

This is correct. In order to keep things simple G is spending on goods and services analogous to the consumption expenditures C of the household sector. All other things have to be dealt with separately.

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REPLY to peterc on Jul 29

(i) You say: “EKH, this is more in relation to a previous thread, but you mention it here also that you think money is better thought in general terms as information rather than an IOU. I actually think the IOU construction adopted by MMTers and some others captures the nature of money better.”

This is a misunderstanding. Money = information, and money = public IOU, and money = the debit side of a credit relationship on the CB’s balance sheet are only different ways of expressing the same thing. Whether the IOU takes the form of a clay tablet, a piece of paper, or of a series of 0/1 in the working memory of a CB server is only a question of technical sophistication.

(ii) You say: “So, for example, when you refer to ‘Cooper’s view’ of money as an IOU, it is of course not my view, but a view developed by others who I am in agreement with.”

I am not refuting you as a person but your argument and by implication all others who come forward with the same argument.

The point at issue is NOT the policy proposals of MMT or their proponents but the lack of sound theoretical foundations.*

* See cross-references

July 28, 2017

Money: from silly stories to the true theory

Comment on Peter Cooper on ‘Short & Simple 11 ― Money as an IOU’

Blog-Reference

“… in fact he [Adam Smith] disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

Not much has changed in 200+ years. The homely stories about how money comes into the world go as follows:

(i) “Before money, …, we all had to barter for the goods we wanted. If I wanted wheat and had chickens, I needed to find someone who wanted chickens and had extra wheat. Money solves this ‘double coincidence’ problem by letting me sell my chickens to buy your wheat. If we didn’t have money we’d invent it immediately.” (Stray)

(ii) “To increase and facilitate trade, …, a paper currency was organized by the Restaurant and the Shop. The Shop bought food on behalf of the Restaurant with paper notes and the paper was accepted equally with the cigarettes in the Restaurant or Shop, and passed back to the Shop to purchase more food. The Shop acted as a bank of issue. The paper money was backed 100 percent by food; hence its name, the Bully Mark.” (Radford)

(iii) “Eventually some goldsmiths noticed that the paper receipts they gave to their customers to evidence the valuables left in storage began to circulate as currency alongside their countries’ coins. A shopkeeper accepting these receipts in payment knew that he could go to the goldsmith to redeem them for gold and silver, and also recognized that a paper receipt was more convenient to use as currency than were pieces of metal.” (Turk et al.)

(iv) “For example, perhaps your neighbor offers to tend to your garden while you are away on holiday. You write ‘IOU’ on a slip of paper and promise that you will accept the slip of paper back again in payment for a service to be performed on your return. Your neighbor knows and trusts you and so accepts this arrangement. On returning home, you wash your neighbor’s car and mend a fence, accepting back the IOU as payment.” (Cooper)

(v) “When government uses the currency to purchase goods and services, it promises to accept back its IOU in payment of obligations to it. These obligations mostly take the form of taxes.” (Cooper)

Whether these stories are historically true does not matter much. The fatal weakness of storytelling economics is the Fallacy of Insufficient Abstraction. The theory of money has to be developed within the framework of a ‘monetary theory of production’ (Keynes).

The pure production-consumption economy is for a start clearly defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C).

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market clearing price is given by P=W/R. So, the price is determined by the wage rate, which has to be fixed as a numéraire, and the productivity. From this follows the average stock of transaction money as M=kYw, with k determined by the payment pattern.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits = overdrafts, and (ii), a legal system which declares the central bank’s deposits as legal tender. Money comes into the world through the autonomous transactions between the business and the household sector and the transfer of deposits.

This is the fully specified analytical account that connects the measurable variables L, R, O, X, P, Yw, C, M of an elementary economy and explains how transaction money comes into the world. Note that the central bank is passive, it only carries out the autonomous transactions which, in turn, determine the average quantity of money M. There is no such thing as monetary policy. The acceptance of money is not brought about by state power or by personal trust but by enforceable law.

Egmont Kakarot-Handtke


Related 'How money emerges out of nothing ― the functional account' and 'The ultimate ― analytical ― origin of money' and 'What is MMT?' and 'MMT is dead'

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REPLY to Calgacus on Jul 28

The history of money from the cowrie shell#1 to bullion to coins to notes and to the credit card shows a clear tendency of progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. The ultimate data carrier is the server at the central bank and the chip under your skin.

Again, the pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. It is a bit stupid to get caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: money = information.

In the ‘monetary theory of production’, things get started like this. The firm says to the worker we pay you one dollar per hour. At the end of the first day, the firm owes the worker $ 8. Money starts as a credit relationship with the firm as borrower and the worker as lender. Let this go on until mid-month. Then the firm’s IOU is $ 120.

Now the firm goes to the central bank and tells them to transfer $ 240 to the worker. The central bank makes a book entry: firm’s overdrafts $ 240 and worker’s deposits $ 240. The private IOU of the firm has become money. The worker owes the firm 120 working hours for the rest of the month. The underlying private borrower-lender relationship has flipped. Vis-a-vis the central bank, the firm is the borrower.

Now, $ 240 is a rather abstract thing until the worker goes shopping. We know from above that the price in the pure production-consumption economy with market clearing and budget balancing is P=W/R. This translates into the real wage W/P=R. The ‘real’ value of money or the purchasing power is determined by the productivity. This is how the arbitrary designation dollar (euro, yuan, ruble, etc.) becomes something very concrete, i.e. value of money = productivity. Money has NO intrinsic value.

By spending the money on the consumption good the credit relationship is resolved. This is the elementary cycle of money creation and destruction. It starts with zero and ends with zero.

Note that this analytical account deals exclusively with the measurable variables L, R, O, X, P, Yw, C, M of an elementary economy and leads to testable propositions. The economist’s job is to explain the ‘quantity of money’ M with the accuracy of two decimal places and its relationship with the price P. Note well that it is NOT the quantity of money that determines the price in the pure production-consumption economy. And this means that the commonplace Quantity Theory is dead. And the MMT story, too.


#1 “Shell money is a medium of exchange similar to money that was once commonly used in many parts of the world. Shell money usually consisted either of whole sea shells or pieces of them, which were often worked into beads or were otherwise artificially shaped. The use of shells in trade began as direct commodity exchange, the shells having value as body ornamentation.” (Wikipedia)

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REPLY to Matt Franko on Jul 28

Nice try to start a futile semantic game. In every concrete historical situation, people know very well what money is. This, though, is a matter of indifference for the theory of money. What people think about the earth and the sun is irrelevant for astronomy, just as it is irrelevant for economics what storytellers tell about the historical emergence of money.

Money in the ‘monetary theory of production’ is in the most elementary case the stock of deposits at the central bank which is measurable with the accuracy of two decimal places. It is a matter of indifference whether it is called dollar, euro, yuan, or ruble. Take the world economy as one and define one currency and call it Bancor and all semantic variety disappears.

The point at issue is that MMT is provably false* and that Peter Cooper’s IOU story of money is beyond ridiculous. Just as your semantic crap. This is NOT a figure of speech.

* Refutation of MMT: all proofs and arguments you ever need

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REPLY to Matt Franko on Jul 28

When social scientists (an oxymoron, not a metonymy) are at a loss they invoke complexity as an excuse. This does not work either.*

* Complexity and stupidity

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REPLY to Matt Franko on Jul 28

The question on this thread is does Peter Cooper’s Short & Simple 11 – Money as an IOU hold water? And the answer is not one drop.

So MMT is refuted on all counts.*

Whether you understand the proof and its significance is your personal problem.

* For details see ‘Refutation of MMT: all proofs and arguments you ever need

July 27, 2017

Why economists have not been effective in economics

Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’

Blog-Reference and Blog-Reference and Blog-Reference on Jul 31

Mathematics has not been effective in economics because economics is a cargo cult science. Feynman defined it as follows: “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 among economists is a proper understanding of what science is all about. Aristotle gave a working definition 2000+ years ago: “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 apparently followed this methodology. Walrasian economics is axiomatized, the hard core premises are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. And this is why economics is a cargo cult science. Economists do all the things scientists are supposed to do but it does not work.

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this, the Walrasian axioms are methodological madness, to begin with.

Economics suffers from the fact that the subject matter is ill-defined. Economists think that they are doing economics while they bungle amateurishly in sociology and psychology. What economists overlook is that their subject matter is the structure and behavior of the economic system and that all questions about Human Nature/motives/behavior/action are NOT their business.

The task of economics is to figure out how the economy works. Economics is a system science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1

What we have at the moment is Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are PROVABLY false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism. Let this sink in: the profit theory is false since Adam Smith. Instead of having clarified their foundational concepts profit and income, economists have wasted their time fooling around with NONENTITIES.

Economics needs a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations. Economics is NOT a social science but a system science. A system can be objectively and precisely defined. This is the very condition for the application of mathematics.

When the premises are not correctly defined mathematics cannot work its magic and as a collateral damage econometrics becomes a senseless exercise.#3 When utility maximization is put into the premises no testable proposition ever results. Scientifically incompetent economists do not understand this elementary methodological fact since 140+ years. And this is why mathematics has not been effective in economics.

Egmont Kakarot-Handtke

#1 New Economic Thinking: the 10 crucial points
#2 Profit theory in less than 5 minutes
#3 Morons on math


For details of the bigger picture see cross-references Math/Mathiness

Immediately following 'Economists: just too stupid for counting'

Refutation of Asad Zaman’s heterodox methodology: all arguments you ever need

Blog-Reference

Heterodoxy is supposed to eventually replace Orthodoxy. Orthodoxy is provably false and therefore a replacement is needed ― this is what Heterodoxy is all about. Heterodoxy is supposed to become the next Orthodoxy.* Fact is, though, that Heterodoxy failed until this day to perform the indispensable paradigm shift. The reason is that the scientific incompetence of ― traditional ― Heterodoxy is just as abysmal as that of Orthodoxy. The proof is in Asad Zaman’s numerous posts on methodology.

For the comprehensive refutation see cross-references (chronological):
Does Asad Zaman fly with POL or SCI Airlines?
Mass unemployment: The joint failure of orthodox and heterodox economics
Ideology? Incompetence? Fake? Or all this together?
Complexity and stupidity
The one stone that kills orthodox and heterodox employment theory
Heterodoxy and the re-invention of science
Who or what exactly did Keynes save?
Keynes’s message for contemporaries
Economics pedagogy: an un- and anti-scientific exercise
Heterodoxy ― a new paradigm or just another political sect?
The end of traditional Heterodoxy in the Malmö coal pit
Economics: Deadlocked between politics and science
The economist as second-guesser, mind reader, and folk psychologist
Refocusing economics
Politics, storytelling, and science
Unemployment ― the fatal consequence of economists’ scientific incompetence
Politics or Science? Decide and act accordingly
Keynes, the methodologist
The scientific self-elimination of Heterodoxy
End of confusion
The consistent ancients and the confused moderns
Methodological wrong-way drivers
Still in the proto-scientific wood
How to get out of the Econ 101 PsySoc woods
Heterodox schizo
Heterodoxy: From bad to better or from bad to worse?
There is no truth in political economics
Sick or false?
Economists’ perennial trouble with accounting
What comes next?
Heterodoxy and the nullity of dead horse beating
How Heterodoxy keeps the Naked-Emperor-Zombie alive
Every thinking economist is heterodox by default, but how do we proceed from here?
Full methodological illiteracy
Passionate belief is no substitute for knowledge
Demarcation works, but it takes longer in economics
Exponentially growing junk
Knowledge vs. Belief
Keynesianism as ultimate profit machine
No license for drivel
Einstein, Mill and the Starting Problem
Rubberneck’s reality
The insignificance of Gödel’s theorem for economics
Failure: method or incompetence?
Over the cliff
Anything goes — for a while (I)
Keynes, Euclid, and economic methodology

Egmont Kakarot-Handtke

* For Constructive Heterodoxy see cross-references Paradigm shift

A tale of three accountants

Comment on Brian Romanchuk on ‘Book Review: GDP’

Blog-Reference

Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market clearing holds, that is, quantity sold X = output O, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.

At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers, which are shown in the form of accounts on Wikimedia.
(a) National accounts, pure production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, that is, every single transaction in the period under consideration.

Before they depart, they sum up loosely: The sum of all expenditures in the domestic economy has been equal to the sum of all incomes.

At the end of the second period, they meet again at the Honest Accountant Bar and compare their numbers. This time they have:
(b) National accounts, consumption expenditures greater than wage income, C>Yw.

The accountants are again pleased that their respective numbers are exactly equal but this time their accounts show balances.

Says Mr. B, I call my balance profit or loss, as the case may be, more specifically I define monetary profit as Qm≡C−Yw.

Well, says Mrs. H, I call my balance saving or dissaving, as the case may be, more specifically I define monetary saving as Sm≡Yw−C.

Then they calculate their respective balances and find out, to nobody’s surprise, that Qm=−Sm or Qm+Sm=0. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise.

Before they depart, they sum up loosely: The sum of all expenditures in the domestic economy has been greater than the sum of all incomes and accordingly the profit of the business sector has been equal to dissaving of the household sector.

Next day, the two accountants hand their numbers = Figure (b) over to the economist. Says the economist, hmm, for my purposes I have to rearrange the accounts, after all, profit has to be treated as the income of capital analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does not realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income.

The economist now says to himself, obviously, Gross Domestic Income GDI is equal to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C−Yw, so GDI≡C by indirect definition. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures C and investment expenditures I, i.e. GDP≡C+I. Then we have always, lo and behold, GDI≡GDP. This the fundamental macroeconomic accounting identity, after all, accounts must be always balanced. Yes? NO! The balances must always add up to zero, i.e. Qm+Sm=0.

The economist’s exercise is futile because profit is NOT the income of capital but the mirror image of dissaving, i.e. the household sector’s increase of debt. Income is a flow and profit is a balance of flows and to lump the two together is sheer accounting madness.*

From the graphics, it is immediately obvious that Keynes’s foundational identity “Income = value of output” is false. This seemingly commonsensical identity leads to I=S which is one of the biggest methodological blunders in all of economics.

Because the profit theory is false since Adam Smith, economics became the failed science that it is today. The scientific incompetence of the representative economist is documented by the fact that he cannot tell the difference between profit and income until this very day. The concept of total income or GDI as the sum of wage income and profit is of unsurpassable mathematical idiocy.

Egmont Kakarot-Handtke

* See also ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach


Related 'How money emerges out of nothing ― the functional account' and 'How the intelligent non-economist can refute every economist hands down'. For details of the bigger picture see cross-references Accounting and cross-references Refutation of I=S.

July 26, 2017

Forget Friedman, forget Keynes

Comment on Bill Mitchell on ‘There is nothing much that Milton Friedman got right!’

Blog-Reference and Blog-Reference and Blog-Reference on Jul 30

There are TWO economixes: 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.

Political economics has produced NOTHING of scientific value in the past 200+ years. This is the track record: provably false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.

To play Friedman against Keynes, as Bill Mitchell does, is a pointless exercise because BOTH were utterly incompetent scientists and BOTH Monetarism and Keynesianism is plain proto-scientific rubbish. If there ever were political agenda pushers = fake scientists, then Friedman and Keynes and their respective followers.

Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, materially/formally inconsistent and ALL approaches got profit theory, employment theory, and the theory of money wrong.

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

From this systemic Phillips curve#2 curve follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar Keynesian arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches. From the macroeconomic interdependencies follows that the market economy is an unstable system. And this, in turn, means that there is NO such thing as an equilibrium, NOT in the short run, NOT in long run, NEVER. Equilibrium is a NONENTITY.

By consequence, there is NO such thing as a NAIRU.#3 The bastard Phillips curve is a misspecification since Samuelson/Solow and has to be replaced by the macrofounded systemic Phillips curve which is entirely free of the familiar silly behavioral assumptions (constrained optimization, expectations, etc.).

The discussion between Monetarism and Keynesianism is until this day not more than brain-dead blather of scientifically incompetent agenda pushers.#4 Policy proposals of these two political sects have NO sound scientific foundation. Time to get rid of worthless economics and failed/fake scientists who get nothing right since 200+ years.

Egmont Kakarot-Handtke

#1 For details see ‘Essentials of Constructive Heterodoxy: Employment
#2 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 See also ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
#4 See also ‘How money emerges out of nothing ― the functional account


Related 'Forget Hayek' and 'The myth of economics knowledge' and 'New Economic Thinking: the 10 crucial points'

July 24, 2017

Forget Hayek

Comment on David Glasner on ‘Hayek, Deflation and Nihilism’

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

There are TWO economixes: 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 consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Keen.

Political economists have achieved NOTHING of scientific value in the past 200+ years. Hayek was a political economist and utterly incompetent scientist. His foundational error/mistake/blunder consisted the assumption that the economy is inherently stable and heals itself. This has never been more than an assertion. No proof has ever been given. Worse, 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. An elementary version of the axiomatically correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown on Wikimedia.#1
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 in 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 price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.#2

Hayek’s vacuous theoretical blather in the 1930s boiled down to the proposal of flexible wage cuts: “Hayek viewed deflation as potentially beneficial if it would break the rigidities obstructing adjustments in relative prices.”

Hayek obviously had no idea how the market system works. The Employment Law shows that a reduction of the wage rate reduces employment. This means that the market economy is inherently unstable. The commonsensical reaction to unemployment is a fall of the wage rate, but this increases unemployment.

The lethal methodological blunder of microfounded employment theory consists in the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

“Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Hayek was one in the long line of scientifically incompetent political economists who actively participated in the dustification of the market economy. He will find his ultimate proto-scientific history-of-thought resting place in the close neighborhood of flat-earthers.

Egmont Kakarot-Handtke

#1 For details see ‘Essentials of Constructive Heterodoxy: Employment
#2 For details see cross-references Employment


Related 'Hayek or how economists miss their subject matter since more than 200 years' and 'Hayek and other informationally retarded proto-economists' and 'Hayek ― agenda pusher or scientist?' and 'Why Hayek was not a scientist' and 'Hayek was not an economist' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Forget Friedman, forget Keynes' and cross-references Failed/Fake scientists.

How money emerges out of nothing ― the functional account

Comment on Peter Cooper on ‘Short & Simple 10’

Blog-Reference

“Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money.”#1

“In MMT, ‘vertical’ money enters circulation through government spending. Taxation and its legal tender power to discharge debt establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met.”#2

Economists are storytellers, not scientists, and because of this, they explain economic phenomena historically. This is a bit dilettantish, just like physicists trying to derive the phenomena and laws of thermodynamics by recounting the history of major events from the Great Fire of Rome in AD 64 to Great Fire of London in AD 1666. The methodological fact is that the historical approach does NOT work in science. It explains NOTHING.

Therefore, money has to be derived FUNCTIONALLY within an analytical framework that is defined in detail by:
(i) Macrofoundations.#3
(ii) National Accounting, which determines the relationship between the nominal flows (wage income, consumption expenditures) and balances = differences of flows (saving/dissaving, loss/profit).#4
(iii) The relationship between the flows and balances of National Accounting and the changes of the stock of money/credit at the central bank.

Thus stock-flow consistency is secured. The pivot between stocks and flows is the positive or negative nominal balances.

In order to reduce the monetary phenomena to the essentials, it is supposed that all financial transactions are carried out (at first without costs) by the central bank. The stock of money then takes the form of current deposits or current overdrafts. From this follows quantity of money = debit side of the central bank’s balance sheet = current deposits.

In the initial period the conditions of market clearing and budget balancing hold. The central bank provides the transaction medium and creates money out of nothing. Loosely speaking, it finances the business sector’s payroll, whatever it is.

By sequencing the initially given period length of one year into months the idealized transaction pattern that is displayed on Wikimedia#5 results. It is assumed that the monthly income Yw/12 is paid out at mid-month. In the first half of the month, the daily spending of Yw/360 increases the current overdrafts of the households. At mid-month, the households change to the positive side and have current deposits of Yw/24 at their disposal. This amount reduces continuously towards the end of the month. This pattern is exactly repeated over the rest of the year. At the end of each sub-period, and therefore also at the end of the year, both the stock of money and the quantity of money is ZERO. Money is present and absent depending on the time frame of observation.

In period 2 the wage rate and the price are doubled. Since no cash balances are carried forward from one period to the next, there results no real balance effect provided the doubling takes place exactly at the beginning of period 2.

The transaction pattern looks the SAME if employment L is doubled and productivity R, wage rate W, and price P remain unchanged. So, only the REAL variables employment L and output O double, but the transaction pattern is identical with a doubling of the NOMINAL variables wage rate W and price P. This tells one immediately that the commonplace Quantity Theory is false.

From the perspective of the central bank, it is a matter of indifference whether the household or the business sector owns current deposits. The pattern of transactions#5 translates into the AVERAGE amount of current deposits. This average stock of transaction money depends on income according to the transaction equation M=kYw.

The variable M is a straightforward period average which results from the AUTONOMOUS transactions between the business and the household sector in the pure production-consumption economy. The central bank enables the average stock of transaction money to expand or contract with the development of wage income. Analytically (not historically), money emerges from autonomous market transactions. In order that money comes into the world, a central bank is needed which issues transaction money in parallel with expanding/ contracting wage income.#6 There is NO commodity like gold and no deficit spending government needed.

Both the Quantity Theory of Money and the Chartalist Theory of Money are figments of the historical imagination.

Egmont Kakarot-Handtke

#1 Wikipedia Money
#2 Wikipedia MMT
#3 Macrofoundations are given by (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. The nominal variables Yw and C reappear in National Accounting.
#4 See Wikimedia National accounts (a) balanced budget, (b) saving, (c) dissaving
#5 Wikimedia Idealized transaction pattern
#6 For more details see ‘Essentials of Constructive Heterodoxy: Money, Credit, Interest’ and ‘Reconstructing the Quantity Theory (I)


Related 'Macro for dummies' and 'A crash course in macro accounting' and 'Where MMT got macro wrong' and 'A tale of three accountants' and 'Money and time' and 'The ultimate ― analytical ― origin of money'

Immediately preceding 'Macro for dummies'
Immediately following 'Money: from silly stories to the true theory'

***
REPLY to Peter Cooper on Jul 25

One way to explain the actual state of the world is the historico-genetic (K. Mannheim) approach. And this is how the development from barter to fiat money is usually presented. This history is quite interesting, but history is not science. From the history of the practical use of levers among animals and humans, one will never arrive a the Law of the Lever as put down by Archimedes.

Take notice that economics is defined as a science and science is well-defined by material and formal consistency. Your series Short & Simple is inconsistent storytelling.

First of all, the theory of money/debt cannot stand alone but must be embedded in what Keynes called the ‘monetary theory of production’, which in turn must be based on macrofoundations.

The fact is that your macrofoundations are ill-defined. More specifically, your profit theory is provably false. By consequence, your theory of money is false, too, no matter how many plausible pieces of history it contains.

This is lethal: you cannot show how, in principle, the flows of a simple monetary economy (which are measurable) affect the stock of money (which is also measurable). This cannot be compensated by stories like ‘how government’s position of strength’ had been used ‘in getting its own IOU widely accepted’.

Take notice that MMT has been thoroughly refuted. Here are all proofs and arguments for your convenience collected:
How money emerges out of nothing ― the functional account
Macro for dummies
A crash course in macro accounting
Macrofounded labor market theory
MMT: No sound basis
Economics is NOT about Human Nature but the economic system
Where MMT got macro wrong
Windmill economics
Rectification and generalization of MMT
Why Bernie Sanders is unintentionally a godsend for the one-percenters
Going beyond Wicksell, Keynes, and MMT
Economists: Incompetent? Stupid? Corrupt?
Economics as poultry entrails reading
Why economists know nothing
Rethinking MMT
The final implosion of MMT
Hobson got full employment policy almost right
Clueless about money and profit
History and future of the monetary economy
Macro of and for the scientifically blind and deaf
Helicopter money — a free lunch for the one-percenters
Money and debt in six elementary steps
Money, cranks, and morons
How to start off on the right foot
Australian upside-down economics
Modern moronomic theory

To continue your series Short & Simple is pointless.

***
REPLY to Peter Cooper

Money has taken various historical forms (token, coin, note, deposit, etc.) and the banking system in each country is the outcome of a murky historical process. Therefore, the first thing to do is to ABSTRACT from the historical detail and to define a clear-cut analytical frame of reference. This frame has been called by Keynes the ‘monetary theory of production’.

(i) The pure production-consumption economy consists of the business and the household sector. The household sector provides the labor input to the business sector which consists initially of one firm. The product of the firm is sold to the household sector. Example: the wage income per period (e.g. year) is 100 [thousand/million/billion, euro/dollar/yen]. So, in a period of defined length, the households put in their work and the firm owes in total 100 monetary units to the household sector.

(ii) The firm issues IOUs and these are used in turn by the households to buy the output. For simplicity, the wage income of 100 monetary units is fully spent on the consumption good. Starting from zero at the beginning of each period IOUs are created by the firm and vanish completely until the end of the period. Clearly, IOUs are debt and they are used exclusively for the transactions between the business and the household sector.

(iii) IOUs work fine with one firm but not with many firms. If the business sector consists of many firms the need for a GENERAL IOU arises. This general IOU is produced by the central bank and is called money. The central bank gives the firm money in the form of current deposits and the firm owes overdrafts to the central bank. The firm pays the workers by transferring the deposits instead of IOUs. The workers spend their income and the deposits return to the business sector which reduces the overdrafts. At the end of the period, all deposits and overdrafts are again ZERO. So money is created out of nothing and vanishes into nothing until the end of each period. This process can continue in principle for all eternity no matter how big or small the economy is. There is NO such thing as a fixed quantity of money.

(iv) Only deposits are money but, clearly, deposits are always exactly equal to overdrafts. Hence, money is the central bank’s half of what is essentially a credit relationship. Both sides of the central bank’s balance sheet are equal at any point in time by logical necessity. So, there is no such thing as debt-free money. But note that deposit/overdraft money as TRANSACTION medium is entirely different from CREDIT for houses and cars or for financing real investment of the business sector or for financing public deficits. Not keeping these things properly apart is a recipe for messing up the theory of money.

The fact that money is debt does NOT mean that it should be spent into existence by government deficits. The proper way of creating money is to finance an expanding wage bill. To bring money into the world by financing government deficits is a program for increasing the profit of the business sector. So, either MMTers in their scientific incompetence do not understand how the economy works or MMT is a pseudo-scientific veil for a free-lunch program for the one-percenters.

July 23, 2017

The myth of economics knowledge

Comment on Simon Wren-Lewis on ‘The politics of ignoring knowledge’

Blog-Reference

Simon Wren-Lewis muses about the psychology of the Brexit vote and then generalizes: “I do not think this ignorance and hubris is confined to the UK’s role in the world. It also extends to an attitude to knowledge of all kinds, and I suspect it is possible to date when this began to the revolutionary zeal of the right under Thatcher.”

This explanation implies that there is valuable scientific knowledge of economists which is thrown to the wind by ignorant politicians. This is not how economic policy works. There is, to begin with, NO such thing as valid economic knowledge, only a rummage table of opinions from which politicians pick one for giving the impression that their measures have the blessing of science. This is not different from selling toothpaste with the testimonial of a white-coated dentist.

Here is the snag: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

It is well-known that economists do not have the true theory. This is their scientific track record: provably false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.

ALL theories/models that contain profit, maximization-and-equilibrium, or I=S/IS-LM are a priori false and this is more than 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks of renowned authors since 1947, as well as 100 percent of what orthodox or heterodox or pluralistic economics professors teach beyond commonsensical trivialities.

It is, first of all, of utmost importance to distinguish between political 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 has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Keynes and Arrow can be summarized as utter scientific failure. Economics never had any truth value, only political use value.

Egmont Kakarot-Handtke


Related 'New Economic Thinking: the 10 crucial points' and 'Delusions of useful idiots' and 'Why Hayek was not a scientist' and 'Economics: Two ages of scientific incompetence' and 'Heterodoxy, too, is scientific junk' and 'Nothing to choose between Orthodoxy and traditional Heterodoxy' and 'First Lecture in New Economic Thinking' and 'Lacking the Midas touch of science' and 'Economics is a scientific zombie waiting to be put down' and 'Heterodoxy, too, is scientific junk' and 'The non-existence of economics' and 'Economists and the destructive power of stupidity'