September 20, 2017

Solving Mill’s starting problem

Comment on Peter Cooper on ‘State Monies are Fundamental to Modern Monetary Economies’


After 20 posts about the MMT balances equations and the income-expenditure model, Peter Cooper gets second thoughts and asks himself: “What is the most appropriate entry point to the study of a monetary economy.” And he concludes “There is no ‘natural’ field in economics that is anything like the natural sciences.”

Each science starts in the middle of a 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)

The starting problem is as old as economics. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

In economics, there are two starting points, microfoundations and macrofoundations. Both are provably false. Orthodoxy went micro: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). Keynes went macro: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” MMT followed Keynes into the macro woods.

The methodologically correct solution consists in new macrofoundations.#2 Here they are:
(A0) The objectively given and most elementary systemic configuration of the (world-) 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.

These macro axioms satisfy all methodological requirements. The graphical representation of the elementary production-consumption economy is shown on Wikimedia.#3

The condition of market clearing is X=O and of budget balancing C=Yw. From non-clearing and non-balancing follow the phenomena of inventory changes (O−X greater than 0 or less than 0) and of monetary saving/dissaving (Sm≡Yw−C greater than 0 or less than 0) and of monetary profit/loss (Qm≡C−Yw greater than 0 or less than 0). It always holds Qm+Sm=0 or Qm=−Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.

The Profit Law tells us immediately that the Keynesian macrofoundations and the MMT balances equations are false. And because the axiomatic foundations are false the whole analytical superstructure of MMT is false.#4

Poincaré once remarked: “The essential thing is to learn to reason with the axioms once admitted. Uncle Sarcey, who loved to repeat himself, often said that the audience at a theatre willingly accepts all the postulates imposed at the start, but that once the curtain has gone up it becomes inexorable on the score of logic.”

It is just the same in economics but economists in general and MMTers, in particular, neither got the foundational postulates right nor the subsequent logic. What unfolds before the audience's eyes is an absurd proto-scientific farce.

Egmont Kakarot-Handtke

#1 Getting out of the economics swamp
#2 The new macroeconomic paradigm
#3 Wikimedia: The pure production-consumption economy
#4 For more details see cross-references MMT

REPLY to Matt Franko on Sep 20

You say: “Accounting is its own science... here in the US the good schools award a Bachelor of SCIENCE in Accounting.”

Obviously, MMTers got their BSAcc from Trump University.#1

You say: “If you are in business, You may use a Cash Basis accounting method and someone else might use an Accrual Basis, you can’t say ‘your accounting is false!’ to the other guy using Accrual...”

I do NOT say such nonsense. Both methods lead ultimately to the same result.#2 Cash Basis accounting is merely a practical relief for small firms that shifts profits BETWEEN periods but does NOT alter the sum of pre-tax profit over all periods. The difference between the business accounting methods plays NO role for macroeconomics. As a matter of principle, profit is NOT produced by accounting only measured, just like speed is NOT produced by the speedometer only measured. Different methods of measurement do NOT affect a vehicle’s speed and should always give the SAME result (+- a tiny inaccuracy). If they do not, something is wrong with the measurement tools.

Macroeconomic profit is clearly defined, i.e. as Qm≡C–Yw in the most elementary case, and measurable with the accuracy of two decimal places. The macro balances equations of MMT are mathematically false#3 and this has NOTHING AT ALL to do with the practical determination of taxable profit of an individual firm.

If accounting and money transactions were fully computerized and all firms apply the accrual method the sum of all firms’ profits/losses is necessarily equal to macroeconomic profit Qm and everyone could look this number up in real-time on the internet. Cash Basis accounting is not “false” it is merely a stone-age method for the mom-and-pop store. As a matter of principle, National Accounting is as good a measurement tool as any simple tool in physics.

Fact is that neither orthodox nor heterodox economists have noticed the macro accounting blunder until this day. Economics is a failed science because economists are scientifically incompetent and do not even get the elementary mathematics of macro accounting right.#4

Make no mistake, what Mitchell, Tcherneva‏, Mosler, Wray, Kelton, Fullwiler, Forstater, and the other MMTers propagate is Trump University economics.

#1 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 See ‘MMT ― the economics moron as problem solver
#3 Rectification of MMT macro accounting
#4 For the details see cross-references MMT

REPLY to Matt Franko on Sep 20

(i) Wordplay does not help. 2+2=5 is mathematically false. The same holds for the MMT balances equations. For the proof see #1.

(ii) Monetary profit is measured by accounting and if the accounting is properly done for an elementary production-consumption economy profit in the books is numerically identical with cash in the box.#2 Auditors carry out this check routinely. The macroeconomic Profit Law is testable just like the Law of the Lever. There is NO room for ambiguity and wordplay.

(iii) You say: “You can have production (real terms) without any accounting but you can’t have profit without accounting.” So what? Counting the inventory is part of the year-end profit determination.

(iv) Profit is not ‘created’ by accounting but by private and public deficit spending. For the economy as a whole, it holds Public Deficit = Private Profit.

(v) Profit does not appear in the MMT balances equations.#3 How weird is this? The MMT balances equations hold only for a zero profit economy. How weird is this?

(vi) Macro profit does not appear in macro models. It is absent in all I=S/IS-LM models since Keynes/Hicks. How weird is this?#4

(vii) Folks who cannot handle the pivotal concept of their subject matter and are too stupid for the elementary mathematics of accounting get economics diplomas and academic tenure. How laughable is this?

#1 Rectification of MMT macro accounting
The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 A tale of three accountants
#3 MMT and the magical profit disappearance
#4 Heterodoxy, too, is scientific junk

REPLY to Matt Franko on Sep 21

You argue “You say public deficit is private profit then you say the System of National Accounts doesn’t include profit: system of national accounts has G-T so there is your profit...”

I said “Public Deficit = Private Profit” and then “Profit does not appear in the MMT balances equations.” I did NOT say that the “System of National Accounts doesn’t include profit”.

You have obvious difficulties with understanding simple sentences.

The macro Profit Law has been derived from the set of macro axioms. This is the methodologically correct way. The question of Cash Basis or Accrual Basis accounting is absolutely irrelevant in the given context.

If C is total consumption expenditures during a given period, e.g. the calendar year, and Yw is total wage income during the same period, then total period profit is defined as Qm≡C–Yw. C and Yw reappear as the sums of all faithfully recorded transactions between Jan 1 and Dec 31 in the accounting system. The profit definition is a formal expression of what the accountants call striking a balance which is something quite different from recording a transaction.

The big question is: Why does that balance ― the pivotal balance of the monetary economy ― not appear in the balances equations of MMT?

My hypothesis is that MMTers are extremely stupid and your silly posts confirm this hypothesis.