September 27, 2017

The profit effect of a Job Guarantee

Comment on Peter Cooper on ‘The Income-Expenditure Model with a Job Guarantee’


Peter Cooper analyses the effect of a Job Guarantee by applying the familiar Keynesian formalism. This formalism is false because it lacks the pivotal variable macroeconomic profit. Keynesian macro models are since 80+ years only good for the wastebasket.

Economics has to be reconstructed from scratch. As the new analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw the price is given by P=W/R, i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#1

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

With this, the point to start with is clearly defined. Now it is assumed for simplicity that the business sector reduces initial employment L by half and that government immediately absorbs the unemployment such that total employment remains unchanged, i.e. Lb+Lg=L=full employment. The wage rate W remains unchanged and therefore total wage income Yw remains unchanged. Under the condition of budget balancing C=Yw consumption expenditures, too, remain unchanged.

Because labor input in the business sector is reduced from L to Lb=½L the initial output is reduced from O to Ob=½O. On the other hand, the output of the public good increases from zero to Og=RgLg. This output is made available to the public for free by the government sector.

The wage bill of the business sector is reduced by half, i.e. Ywb=WLb with Lb=½ L. The other half of the wage bill is paid by the government sector, i.e. Ywg=WLg with Lg=½L. The government pays the wage bill Ywg with money created by the central bank.

Consumption expenditures C remain constant but the business sector’s output is halved. By consequence, the market clearing price rises from P0 to P1. As a result, the profit of the business sector rises from Qm0=C-WL=0 to Qm1=C-WLb=C-W ½L.

Ultimately, the budget deficit of the government sector, i.e. Ywg, ends up as profit in the cash box of the business sector, i.e. Qm1=Ywg. This configuration can continue for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of cash rising continuously.

What is rather strange is that the word profit does not appear once in Peter Cooper’s analysis of the Job Guarantee program which is in effect a Profit Guarantee program.#2

Egmont Kakarot-Handtke

#1 Wikimedia, Pure production-consumption economy
#2 For the full-spectrum refutation of MMT see cross-references

REPLY to Six, Tom Hickey on Sep 27

You obviously have not noticed that the issue is MMT profit theory and NOT MMT employment theory.

MMT employment theory has already been refuted elsewhere, see ‘Macrofounded labor market theory

REPLY to Six, Matt Franko on Sep 27

In your utter confusion, you obviously have not noticed that the issue is MMT profit theory and NOT distributed and retained profit.

These issues have already been dealt with elsewhere, see ‘Essentials of Constructive Heterodoxy: Profit’, Sec. 7

Because MMT got profit theory wrong it got also profit distribution wrong, nay, it got the whole analytical superstructure wrong. Which brings us back to Peter Cooper’s provably false MMT income-expenditure model which neither mentions profit, nor distributed profit, nor retained profit.

In sum: (i) the formal foundations of MMT are inconsistent,* (ii) MMT is a wholesale analytical failure, (iii) MMTers are incompetent scientists, (iv) MMT policy is a Profit Guarantee program for the one-percenters, (vi) the claim that MMTers support the cause of the ninety-nine percenters is either self-delusion or political fraud.

* For the axiomatically correct formal framework see on Wikimedia ‘Pure production-consumption economy incl. distributed profit and money

REPLY to Matt Franko on Sep 27

You say: “… all MMT is doing is relying on the well-established accounting methodology in National Income Accounting ...”

That is very bad because National Accounting is methodologically flawed and if MMTers were only a little above Trump University level they would have realized the blunder.#1

In addition, it is NOT true because profit appears in National Accounting but NOT in the MMT balances equations.#2

Fact is that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of accounting.

REPLY to Six, Matt Franko on Sep 28

Let us agree on the essential points:
(i) A Job Guarantee program combined with deficit spending increases the business sector’s overall monetary profit by the exact amount of the deficit,
(ii) Peter Cooper’s Income-Expenditure Model does not capture this effect,
(iii) all models that do not explicitly contain macroeconomic profit are scientifically worthless,
(iv) the MMT policy agenda has no sound scientific foundation,
(v) MMTers have to be expelled from the sciences.