What the layperson and most economists cannot see is that MMT has NO sound scientific foundations. The MMT models are based on Keynesian macro which has been refuted long ago.#1 As a rule of thumb, economic policy proposals of MMTers cannot be taken seriously.
First of all, the false MMT macrofoundations have to be fully replaced. As the correct 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=C/X=W/R (1), i.e. the market clearing price is in the initial period 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.#2
From (1) follows that the real wage is equal to productivity, i.e. W/P=R (2). The wage income receivers get the whole product.
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 macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.
Now, the sovereign government decides, following Stephanie Kelton, that every American shall get a pony for free, or in more abstract terms, that a part of output shall be redistributed. This measure is intended to increases employment and output and to improve the distribution of output.
It is assumed for simplicity that in the next period the business sector doubles initial employment L0, i.e. L1=2L0. The wage rate W remains unchanged and therefore total wage income doubles, i.e. Yw1=W2L0. Under the condition of budget balancing, the household sector’s consumption expenditures, too, double Ch1=Yw1=2WL0.
The market clearing price is again P=W/R and since neither wage rate W nor productivity R change the price, too, remains unchanged, i.e. P1=P0. So does the real wage (2). Again, the wage income receivers get the whole product.
However, if government expenditures in period 1 are Cg1 and taxes are zero then things change. Total expenditures are now C1=Ch1+Cg1=2Ch0+Cg1, that is, are more than double the expenditures in the initial period. On the other hand, output exactly doubles O1=RL1=R2L0. The market clearing price is now P1=C1/X1=(2Ch0+Cg1)/2X0=P0+Cg1/2X0, that is, the market clearing price rises compared to the situation with no government deficit spending. This is a one-shot increase and has NOTHING to do with inflation.#3 The price increase effects the redistribution of output O first between the household and the government sector and ultimately within the household sector. The real wage of the wage income receivers is now lower, i.e. W/P1 instead of W/P with P1 higher than P. The wage income receivers no longer get the whole product. Part of output is transferred via the government to other households. What happens in effect is a redistribution of output without taxation. The wage income receivers are taxed via the price increase.
The government runs a deficit, i.e. Cg is greater zero and T is zero. The money comes from the central bank, i.e. is created out of nothing.
The profit of the business sector Qm was zero in the initial period, because of C=Yw, and is now positive, i.e. Qm=Cg1, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit.
This can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of money rising continuously and with the redistribution of output going on continuously and without inflation.
MMT has no valid scientific foundations#4 but achieves four stunning feats of shell-game economics, (i) real redistribution among the households a.k.a. working class via the anonymous price mechanism instead of taxation, and (ii), a profit boost for the business sector, and (iii), safe interest revenues for the business sector in subsequent periods if profits are invested in government bonds which are supposed to consolidate the government’s debt, and (iv), a deflation of indefinite length because of government’s tax-financed interest payments.#3
The thing Stephanie Kelton and MMTers are really good at is economic policy marketing for the one-percenters.
#1 How Keynes got macro wrong and Allais got it right
#2 Wikimedia, Pure production-consumption economy
#3 MMT was right all along: Gov-Deficits do NOT cause inflation
#4 For the full-spectrum refutation of MMT see cross-references
Related 'MMT: Just political heat, no scientific light' and 'Why is MMT so false?' and 'Profit and the collective failure of economists' and 'A social science is NOT a science but a sitcom'
(i) You maintain “I think that Keynes would likely agree with the MMT position that automatic stabilization results in the fiscal balance expanding and contracting counter-cyclically, but that stimulus could be required in certain situations, in which case it would be diminished and withdrawn as conditions indicate.”
This is fruitless speculation. Fact is that Keynes got macro wrong and, after 80+ years, Post Keynesians and MMTers are still behind the curve.#1
(ii) Stephanie Kelton says: “Perhaps no one is more skilled in the dark art of deficit deception than Representative Paul Ryan, the House speaker.”
In fact, Stephanie Kelton is second to none. In the Pavlovian exchange of worn-out arguments, she avoids carefully to mention the pivotal economic concept profit.
• “Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses.”
False, their minuses become the pluses of the business sector = overall macro profit.
• “And since many Americans are missing it, too, they end up applauding efforts to balance the budget, even though it would mean erasing the surplus in the private sector.”
For private sector read business sector.
• “When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.”
Right, a certain part of the accumulated = non-distributed profit is used for bond buying and getting riskless additional interest revenues courtesy of government’s taxing power. That’s benefit squared for the business sector: profit plus interest on non-distributed profit.
• “… the math always adds up.”
True, it holds Qm =(I−Sm )+(G−T) or Public Deficit = Private Profit.#2
MMTer are the perfect example of ‘How We Think About the Deficit Is Mostly Wrong’.#3
#1 Keynesians ― terminally stupid or worse?
#2 Rectification of MMT macro accounting
#3 For the full-spectrum refutation see cross-references MMT
Thank you for the numbers. You say “so the main part of earnings isn’t put into bonds by firms anyway.”
You probably overlook two things
• accumulated profit means NOT the total profit per period (= flow) but the sum of non-distributed profits = retained profits (= stock),
• so the number under discussion is the ratio of the stock of bonds to sum of retained profits for the business sector as a whole.
The comparison of the business sector’s retained profits per period to the total stock of bonds makes no sense. This stock is mainly held by foreigners, pension funds, insurance companies, banks, etc.
I have clarified the sentence thus “a certain part of the accumulated = non-distributed profit is used for bond buying …”
Keynes got the paradigm shift from microfoundations to macrofoundations wrong. His methodological blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)
This two-liner is conceptually and logically defective 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, #2
Keynes NEVER grasped what macroeconomic profit is. That is disqualifying for an economist.
The axiomatically correct relationships are:
Qm=−Sm in the case of the pure production-consumption economy,
Qm=I−Sm in the case of the investment economy,
Qm=(I−Sm)+Yd+(G−T)+(X−M) in the general case.
Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.
Therefore, all I=S and IS-LM models are provably false#3, Post Keynesianism and MMT, too, is false. Macroeconomics is proto-scientific rubbish since Keynes. Macro policy guidance is based upon materially and formally inconsistent economic theory.
#1 How Keynes got macro wrong and Allais got it right
#2 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#3 For the details of the bigger picture see cross-references Refutation of I=S
You say: “I don’t listen people who make bold claims that are not backed by some kind of empirical evidence.”
Obviously, you have never heard that bold claims are the very essence of science.
Take notice that economics is about how the economy works and NOT in need of silly announcements to whom a retarded blogosphere blatherer prefers to listen.
You say: “Guess what? I will not waste my time reading your references.”
That’s OK. But why do you waste so much time parading as moron in the economics blogosphere?
Science consists of two essential elements: “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) Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.
Because BOTH logical AND empirical consistency is needed it is sufficient for a refutation to prove EITHER logical OR empirical inconsistency.
What has been proven is that the formal foundations, i.e. the balances equations, of MMT are false.#1 Because of this, the whole analytical superstructure of MMT is false.
This is the big claim: “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 all fail to capture the essence of the market economy.” (see also Palgrave Dictionary, Profit, Dessai, 2008)
Guess what, you do neither understand the significance of this claim nor can you refute it.#2 And this brings us back to the point at issue: How Stephanie Kelton and the rest of MMT thinks about the deficit is mostly wrong because they, too, got profit wrong. For the proof see the cross-references.#3
#1 Rectification of MMT macro accounting
#2 10 steps to leave cargo cult economics behind for good
#3 Cross-references Profit
You say: “As I said before, I will not waste my time reading #1, #2 or #3, because there is nothing there, just big claims without any real content.”
MMT is a scientific failure because MMTers are incompetent. And you are one of the worst examples of the absence of logic and the lack of scientific standards.
The proof that the MMT balances equations are false has been given here #1 and at some other places #2. Because you do not waste time reading references you missed it. You do not read the proofs, not to speak of understanding them, you just idiotically repeat that proofs have not been given.
The proof that the Keynesian macro equations, on which MMT is based, are false has already been given by Allais (Nobel Prize 1988).#3 Because you do not waste time reading references you missed it.
The proof that economists in general are too stupid to get the foundational concept of profit right has been given here #4. Because you do not waste time reading references you missed it.
That the profit theory is false since Adam Smith is plainly stated in the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai, 2008). Because you do not waste time reading references you missed it.
Because you can neither read nor think you do not understand anything. You say “I can also add that I and everyone that have discussed with you around here knows that ‘the formal foundations, i.e. the balances equations, of MMT’ are not ‘false’ as you claim.” This tells you only that your MMT buddies are just as far behind the curve as you are.
That the foundational MMT equations are false is not a claim but a mathematical proof. And neither you nor any other MMTer has refuted the proof. If you had more than MMT-buddy-blah-blah you would certainly present it, wouldn’t you?
The question of the empirical proof of the objective macroeconomic axioms has been dealt with elsewhere at length.#5 Because you do not waste time reading references you missed it.
MMTer are not only too stupid to understand a plain mathematical proof but violate scientific standards by not properly responding to it: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)
The issue has been decided: the MMT balances equations are formally refuted. MMT is scientifically dead. Whether you realize, understand, or accept it is a matter of indifference. People who do not ‘waste time’ following references and take notice of an indisputable refutation are the worst possible advocates of MMT. The living proof of the failure of MMT is MMTers.
#1 Rectification of MMT macro accounting
#2 For the full-spectrum refutation of MMT see cross-references
#3 How Keynes got macro wrong and Allais got it right
#4 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#5 Just make a search run with ‘testable’ on the AXEC blog
You do not waste your time reading references and taking notice of proofs, perhaps you can waste a minute on reading your own stuff.
You will realize that in your filibuster there is NOT ONE iota of the point at issue, i.e. that Stephanie Kelton’s policy proposals are based on provably false balances equations.
No living soul is interested in what you have read once and why you disliked it. Like/dislike is for the gossip on Facebook, true/false is the sole criterion in an economics debate.
Either you can demonstrate that the elementary Law of Profit Qm=−Sm as derived from the objective-systemic axiom set is false or you cannot. Obviously, you cannot, therefore the refutation of Stephanie Kelton’s soapbox economics is final. In sum:
• MMT’s sectoral balances equations are mathematically FALSE,
• MMT’s policy proposal have NO sound scientific foundations,
• MMTer are scientifically INCOMPETENT.
Inflation is a pseudo-issue, see ‘MMT was right all along: Gov-Deficits do NOT cause inflation’