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Saturday, January 6, 2018

MMT Is Not Just "Theory X"

I keep running into arguments of the form: "Modern Monetary Theory (MMT) is just {mainstream theory X} with {qualifier Y}." (The loopiest recent variant of this was that "MMT is just the Quantity Theory with bonds as part of the money supply." My head hurts just thinking about that assertion.) I believe that such characterisations are largely inevitable, and it is not obvious how to deal with them.

It would be very easy to be annoyed at these characterisations of MMT; they almost invariably trivialise the theory, saying it is "just" some simple theory (the word "just" is always in the phrasing). However, having seen variations of this dozens of times over the years (with the theory it is compared to always changing, of course), I think a more constructive and proactive stance is needed. Unfortunately, I am unsure how to go about that.

Why These Comparisons Are Obviously Wrong

The first thing to keep in mind is that MMT is not a single idea, it is what appears to be an internally consistent economic school of thought, which lies in the "broad tent post-Keynesian" economics, following the definition of Marc Lavoie in his text Post-Keynesian Economics: New Foundations (link to review). The issue with (broad tent) post-Keynesian economics is that is the union of a number of distinct thinkers, who did not always agree with each other, and so it is hard to define. Modern Monetary Theory is an attempt to strip out one consistent theoretical narrative, tied to some policy views that are controversial within the broad post-Keynesian community.

(The most acute issue is the view of the external sector; the MMT preference is to let the external sector sort itself out, which causes some post-Keynesians to be very unhappy.)

Therefore, when someone compares MMT to some variant of a mainstream model, it runs into the immediate problem that MMTers reject practically every single core assumption of the mainstream model it is being compared to.

Saying that "MMT is just {mainstream model X with qualifier Y}" may make sense to the speaker in trying to understand some aspect of MMT, but it probably conveys no useful information to anyone else. It insinuates that MMT accepts the core assumptions of model X, which is incorrect.

Since everyone uses physics analogies, I might as well use one myself. For some mysterious reason, the electrical engineering department at McGill thought it was a good idea to require every honours electrical undergraduate to take a course in quantum physics taught by the Physics Department. Of course, it included a section on relativistic quantum mechanics, since there are so many electrical components that travel at a significant fraction of the speed of light. In order to pass the course, I developed a decent understanding of Special Relativity (which I have long forgotten, so don't bother asking me any questions about it).

One could think of special relativity as just Newtonian mechanics with some corrections thrown in for the speed of light. However, that sort of thinking probably doomed you to not doing well on the course. Special Relativity makes sense, so long as you follow the internal logic of the theory. The internal logic determines the form of the equations. Conversely, if you tried to memorise all the possible corrections from Newtonian mechanics, it would be extremely easy to do it wrong, since you have little idea why the corrections are being added in the first place.

In other words, although you might be able to get away with thinking that Special Relativity is just Newtonian mechanics with corrections for the speed of light, that is not a helpful way to explain it to others. (You can go the other way of course, taking Newtonian mechanics as the limit of Special Relativity where velocities relative to that of light are small.)

Furthermore, the breadth of the theory implies that it is not going to be easy for a MMTer to offer a short summary of what MMT is. Someone may be able to come up with a succinct theoretical summary, but that summary would be meaningless for anyone not already familiar with MMT in the first place. (For example, one could try to summarise DSGE macro as being "based on the optimising decisions of households over time," but that summary conveys almost no useful information to anyone who is not already familiar with the structure of the models.)

What Can MMTers Do?

The problem that MMT faces for acceptance by other economists is not really education, rather it de-education. The problem with mainstream macroeconomics is that it is built upon a series of wrong assumptions, and the objective of economic education is to ram those assumptions into students' ears until they come out of their mouths. Mainstream economists are very open to discussing models, but have almost no willingness to think about the assumptions they are using.

As a small telling example, take the government debt oeuvre of Reinhart of Rogoff. I first looked at it before I had ever heard of MMT, and knew it was obviously wrong: the data sets that they used commingled sovereign issuers with others with various external constraints on borrowing (they even threw a sub-sovereign into one of their lists of defaults). I never would have found the spreadsheet error in that one particular paper, since I knew it was a priori not worth reading -- never mind testing.

After various theoretical embarrassments, various mainstream economist argue that they knew all along that there is a difference between currency sovereigns and other issuers. However, if that were true, how did Reinhart and Rogoff's work get taken seriously in the first place? The reality is that mainstream theory is hopelessly deficient in its analysis of government debt, and that they have been forced to bolt on an ad hoc correction (an epicycle) to better fit reality. The problem is not that particular mainstream economists made a mistake, rather they are battling with an assumption that the currency framework does not matter when discussing sovereign debt. Since the assumption is never examined, it is extremely difficult to have a useful conversation about government debt.

Since abandoning core assumptions would be a de facto admission that the entire DSGE literature was a failure, I would not hold my breath waiting for such an event. Instead, the course of action that may have a chance of success is keep discussions very concrete. As soon as theory is brought up, the clash of assumptions will drown out any useful discussion, (Although there appears to be a 100% chance that the mainstream side will invoke hyperinflation at some point of the debate -- even though they cannot offer an explanation of how the hyperinflation would occur even in the context of a mainstream model.)

As a result, there is probably room for primers to MMT written at an advanced level. (One would think that this would be the role of the academic literature, but such is the state of the "science" of economics is that the best way to guarantee that a mainstream economist will not read something is to publish it in a heterodox journal.) There is little point aiming at mainstream academics, but one can plausibly reach out to people working in finance or even places like rating agencies. The larger the advanced technical audience is for MMT, the more ridiculous the attempts to explain it away will appear.

(Update: I should have noted this when I first wrote this, but the blogs by Bill Mitchell -- the Billy Blog -- are often at the more advanced level of analysis that I am discussing here. The problem is that many critics of MMT have obviously not read any of his material. The new MMT textbook -- which I have long argued was a critical missing link for MMT -- will also help matters. However, many people who already have an undergraduate/graduate education in economics would probably pretend that reading a new undergraduate text is beneath their station. )

(c) Brian Romanchuk 2018


  1. MMT summary: it's not Modern but as ancient as humanity, its not about Money but real stuff and as it describes how reality works it certainly isn't a Theory.

    For me economics should be eliminated from academia. It is as defunct as studying Catholic dogma or Alchemy. Anything useful can be absorbed into Systems Engineering or Management Science.

    1. As an ex-systems engineer, I doubt that they would want to deal with this mess...đŸ˜€

    2. I studied quantum physics in undergrad. Students tried to understand quantum mechanics (QM) in terms of (with notions of) classical (Newton) mechanics (CM). One professor said it well: QM is more general and it reduces to CM for macroscopic objects so if anything it makes sense to understand CM in terms of QM but never the other way round.

      Classicals try to wrap their heads around MMT in terms of a paradigm that is flawed wo they fail. But in the other direction it works: you can understand their failed models in terms of MMT :)

    3. These guys are going to regain the cojones for economics

  2. How about joining these guys Brian??

    1. I heard about that initiative at the MMT Conference. I was unsure how far advanced it was; thanks for reminding me.

  3. JFTR Brian Romanchuk

    MMT is refuted on all counts. See cross-references

    and ‘The new macroeconomic paradigm’

    Egmont Kakarot-Handtke

    #MMT #MMT2018 #DebunkMMT #NotDifficult #FailedScience #FakeScience #BogusScience #ScientificIncompetence #PoliticalEconomics #ProfitTheory #SectoralBalances #PrivateSectorSurplus #Debt #Money #ParadigmShift #MacroFoundations #Science

    1. Hello,

      I thought I looked at your comments about MMT some time ago. I might do it again, but my family expects me to put away the &*%#@ computer and eat supper...

  4. This comment has been removed by a blog administrator.

    1. Hello Steve, I got the message, and sent a test email. I deleted the comment so that your email was not exposed to the various bots on the internet.

      If you have problems, the "contact me" widget (which shows up on the desktop version of the website, although maybe not the mobile) works...

  5. "The problem that MMT faces for acceptance by other economists is not really education, rather it de-education."

    Every MMT intro (especially economists!) to should begin by quoting Keynes' wise words...

    "The difficulty lies not so much in developing new ideas as in escaping from old ones"

  6. There are lots of poor arguments against MMT, but it's important to address the key concepts. MMT says gov issues the currency, but I think it's more apt to say governments standardize, regulate, and colonize social credit systems. MMT correctly asserts that modern nation states aren't subject to solvency, but this can be true of many financial entities, public or private(though such flexibility is not always a good idea). Finally, MMT correctly challenges standard ideas about inflation, but doesn't offer a comprehensive theory of pricing and inflation itself. Demand push and cost pull are certainly not the full picture, and supply and demand is riddled with problems too(it is a stategic equilibrium, but does not even consider hierarchical structure and memetic shaping of identity). Pricing can be generalized as quantified accounting, where direct exchange isn't even necessary. Accounting IS performing self and it defines identity. If an econ theory doesn't clarify its dependence on the morality of life and the ethics of culture, it is missing the big picture. MMT does better than most theories at this, but still missing a lot. The most frustrating part, is that MMT tells people that outcomes are primarily dependent on national policy, effectively dismissing our power as smaller groups and individuals. But it does have insights into what is good gov policy, too bad it does not extend that to how individuals and small groups can exercise their full capacity too.

    1. (Once again, the spam filter picked up a long comment...)

      You raise a lot of issues here. I can’t really cover them all, it being Saturday night and all...

      MMT largely inherits post-Keynsian notions of how prices are determined, although the (neo-)Chartalist side of MMT points to the role of fiscal policy. The use of the Job Guarantee to provide the missing nominal anchor for the price level is also a distinctive part of MMT. As for predicting what happens month-to-month for the CPI, the post-Keynesian answer is an honest “it’s complicated.”

      As for the national versus sub-national, the usual description of the Job Guarantee implementation is that it would be aimed to give local groups control of their affairs. The only thing that is centralised is that the central government is cutting the cheques.

    2. Thinking that the federal government needs to cut the check is entirely the issue. Sometimes states and cities have no political interest in providing employment programs, in which case a federal program would be a good idea. But getting the political machinery of the federal government to implement a JG, is not easy, smaller polities usually experiment with programs first. Unemployment creates mostly local burdens and local issues anyway. States and cities need to know how to finance themselves, using financial tools with flexible terms. Properly engineering financial flexibility does not require you to be a currency issuer. It's just about failure protocols. What does a bank do when its reserves are stressed? What does a municipality do when its cash flow can't support bond payments? These protocols should be both fair and serve the highest priorities before other concerns. Essential operations of a city should always be a higher priority than any claims of bond holders. I don't know too much about how this works, but financial rules often don't serve the most important things first. Truth is, anyone and anything can create as much money as they can spend, that is how credit works. And if failure protocols(default, inflation, etc) are good and the spending is well allocated, it never creates unsolvable issues.

      Now, if there are fewer resources under your responsibility and authority, you should limit your spending appropriately, but not because of some debt trap or anything else.

      Our regulations could allow local financial entities to use local bonds as their reserves or on their balance sheets, or they could be bonuses for city employees. It wouldn't be too hard to make bond payouts transparently contingent on cash flow either, perhaps you would need a bit more upside to sell, but increasing financial autonomy would make these polities more resilient, which decreases risks.

    3. There’s nothing financial engineering can do. People will only lend to municipalities if they think they will be paid back in the national currency. As soon as you are forced to pay back debt at fixed terms, and you don’t control the central bank, you are at risk of default.

      If it were possible to structure debt so that it’s not going to be defaulted upon, people would already be using that structure.

    4. It is dependence on external resources that forces entities to use external money. If all you need to do is coordinate local actions, you don't need anything external. Labor is a local resource. You can always afford to direct it to the most productive thing, as opposed to letting it idle.
      Local financial entities, businesses, and citizens would be completely willing to work with local assets, if there was culture that supported that. Not easy, but there is a continuum of different options. I agree there are good reasons to prefer national currency, especially with supply chain based global economies, but if local polities were to become more dominant resource authorities, this could easily reverse.

      Finally, the issue is not making default impossible, but rather “graceful failure", a term used a lot in web programming, with the hodgepodge of technologies, vendors, and interfaces out there.
      And yet they all try to work together the best they can. We could do the same with money. I think Federal government should focus job and development programs on neglected and distressed communities that otherwise don't have good options. Sorry this is long, you probably have a lot to do besides this.

    5. There have been any number of local currencies floated. Pre-Confederation Canada largely worked with very little centralised money, people used tokens. However, there is a clear preference for central government money. As soon as you have a mortgage denominated in centralised money, working for local currency is unattractive.

      We did have a system where the economy was largely local, and the central government did very little - feudalism. Calling for a return to feudal conditions as a policy prescription is going to raise a lot of eyebrows.

  7. Your observation about "internal logic" being inconsistent between economic theories is an observation that everyone should remember.

    In my opinion, the internal logic of MMT is not yet complete. Take the job guarantee proposal for example. What are the macroeconomic mechanics of JG?

    This question can addressed better if we add some internal logic to MMT. Assume that money can be considered as if it were a gift certificate circulating on the national level . Using that assumption, we could consider what happens when gift certificates are used for wage enhancement in a micro-economic setting and scale our thoughts up to a macroeconomic environment.

  8. "The problem that MMT faces for acceptance by other economists is not really education, rather it de-education."

    100% agreed. De-education is a nightmare. It is almost impossible to achieve.

    "The first thing to keep in mind is that MMT is not a single idea"

    Well, that is not entirely true. MMT is based on a single idea: the Chartalist idea, or "taxes drive money" idea. This is the pillar for all MMTers and their theories. And that single concept changes everything.

    You may be right when we talk about the positive aspect of MMT. I mean, there are the prescriptions on what policymakers should do in order to make the economy better. Each MMTer will have his or her own opinions and prescriptions. They will not agree all the time, and it is not easy to find some kind of consensus. Also, if you compare the works of Bill Mitchell, Warren Mosler and Randall Wray, you will see that they do not share the same inflation theory. Each MMTer seem to have his/her own inflation theory...

    1. André,
      I believe Marc Lavoie summarised the post-Keynesian inflation theory as “it’s complicated.” There’s a lot of theoretical issues flying around. The advantage of the mainstream is that they have a neat, tidy (and wrong...) theory about *inflation*. (Unfortunately, they have no idea what determines the price level.)

      Sure, saying “taxes drive money” covers a lot of what makes MMT distinctive. What does that actually mean? I have some ideas, but I already am familiar with MMT. If you are unfamiliar with MMT, it sounds like a vague slogan.

      For example, a key point of differentiation between MMT and others is the embrace of a free-floating currency, and the policy space it provides. (That’s actually how I would summarise MMT in one sentence if someone forced me to do it.) I see no obvious link between that and “taxes drive money.” You might see it, but the point being is that is already based on you having some knowledge about MMT.

    2. "MMT (...) embrace[s] (...) a free-floating currency, and the policy space it provides."

      That is a prescription: Countries should free-float their currencies to rise the policy space and hence make the economy better. But again, it is hard to find consensus on the prescriptive part MMT, although that free-floating thing is one of them (and the Job Guarantee is another).

      However, probably the most important part of MMT is not the prescriptive part, but the normative part. MMT is capable of explaining the world as it is (even for non free-floating countries) better than the orthodox economic theory. Once people are able to understand the superiority of the descriptive part, they will be able to reach their own prescriptions and then the economic debate will be much richer.

      You should read that Bill Mitchell post (which I don't agre 100% but it is good nonetheless): "MMT is what is, not what might be" (

      I mean, maybe you will reach the conclusion that some country should not free-float its currency for some reason even if you are someone who understands and believes that MMT theory is better than all other theories avaliable today.

      What binds all MMTers together is the notion that the government does not works like a household (and so it does NOT need to earn money before it spends) and that modern money is not like gold.

      Currency is a token that has value because people need it in order to settle tax obligations, or else face legal penalties. Its value is not dictated neither by its metallic content nor by some mystical mass delusion (money has value because delusional Joe believes Marie will accept it, and delusional Marie believes Joe will accept it and so on). That is the "tax drives money" approach.

      Also, if you read Randall Wray's MMTer primer, you will understand how monetary operations between the treasury, central bank and commercial banks work. It is not prescriptive, it is descriptive. It is the world as it is.

      Those descriptions are the pillar of MMT. With them, different MMTers will reach distinct conclusions and prescriptions. For example, Bill Mitchell and Warren Mosler insist that the EMU should be dissolved, because they believe there is no way of reforming it in any meaningful way. On the other hand, Scott Fullwiler (or it was Randall Wray?) does believe that a reform is possible. They may not agree on policy prescriptions, but they sure agree 100% on the MMT world description...

    3. The free-floating part is not just a preference, it affects how we analyse policy. Without that distinction, we end up like Reinhart and Rogoff, and dump data from incompatible currency regimes into the same data set. One might still have a preference for managed currencies (or trade/capital flows), but you still need to keep the different rules of analysis in mind.

    4. Indeed, but MMTers now that.

      Bill Mitchell, through the MMT theory, understands better than anyone how the EMU works and its flaws. And EMU nations do not have their own currencies, much less free-floating currencies. Yet he is able to understand their economics better than anyone.

      He writes a lot about european economics. He is able to correctly (i) describe exactly how the EMU system works, better than any orthodox economist and (ii) make predictions about how to solve EMU problems.

      As you can see, MMT is not just about free-floating nations...

    5. That’s exactly my point - you need to understand the currency regime the country is in. However, that is extremely hard to relate to “taxes drive money” as a summary of MMT, which is why I brought it up in the first place.

  9. Hello Brian,
    I completely agree with your observation that 'it is not going to be easy for a MMTer to offer a short summary of what MMT is. Someone may be able to come up with a succinct theoretical summary, but that summary would be meaningless for anyone not already familiar with MMT in the first place'.
    I tried a few months ago to explain MMT to a federal politician I know and OMIGAWD it's not easy. I hope the textbook helps. The introductory one is out but I am waiting for the intermediate level version scheduled for release in a few months.
    Also, I took a look at AXEC / E.K-H's references. He has many involved posts all stating that MMT, Keynesianism, etc, etc, are nonsense. As far as I can tell Mr. E.K-H takes great issue with MMT macro accounting, noting for example 'that public and private deficit spending determines the overall profit of the business sector' but that MMT ignores this, using a model of a 'zero profit economy'. (
    My comment: The macro origins of profit is an interesting topic determined by Kalecki many years ago. Bill Mitchell has an interesting post on the subject that includes the sectoral balance approach. A quote: 'How does Kalecki see budget deficits in this model? The way in which the budget deficit generates profits is via its effect on national income. The budget deficit means that the private sector is receiving more flows from the government than it is returning via taxes. Budget deficits provided an increased capacity for capitalists to realise their production because they expand the economy. Kalecki said that budget deficits allow the capitalists to make profits (net exports constant) over and above what their own spending will generate. (
    A very interesting publication on the subject is available from the Jerome Levy forecasting Center entitled Where Profits Come From, to be found at

    1. I think it’s Doktor E K-H. I tried deciphering his arguments a year ago, and I think his arguments came down to his using some primitive cash-based notion of profit. Working from memory, he argues that you only make a “profit” (his definition) if you increase your cash holdings. Unfortunately, the entire financial and national accounting professions disagree with his definition of “profit”.

      As for educating a politician, I think the issue is to find out what the point of interest is, and just focus on that. Unless they are a bug on economic theory (which I am), you probably ended up distracted from what really matters.

  10. Keith Newman

    You say “Hello Brian, I completely agree with your observation that ‘it is not going to be easy for a MMTer to offer a short summary of what MMT is. Someone may be able to come up with a succinct theoretical summary, but that summary would be meaningless for anyone not already familiar with MMT in the first place.’”

    In fact, it is quite straightforward: MMT is money-making for the one-percenters because Public Deficit = Private Profit and fake science because MMT’s foundational balance equation (I−S)+(G−T)+(X−M)=0 is false.

    For details see Down with idiocy!

    You say “Bill Mitchell has an interesting post on the subject that includes the sectoral balance approach. A quote: ‘How does Kalecki see budget deficits in this model? The way in which the budget deficit generates profits is via its effect on national income.’”

    Kalecki messed profit theory up just like all the rest.
    See Heterodoxy, too, is scientific junk

    You say “A very interesting publication on the subject is available from the Jerome Levy forecasting Center entitled Where Profits Come From.”

    I have summarized this paper as follows “The lethal error/mistake/blunder of the Levy approach consists in starting with Saving = Investment.” This is the original Keynes-blunder.

    See Rethinking deficit spending

    Brian Romanchuk’s remark “I think it’s Doktor E.K-H. I tried deciphering his arguments a year ago, and I think his arguments came down to his using some primitive cash-based notion of profit.” tells you that he does not even understand what the matter is all about.

    So here in brief: The MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is false and the E.K-H balances equation (I−S)+(G−T)+(X−M)=(Qm−Yd) is true. Legend: Qm is monetary profit, Yd is distributed profit. Qn, i.e. non-monetary profit, has been left out here to simplify matters but has been treated extensively in the Levy Economics Institute of Bard College Working Paper No. 741

    See also The Common Error of Common Sense: An Essential Rectification of the Accounting Approach Levy Economics Institute of Bard College Working Paper No. 371

    So the description of MMT boils ultimately down to: MMT is proto-scientific garbage which is promoted by folks with less than two brain-cells who cannot even tell what profit is.

    Egmont Kakarot-Handtke

    1. Yeah, in other words, you defined profit differently.

      Perhaps it would be an idea to find out why everyone else thinks your definition is wrong rather than attempting to reinvent economics...

    2. Brian Romanchuk

      The formal basis of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, 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.” (TĂ³masson et al., 2010, pp. 12-13)

      So, Keynes, the fake scientist, had NO idea of the foundational concept of economics. After-Keynesians in their bottomless incompetence never spotted Keynes’ blunder with one honorable exception: Allais.#1, #2

      Post Keynesians and MMTers blindly reproduced Keynes’ blunder until this very day.#3

      So it is NOT the case that I “defined profit differently” but it is indeed the case that I defined the macroeconomic Profit Law for the first time axiomatically correct.

      From this follows for the balances equations
      (I−S)+(G−T)+(X−M)=0 = MMT = false
      (I−S)+(G−T)+(X−M)=(Qm−Yd) = AXEC = true.#4

      Now it is your turn. The Walrasians have put their axioms on the table, so have I.#4 Stop blathering, show your axioms and your definition of macroeconomic profit or get out of the scientific discussion.

      Egmont Kakarot-Handtke

      #1 How Keynes got macro wrong and Allais got it right

      #2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)

      #3 Why Post Keynesianism Is Not Yet a Science

      #4 The new macroeconomic paradigm

    3. I believe that “axiom” is essentially “assumption” in Greek, but in the English-speaking mathematics world, “axiom” is reserved for foundational mathematical assumptions, like those for plane geometry or the real line. Labelling run-of-the-mill “assumptions” as “axioms” pretty much marks oneself as not really understanding mathematics. That distinction may not hold in other languages, but I just wanted to fill you in on the decorum.

      In any event, you can pick up practically any introductory macro textbook and get the *definitions* used in the national accounts. MMT authors follow those definitions ( although there are tons of arguments how they use “savings”). I have enough problems on my plate that inventing a new accounting system is not high on my list of priorities.

      But seriously, cash-based profits? Nobody uses that primitive an accounting system. Probably the Romans had a more sophisticated notion of profits.

    4. Brian Romanchuk

      You said “It would be very easy to be annoyed at these characterisations of MMT; they almost invariably trivialise the theory, saying it is ‘just’ some simple theory (the word ‘just’ is always in the phrasing). … The first thing to keep in mind is that MMT is not a single idea, it is what appears to be an internally consistent economic school of thought, which lies in the ‘broad tent post-Keynesian’ economics, following the definition of Marc Lavoie in his text Post-Keynesian Economics: New Foundations.”

      Why do you not simply put down in a clear language the handful of core propositions MMT is built upon instead of constantly being annoyed by the wrong characterizations and misunderstandings of non-MMTers? After all, this is how science works since 2000+ years: “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.” (Aristotle)

      If your premises/core assumptions/primitive propositions/axioms are not well defined the whole of your argument falls apart. It is pretty obvious that you are too confused to define MMT properly. Instead, you waffle about quantum physics or the use of the word axiom.

      You maintain “I believe that ‘axiom’ is essentially ‘assumption’ in Greek, but in the English-speaking mathematics world, ‘axiom’ is reserved for foundational mathematical assumptions, like those for plane geometry or the real line.”

      Obviously, you have never heard that one of the most famous books in physics ― Newton’s Principia ― starts with the words Axiomata Sieve Leges Motus or that Debreu titled one of the most important Neoclassical books The theory of value: an axiomatic analysis of economic equilibrium.

      Keynes understood the crucial role of axioms very well “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.”#2

      The same holds for MMT. Because of a lack of clearness in the premises/axioms, MMT is simply a heap of inconsistent and confused blather that MMTers themselves do not understand. Every approach stands or falls with the consistency of its axioms.

      You say “In any event, you can pick up practically any introductory macro textbook and get the *definitions* used in the national accounts.” Yes, but the fact of the matter is, that these *definitions* are false since Samuelson’s textbook of 1947.#3

      I understand that you have a lot of problems on your plate which explains that there has not been one second left since your textbook years for thinking about profit and income which are without any doubt the foundational concepts of economics. Fact is that you are too stupid for the elementary mathematics that underlies accounting.#4

      Egmont Kakarot-Handtke

      #1 Keynes, Euclid, and economic methodology

      #2 Keynes, the methodologist

      #3 The father of modern economics and his imbecile kids
      In the 1998 edition the blunder is on p. 392.

      #4 A tale of three accountants

    5. Unfortunately, I’m going out the door, so I will have to ponder definitions later.

      However, Newton was writing in Latin, not English. As I wrote, this is the convention in the English-speaking world. As for “axiomatic”, one mwy note that it is a different word, and no good mathematician uses it - all mathematics (in its modern invpcarnation, anyway) follows from assumptions. Debreu was just being a poseur.

    6. Brian Romanchuk

      You say “Newton was writing in Latin, not English. As I wrote, this is the convention in the English-speaking world.”

      WOW, did you never realize that the Principia were translated into English in 1729 and Book I starts since then with ‘Axioms, or the Laws of motion’?

      Where did you get your diploma from? Trump University?

      As far as axiomatization in mathematics is concerned you better look up Hilbert, Bourbaki, Russel, Whitehead in Wikipedia before posting brain-dead nonsense.

      In economics, axiomatization started with Senior: “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter)#1

      Modern microeconomic textbooks start with the Axiom of Rationality, see Mas-Colell Microeconomic Theory, page 5.

      Obviously, you have no idea of the scientific “conventions in the English-speaking world.”

      But our issue is not methodology in general but the conceptual mess of MMT. And here the proof has been given that the balances equation MMT is based upon is false.#2

      MMT is scientifically dead, admit it and get out of the way.

      Egmont Kakarot-Handtke

      #1 From obscurity to enlightenment

      #2 Rectification of MMT macro accounting

    7. In case it was not obvious, I was writing about the English conventions in 2018, not 1728. If you wish to hop into your time machine, your English might fit in much better. However, most non-pseuds use “formal” (or something similar) instead of “axiomatic”. Look, if you want to sound like a bad translation of a 19th century continental European, be my guest. In any event, I cannot see how a “definition” (of profits) turns into an “axiom.” I’m trained as a mathematician, not a “scientist,” and your writing style is mangling *modern* mathematical conventions.

      Hoever, you raised a good point earlier - why doesn’t MMT *formalise* its arguments? Since I am not the person to write such a textbook — it would be a textbook of “Romanchian economics” (a frightful concept) — not necessarily MMT. There is one in the works for late 2018.

      But even then, you would be disappointed. One could summarise a significant portion of heteredox macro as — mathematical models of the macroeconomy fail. Why write out a formal description that you know does not work?

      But for our purposes, MMT uses standard national accounting, which is a formal framework developed earlier, and is still under revision. National accounting provides an internally-consistent set of definitions for defining aggregates.

      The closest you can find to a mathematical description is tge SFC modelling literature, which MMT inheits from. A purist would argue that the treatment in Godley and Lavoie is not formal enough. However, any competent mathematician can fill in the missing formalism. (I have strong enough credentials in applied mathematics to make that claim, thank you very much.)

      However, the mathematical treatment is too straightforward, and does not capture the notion of model uncertainty. I did some analysis a few months ago that might better capture the notion of model uncertainty.

  11. Brian Romanchuk

    You say ”I’m trained as a mathematician, not a ‘scientist,’ and your writing style is mangling *modern* mathematical conventions.”

    Frankly, is is a matter of indifference what your training was. Perhaps Wikipedia can bring you up to speed with regard to axiomatization: “The Zermelo-Fraenkel axioms, the result of the axiomatic method applied to set theory, allowed the ‘proper’formulation of set-theory problems and helped to avoid the paradoxes of naĂ¯ve set theory. One such problem was the Continuum hypothesis. Zermelo–Fraenkel set theory with the historically controversial axiom of choice included is commonly abbreviated ZFC, where C stands for choice. … Today ZFC is the standard form of axiomatic set theory and as such is the most common foundation of mathematics.”

    You say “I cannot see how a ‘definition’ (of profits) turns into an ‘axiom.’” Nobody can see a definition turning into an axiom because this is a hallucination of your own making.

    The three macroeconomic axioms for the elementary production-consumption economy are given by (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. And the profit definition reads Qm≡C−Yw.

    You say “But for our purposes, MMT uses standard national accounting, which is a formal framework developed earlier, and is still under revision. National accounting provides an internally-consistent set of definitions for defining aggregates.”

    Again, the formal framework of standard national accounting is inconsistent. For the proof see The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

    Because of this, the MMT balances equation (I−S)+(G−T)+(X−M)=0 is false. A mathematician worth his salt sees this immediately. Profit is the balance of the business sector and it is MISSING in the equation.

    Your reference to the SFC modelling literature is pointless because if the foundational concepts profit and income are ill-defined the models are only good for the wastebasket. This applies all MMT models.

    MMT policy guidance lacks sound scientific foundations.

    Egmont Kakarot-Handtke

    1. Egmont,

      As is clear, you are having a difficult time with English. What I wrote was very clear, and I will repeat.

      In modern English convention, “axiom” is reserved for foundational assumptions. Lesser assumptions are just labelled “assumptions.”

      No matter how earth-shattering you think your work is, the convention in mathematics is that you have to let other people decide that. At best, your analysis is a curiosity. The assumptions used in a curiosity does not rate the term “axiom.” Furthermore, the definition of profit is a definition, and is labelled as such in English.

      If you actually understood mathematics, you would realise that one can change definitions, and then create a new chain of logic. Rather than wasting your time saying that a definition is wrong - which is logically impossible - you would explain how your set of definitions gets more useful results. It might actually induce someone to read your output.

  12. "(I−S)+(G−T)+(X−M)=0"

    Term G (Government spending) can be considered as annual movement of sand (each grain of sand = one dollar).

    Term T (Taxes received by government) can be considered as sand received by government each year.

    The combination (G-T) represents the annual change in a huge pile of sand controlled by government.

    The remaining terms of the equation represent inflow or outflow of sand from the private and external sectors of the economy.

    When the combined flow is equated to zero, the assigned change in the total macro sand pile is zero. This effectively defines the macro money supply as being constant. Which is obviously incorrect.

    The money supply does grow, which is what I think E K-H is trying to say.

  13. Brian Romanchuk

    At the beginning of every scientific investigation stands the following question “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.” (J. S. Mill)

    The foundational propositions are called in methodology axioms. Every scientific discipline is ultimately based on axioms.

    In economics we have Walrasian microfoundations and Keynesian macrofoundations. Both are clearly defined and provably false. So what is needed is a paradigm shift. As Keynes put it “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”#1

    MMT claims to be a new approach, aka paradigm, and has published its foundational assumptions, aka axioms, on Wikipedia.#2. And what do we see here? the sectoral balances equation which is false since Keynes wrote I=S on p. 63 of the GT.

    So, MMT is not a new paradigm but Post Keynesian rubbish. Keynes did not understand what profit is, and the abysmally incompetent After-Keynesians did not realize the foundational blunder in the last 80 years.

    What is the last refuge of morons? It is Humpty Dumpty wordplay “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that's all’.”

    This is NOT how science works. The freedom or arbitrariness of definition is a methodological illusion. It applies only to the first definition. Subsequently, one has to make sure that every new definition is consistent with the preceding ones. Formal consistency is indispensable.

    The MMT balances equation is provably false. Because the foundational assumptions, aka axioms, are false the whole analytical superstructure of MMT is false. MMT policy guidance has NO sound scientific foundations.#3

    Needless to emphasize that the Trump University economists Romanchuk, Kelton, Mosler, Mitchell, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine etcetera, who do not even get the elementary mathematics of macroeconomic accounting right and do not know what profit is, are too stupid for the opus magnum, that is, for the formulation of a consistent set of foundational propositions, aka axioms, of the hallucinatory new paradigm called MMT.

    Egmont Kakarot-Handtke

    #1 New Economic Thinking: the 10 crucial points

    #2 Wikipedia, Modern Monetary Theory

    #3 MMT: The one deadly error/fraud of Warren Mosler

    1. Do you want to know why I tried explaining how to write modern English properly? To be blunt, to a modern reader of English, you sound borderline clinically insane. Your word choices help reinforce that impression. If English is your second language, you probably will miss the subtleties involved. I was trying to nudge you in a direction that might allow other people to take you seriously. That perhaps was a waste of time. If you insist on sounding like a loon, be my guest.

      1) I don’t care how you think “science” operates, but in mathematics, every competent mathematician knows that we can change definitions, and go off in new directions, even while sticking with the same foundational axioms (such as those that define the real line). You cannot use results from one set of definitions to “prove” the other false.

      2) The same English word can have multiple meanings, even within mathematics. You have to understand context.

      3) Every credible MMT writer has indicated that MMT is part of the post-Keynesian tradition — assuming that one means “broad tent post-Keynesianism” and not “narrow tent post-Keynesianism” (as defined by Marc Lavoie). So congratulations on your reading skills.

    2. Brian Romanchuk

      Come to the point and tell everybody in a few clear sentences and a neat equation what the MMT definition of profit is instead of complaining that MMT is not just ‘Theory X’.

      “In modern science, the term ‘theory’ refers to scientific theories, a well-confirmed type of explanation of nature [or sub-systems like the economy for example], made in a way consistent with scientific method, and fulfilling the criteria required by modern science.” (Wikipedia)

      The criteria of modern science are material and formal consistency “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)

      MMT is no valid theory because it lacks logical consistency and MMTer cannot even tell what profit is.

      Egmont Kakarot-Handtke

    3. What "profits" do you want to know about? GAAP profits? [GAAP = Generally Accepted Accounting Principles] Profits according to tax law? Profits (which has a half-dozen variants) in national accounting standards? As defined in simple macro models?

      The basic premise is that profits = (Revenues) - (Expenses), but the devil is in the details of the definition of "revenues" and "expenses." If you look at GAAP, the definitions turn into a very thick book of accounting guidelines. Good luck with turning that book into, er, axioms...

    4. This discussion is entertaining to read and it looks as though it could go on for ever. Why must you be so polite Brian? Egmont does not seem to have any problem calling any number of people stupid.

      Well, I guess it is usually good policy to take the high road in this sort of thing.

  14. Brian Romanchuk

    I asked you to state “in a few clear sentences and a neat equation what the MMT definition of profit is.”

    You merely give the question back “What ‘profits’ do you want to know about?” In other words, you have no idea what profit is.

    So, here we go, profit for dummies.

    For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure production-consumption economy without investment, government, and foreign trade.#1 In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

    In case (i) the monetary saving of the household sector Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero.

    In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.

    In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

    It always holds 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. Total profit is scattered among the firms that comprise the business sector.

    Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, waiting, risk, greed, the smartness of capitalists, or any other subjective factors. Total profit/loss is objectively determined in the most elementary case by the change of the household sector’s debt.

    Monetary profit/loss is measurable with the accuracy of two decimal places.

    Needless to emphasize that the complexity of the monetary economy can now be successively increased. Accordingly Qm=−Sm+Yd+I+(G−T)+(X−M) is the Profit Law for an open economy (X−M) with a government sector (G−T) and with business investment I and distributed profit Yd.

    This equation tells everybody that Public Deficit = Private Profit and this, in turn, tells everybody that MMT’s relentless propagation of deficit spending for social purposes is nothing but agenda pushing for the one-percenters.

    So, a MMTer is either stupid because he does not know what profit is, or corrupt because he deceives the ninety-nine-percenters.#2 Take your pick.

    Egmont Kakarot-Handtke

    #1 (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. For a start it holds X=O. Note that ALL variables are measurable.

    #2 MMT is ALWAYS a bad deal for the 99-percenters

    1. Ahem. In the real world, businesses are supposed to want to maximise GAAP. In practice, they usually target some variation of GAAP. So if we want to capture observed behaviour, we should be looking at GAAP.

      However, corporations want to minimise the profits they report to the government. So they try to find techniques to drive as big a wedge between GAAP profits and what is reported for income tax.

      Meanwhile, national atatisticians need to find measures of profits that look as much as possible like GAAP, yet are consistent with the entire set of national accounts. The fact that most large corporations are multinationals makes this obviously complicated.

      However, you are talking about toy models. Most of us who build models attempt to define profits so that they align with the national accounts. The exact definition depends on the model used, as would be clear to anyone who actually understands how mathematical models work.

      So a question for you. If I have a firm with a $100 wage expense in 2017 (paid out of “cash”), sent my invoice of $200 to the client of Dec 31, 2017 (with the (obvious) expectation that I will be paid in 2018), what is my ‘E.K.-H. Profit” in 2017?

    2. Brian Romanchuk

      Science is about universals. The Law of Gravitation is not different in Newton’s Cambridge, in the US, or in China but holds throughout the universe. However, when it comes to measurement, some practical problems arise because different countries measure mass or length in different units.

      Therefore, the first and foremost task of science is to define the foundational concepts and their dimension (e.g. mass, length) consistently and with the utmost precision. This is the precondition of testing which is the final arbiter in science. In order to get rid of different national definitions of dimensions, in physics, natural units are used which are “physical units of measurement based only on universal physical constants”. (Wikipedia)

      Analogously, economics has to establish a consistent set of foundational economic concepts (e.g. income, profit, employment etc) and then to figure out how they are related (e.g. Profit Law, Employment Law). How is this done? “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)

      Economics has failed already at this first step. Profit is ill-defined since Adam Smith, and MMT is no exception. The scientific incompetence of economists stinks to the high heavens. Physics students all over the world can tell you precisely what energy is but economics students look up the definition of profit in their national tax code. This tells the general public everything about the absurdity of the claim that economics is a science.

      Your reference to GAAP is a case in point. We are dealing here with the MMT balances equation which is a macroeconomic relation and macroeconomic magnitudes are measured by national accounting. Here the practical problem arises that different countries have historically developed their own systems. The problem of unification has been addressed by the United Nations System of National Accounts.#1, #2

      The GAAP has the practical purpose of determining profit for taxing American firms. It has NO scientific content whatsoever. When we are talking about macroeconomic profit the GAAP is absolutely IRRELEVANT.

      The axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)=(Qm−Yd). The MMT balances equation reads (I−S)+(G−T)+(X−M)=0. As everybody can see, monetary profit Qm and distributed profit Yd is MISSING in the foundational equation of MMT.

      MMTers have not realized until this day that the most important real-world economic magnitude ― profit ― is absent in their “theory”. They even think they can look it up in the GAAP. More proof of manifest idiocy is not needed.

      Egmont Kakarot-Handtke

      #1 United Nations, 2008

      #2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

    3. You’re making a huge assumption: that there is a single mathematical model that describes the macroeconomy, solely based on weak analogies to physics. What if I told you that it was possible to demonstrate that no such model exists?

      We know that firms are trying to maximise some variant of GAAP profits, not a national accounts definition. I’m self-employed, and I can quite confidently tell you that the aggregate profit numbers do not help me, only my GAAP profits.

      I see that you could not answer my simple mathematical question about your definition.

    4. Everybody else knows the difference, so it’s not like I’m showing off.

      As should be clear, I read your stuff once. I was not happy with it, and I am not going through the exercise again. Your answer tells me what I believed: your definition gives the wrong answer at the firm level.

      Even heterodox economists appear to subscribe to a version of micofoundations: firms attempt to maximise something resembling GAAP profits. (This micro argument is probably more complicated than that, but that’s my approximation. Get a post-Keynesian text on micro if you want a cleaner answer.) The national accounting measure is an attempt to approximate aggregate GAAP, and is assumed to be what the aggregate business sector would appear to be optimising.

      Your theory is that microfoundations is wrong, we should use another definition of national accounting profits as an analytical tool. That is, it does not matter what individual firms want to do, aggregate behaviour follows different dynamics. (The heterodox microfoundations haters would actually love that argument. )

      Unfortunately, this is not that radical. Economists have been arguing over the best definition of national accounting profits for a long time. Nobody looks at cash accounting, because that is obviously wrong at the firm level. Perhaps you are right: maybe it is a mistake to not examine cash accounting at the aggregate level. However, it appears hard to square your accounting methodology with data at the industry level, although I admit have not seen any need to do so.

      But guess what? Even if your new definition became accepted, it’s just changing a couple of not-very-important terms in various accounting identities. MMTers would just adjust their verbal description to take into account the extra terms.

      However, nobody is going to listen to you since you are using terminology in a bizarre fashion, and you are asserting that a relatively minor definitional change is a scientific revolution. I slag off mainstream economics, but I have worked around it for long enough to be able to gauge the relative importance of theoretical issues.

    5. In particular, your arguments that your theory is “axiomatically correct” are completely wrong. You’re just taking a different definition of aggregate profits, which is perhaps defensible. However, your definition is incompatible with known micro behaviour. If you want to get all axiom-y, you are actually on very shaky ground. Since there are typically only a few large firms dominating many industries, a theory that does not predict firm-level behaviour will have problems once we break GDP on any industrial basis.

    6. Brian Romanchuk

      Let us agree on the following

      • There is micro and macro and the MMT balances equation is macro. So all your references to the behavior of firms and individuals and GAAP accounting principles are entirely beside the point.

      • Macro is false since Keynes due to the Fallacy of Insufficient Abstraction. MMT has inherited Keynes methodological blunder. It is a historical fact that the Keynesian Revolution, i.e. the move from microfoundations to macrofoundations, i.e. the replacement of micro axioms by macro axioms, i.e. the paradigm shift, failed.

      • If my argument sounds bizarre to you this has nothing to do with language or terminology but with the plain FACT that economics has failed in the last 200+ years to get the definition of the foundational concepts income and profit right.#1 MMT is NO exception. The actual state of economics is like medieval physics before the foundational concept of energy was properly defined and fully understood.#2 If this is not bizarre, what is?

      • The question is not at all how my argument sounds but whether it is true or false. I wonder how long it takes MMTers to stop talking methodological nonsense and in earnest try to disprove the axiomatically correct balances equation.

      • The whole issue boils down to this: Which one of the two macroeconomic relationships is true MMT=(I−S)+(G−T)+(X−M)=0 or AXEC=(I−S)+(G−T)+(X−M)−(Qm−Yd)=0?

      We both know the simple answer: the AXEC equation is true and the MMT equation is rather bizarre because it applies to a zero profit economy. And this means that MMT policy proposals have NO sound scientific foundations.#3 Not one of them.

      Egmont Kakarot-Handtke

      #1 The Profit Theory is False Since Adam Smith

      #2 “Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little?” (Schoeffler)

      #3 MMT = proto-scientific junk + deception of the 99-percenters

    7. Look, it’s pretty simple. If there is one firm in the company, it attempts to maximise GAAP profits, and the natuonal accountants attempt to approximate GAAP notions in the standard definitions. Your definition gives the wrong answer.

      If you think we can only define things one way, your investment in higher education was sadly wasted.

    8. Brian Romanchuk

      You say “If you think we can only define things one way, your investment in higher education was sadly wasted.”

      Lack of definitions is NOT the problem. Just the opposite. In the political realm, at Trump University, or in the Station for Mentally Deranged you can define anything in multiple ways. Not so in science. If you leave science and rename MMT to MMB ― Modern Monetary Blather ― you can define anything in any way and are safe from criticism and refutation.

      My higher education tells me that you are 2000+ years behind the curve “There are always many different opinions and conventions concerning any one problem or subject-matter …. This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other …” (Popper)

      Egmont Kakarot-Handtke

  15. again (I−S)+(G−T)+(X−M)=0

    It seems to me that, because each term is a difference, we are describing an observed change in something. That 'something' may be profit but I think it is 'money supply'.

    The equation includes three macroeconomic sectors, which (combined) presumably hold all the money supply available to the single macro-economy.

    What if we allowed the money supply in the macro-economy to expand? Would that be profit to one (or more) of the sectors? What might be the source of a money supply expansion? Should the sum of changes for the three sectors still equal zero?

    I like to think that only government can expand the money supply in a fiat economy. I like to think that banks are controlled by government (however indirectly) and that banks create fiat money.

    The first-spender of newly created money can be any of the three sectors. I guess we could say that newly created money will eventually create a profit for someone. I prefer to say that newly created money will eventually find an owner (and come to long-term quiescence).

    I like to write

    (I−S)+(G−T)+(X−M)= change in money supply.

    Then, to learn how the money supply has actually grown, we need to distinguish between borrowing from the private sector and borrowing from one's self (as when government borrows from banks). Only borrowing-from-one's-self results in long term increases in the money supply.

    It is not enough to measure the terms in the equation and expect to learn how the macro-economic money supply has grown.

  16. Correction:

    In the second paragraph, "because each term is a difference" should read

    "because each term-group is a difference".

  17. This has been a good article and a good discussion. Now I'm intrigued. I get the impression that MMT is about applying the sophisticated ideas of double entry bookkeeping to macro-economic analysis. One of the things that has always bothered me about macro is that so much of it didn't make accounting sense. Every entity in the economy can be described using double entry bookkeeping, but somehow the aggregate can not. At some point the mysticism creeps in.

    I'll have to read more.

    Also, I'm guessing that money supply as now discussed is probably less important than something about money flow. That (I−S)+(G−T)+(X−M)=0 looks a lot like Kirchoff's Law or an accountant's desideratum. I think too many have been looking at the flow of electrons while the flow of electric current is quite different and more important. I'm guessing that some new understandings will emerge from MMT.

  18. "(The loopiest recent variant of this was that "MMT is just the Quantity Theory with bonds as part of the money supply." My head hurts just thinking about that assertion.)"

    While I agree that's quite reductive, I don't think it's *too* far off. I ended up at something pretty similar when I tried to come up with the most condensed essence of modern MMT, at least when trying to get through to a Krugman or SWL type:

    Even Larry Summers was telling people in 2016 that t-bills were basically equivalent to reserves & printing money (in post-IOR world), before trump won and he started politically railing against government debt again.

  19. The problem is that the Quantity Theory of Money implies that there is a strong relationship between the “money supply” and the price level. The MMT view on inflation is not that simplistic. I do not think there is a snappy summary of “the MMT view” on what determines inflation; the post-Keynesian answer is “it’s complicated” (as per Marc Lavoie’s survey in his textbook); the MMT answer is probably even more complicated.

    For a lot of people, if there is no reductionist mathematical model for inflation, there is no theory of inflation. I tend not to have a lot of respect for such people. Give me *any* mathematical model for inflation, and I could find a counter-example in the data.

    1. Yeah true, I don't know enough about what people think of the Quantity Theory to hitch any wagons to it.

      I would say that the MMT inflation story puts macro demand-pull inflation broadly as a result of 'net-financial-assets' vs the emergent 'savings desire' of the population (which can vary between countries, depends on the currency itself, and certainly changes with the business-cycle), with caveats that inventory & employment are shock-absorbers that fluctuate before prices. It seems kind of like a quantity theory.

      I don't know if MMT has any unique take on cost-push type inflation. And Mosler is really trying to talk & think about how the government is truly price-setter, which to me sounds like his answer for 'built-in' kind of inflation (government trying to index salaries to previous inflation, etc), which is really the only type we see in the absence of full-employment max-demand environment (where you get large-scale demand-pull inflation and labor cost-push).

      Then there are plenty of nuances as you say, and verbal explanations of phenomena, such as your article:

    2. I ran into someone on Twitter that said that there was a modern “Quantity theory of Money” that goes beyond the simplistic belief that velocity is constant, that it is allegedly more sophisticated than that. Thing is, if we define the QTtoM to just be “too much money chasing goods”, any theory that is based on aggregate demand qualifies. That’s then meaningless, since it is too broad.

      I was about to write an article on the limitations of mathematical inflation models. I’ll have to see what I wrote there, since I have forgotten that. Thanks for digging that up... đŸ™‚


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