Thursday, March 8, 2018

Steve Roth — Wealth and the National Accounts: Response to Matthew Klein

Accounting and national accounts.

Wealth and the National Accounts: Response to Matthew Klein
Steve Roth


Detroit Dan said...

Here's a link:

Tom Hickey said...

Thanks. Fixed now.

AXEC / E.K-H said...

MMT is idiocy and fraud
Comment on Asymptosis on ‘Wealth and the National Accounts: Response to Matthew Klein’

Randall Wray says about the foundations of MMT: “In this blog we are going to begin to build the necessary foundation to understand modern money. Please bear with us. It may not be obvious, yet, why this is important. But you cannot possibly understand the debate about the government’s budget (and critique the deficit hysteria that has gripped our nation across the political spectrum from right to left) without understanding basic macro accounting. So, be patient and pay attention. No higher math or knowledge of intricate accounting rules will be required. This is simple, basic, stuff. It is a branch of logic. But it is extremely simple logic.”

This is true, of course, the point is that economists in general and MMTers, in particular, do not even get the extremely simple logic of accounting right. In other words, MMTers are just as incompetent as the representative economist.#1

There is no need to plow through the heap of MMT verbiage about income/profit/saving/wealth. The elementary points MMTers do not get is (i) that business sector profit/loss is the mirror image of household sector dissaving/saving, and (ii), that profit is NOT a flow like wage income but a difference of flows, hence the simple operation profit + wage income is a methodologically inadmissible Humpty Dumpty Fallacy.

MMT policy advice is patently false because MMT theory is false, more specifically, MMTers do not know how the price- and profit mechanism works. They do not know the difference between profit and income, between profit and distributed profit, between monetary profit Qm and nonmonetary profit Qn, and between monetary saving Sm and nonmonetary saving Sn.#2 Monetary profit emerges in the production-consumption economy, nonmonetary profit/saving stems from the revaluation of real and financial assets/liabilities.

In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).#3

It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. This Law refutes the MMT profit theory. So, the whole of MMT is scientifically dead already at this point.

Money is needed by the business sector to pay the workers who receive the wage income Yw per period (econ-speak for wages + salaries). The workers/employees spend C per period. Given the two conditions, the market clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.

See part 2

AXEC / E.K-H said...

For the full text see

ANC Driver said...

E.K.H said

" and (ii), that profit is NOT a flow like wage income but a difference of flows, hence the simple operation profit + wage income is a methodologically inadmissible Humpty Dumpty Fallacy."

I recently had an online conversation with Steve Keen who told me in no uncertain terms that profit is a flow of income.

What I do not understand is why so much debate centers around something that should be so obvious...and that is, if profit is the final balance of a profit and loss statement, then why on earth are people treating it as a flow?

Maybe it is because at a fundamental level, whilst just about every other field of study everyone knows if you take a +1 and a -1 you get zero, but alas, economists and politicians do not seem to know this. Maybe when they made usury legal and changed the name to interest they had to create a subject called economics to create confusion and disguise the fact that they were going to allow +1-1 to equal something else other than zero for the next few centuries

Tom Hickey said...

Maybe because the incomes statement is an accounting record of flow in a period and the balance sheet is an accounting record of stock?

ANC Driver said...

Tom Hickey said:

"Maybe because the incomes statement is an accounting record of flow in a period and the balance sheet is an accounting record of stock?"

Possibly...but then at what point does it stop being treated as a flow? By this I mean, if you treat the balance of an income statement (1) as a flow, then this implies it must become income on some other income statement (2), and then so on forever.

A profit - short for profit-à-prendre in Middle French for "right of taking". From a legal perspective, any right corresponds to a duty (an equity owed). A flow does not constitute a right until it stops flowing. A flow cannot be alienated/transferred, only a stock can, because it is the act of transferring which is the flow, and it is the thing being transferred which is the stock.

Many legal cases have had to deal with the difference between a stock and a flow when those attempting to transfer 'rights' in wills, contracts etc have not themselves understood the difference. These cases usually resort to the tree and the fruit analogy. One case in point is where one man who owned royalty rights to a patent attempted to transfer any future 'income' from the patent, and which by law failed and was void. The court demonstrating that one cannot transfer a flow but only the 'right to the flow', which is a stock, and it is here which lies the massive difference and confusion.

Using the analogy, the court expressed that whilst the income is seen as the fruit, one cannot transfer it until it comes into existence because it is a future expectancy which may or may not come into existence (which means he would have to wait until each income was received and in his hands, thus becoming a stock before he could transfer it), but one 'can' transfer the present 'right' to any future income, which in the analogy sense is the tree. [in this case, he failed to use the words 'right to future income' and instead used only 'future income' and hence the contract was voided by law]

As profits are distributed, they must by law be treated as stock, as one cannot distribute what is not a present right/duty; however, the act of distributing is a flow.

1. Firm agrees to pay wages of WL = duty of firm, right of worker = stock
2. Firm pays wages into workers bank account = firm discharges duty and no right of worker exists anymore = flow
3. Workers bank account has positive balance = duty of bank to convert on demand, right of worker to demand conversion = stock
4. Firms bank account is negative (overdraft) = duty of firm to repay overdraft, right of bank to demand repayment = stock
5. Firm owns inventory = stock
6. Firm sells inventory to some consumers at a markup to wages cost, at the same time consumers transfers stock (money from #3) to firm = flows, in opposite directions
7. Firms bank account has positive balance (profit) of the difference between overdraft (wages) and sales = duty of bank to convert on demand, right of firm to demand conversion = stock
8. Firm agrees to pay a % of #7 to share holders as a dividend = share holders own a right against firm, firm owes a duty to shareholders = stock
9. Firm pays dividend = flow
10. Shareholders bank account has positive balance = duty of bank to convert on demand, right of shareholder to demand conversion = stock
11. Firm converts remaining % of #7 into inventory = stock

Profits are thus always a right to take, and hence a stock.

Returning to the original question, whatever the reasons, it is obvious there is no intent for a consensus to be reached any time soon.

Tom Hickey said...

The flows recored in the income statement are reflected in changes in stocks on balance sheets.

Profit (loss) from the income statement adds to(subtracts from) equity on the balance sheets, either distributed profits (owners' balance sheets) or retained earnings (firm balance sheet).

The real question of interest is where the profit comes from in a monetary production economy using modern money, all of which is created either by private credit (which nets to zero as an accounting identity) or else government issuance.

In a closed economy with no government contribution (balanced budget) then all private saving has to come from private borrowing (against collateral or future income). Credit extension creates a flow (increase in M1) that leads to expansion of the money stock. Loan repayment is a reflux flow that decreases the money stock.

The only way to get a net increase is through government issuance. The record of that is the fiscal deficit (flow) and the accumulated debt (stock).

Adding an external sector doesn't change anything materially, since the consolidated books in any case are government and non-government in that currency zone, where the external sector is composed of users of the currency like any domestic user. Location doesn't really change anything.

There are three major things going on in a monetary production economy — circular flow of production, distribution and consumption of goods, market-based commerce based on price rationing, and money creation. This can be viewed as a financial/economic system, which is what Steve Keen is attempting to model algorithmically.

The bookkeeping just keeps track of the transfer of goods. Economists use the bookkeeping as a shorthand for this, since "everything has it's price" and cost.

The difference between price (revenue) and cost (expenses) is profit.

In outline, it's a pretty simple system. But the intersection of the economic (non-financial, real goods) and financial (financial) makes it difficult to model simply.

ANC Driver said...

Thanks Tom.

Yes Keen did elaborate by saying net accumulation of assets can't happen unless there is an increase in household debt, government deficits, or current account surpluses, which was the whole point I was driving at with Keen. But he was emphatic that I had made an almost fatal flaw by treating profit as a stock, implying that I (along with him) thought there was a difference between profit and the net accumulation of assets.

"The real question of interest is where the profit comes from in a monetary production economy"
"the intersection of the economic (non-financial, real goods) and financial (financial) makes it difficult to model"
"everything has it's price" and cost"

indeed, it is in fact very simple, but brutally honest, the latter part being that which most don't want to deal with.

its the difference between ownership and non-ownership...everyone who does not own is paying a fee to those who own...the fee is the price, the cost is lower wages for active earners...passive income receivers are being paid by active income earners

however, there is no such thing as 1%ers and the 99%ers because this implies that 99% do not own anything - if anything it is closer to 50/50 than 1/99

the ratio of passive to active income is always under constant change due to increased demand from middle classes to increase their passive income holdings..everyone who has a bank account earning even the tiniest of interest, to those with super funds, to those economists who write books and earn royalties, are just as much contributing to the increase in the profit ratio as those who own stocks, bonds and real estate

I don't think it is any surprise that governments (probably at the request of some larger international body) seek to move to a surplus, because they know that there is no way to sustain the ever increasing demand for passive over active income, and that by pumping more money in they are simply encouraging it. If they are going to do this, i.e. increase deficits, then they may aswell use Keen's idea of a debt jubilee, because in the end, nothing will stop the demand.

This makes me think about the idea of a jobs guarantee. My question is, what makes us think that everyone will be happy with just a job and no more? The moment you give people a guarantee of income what is to stop them planning to become portfolio owners with the intent to replace all active income? If one person can do it, then why not everyone? But how can this be? How can we all own rights with no one left to owe the corresponding duty?


Tom Hickey said...

@ANC Driver

The classical economists were onto this, culminating in Marx. Passive income is gain without work (no productive contribution). It's called "economic rent." In the feudal age in which agriculture dominated and therefore land ownership, landlords took a share of the produce as the right of ownership and did no work. Marx viewed capital in the same light as land previously, when the agricultural age was giving way to the industrial age.

Neoclassical economics can be viewed as the bourgeois response to classical economics, Marx and Lloyd George (land value tax) that "resolves" the issue in terns of reward based on marginal productivity being "just deserts." Being the dominant factor of production in the industrial age, capital is productive and is rewarded along with labor based on marginal contribution so that everyone get what they deserve, assuming perfect markets.

However, markets are not perfect and the theory of marginal productivity applies to factor and not individuals. It's a flawed argument, as heterodox economists have been pining out.

The JG would help in evening up "the labor market" by increasing worker bargaining power and removing the buffer stock of unemployed that serves as a reserve army of the destitute in "disciplining" workers.

It's a start within the existing system and that's were we have to start to get from here to there without a revolution.

But the capitalistic system is inherently flawed as is the 18th century model of liberalism, capitalism being economic liberalism.

The challenge for liberalism is to reconcile the trifecta of economic, political, and social liberalism, and that has neither been done nor is it being seriously acknowledged and addressed. So we are beset with the paradoxes of liberalism.

The basic problem with 18th century liberalism is that it sought to replace the monarch/aristocracy/landed gentry with the rising bourgeoisie as the owners of property other than land title during the transition from the agricultural age to the industrial age.

Now the haute bourgeoisie have replaced the monarchies and aristocracies and absorbed the land lords. Between the haute bourgeoisie ("1%") and the workers (proletariat) are the petite bourgeoisie (small property owners) and the petite bourgeoisie identify with the haute bourgeoisie rather than the proletariat and this implicit alliance perpetuates the system and will continue to perpetuate it until enough of the petite bourgeoise are either downgraded to the proletariat or join the precariat. That is now happening in many countries of the developed world and it is resulting in social unrest and dysfunction.

Stay tuned.

ANC Driver said...

nicely put

i hope you don't mind but i am enjoying this conversation

what is common throughout this historical account is still 'ownership' and control based on individualism..all that changes is how much

i have asked socialists for years now, why instead of trying to replace capitalism, do you not look at multiple economic/legal systems running concurrently, for instance capitalism and forms of socialism co-existing?

It's really not that difficult to imagine once one thinks about it for a while..the more one thinks of it the more one realizes how beneficial it is to both sides, and not only that, it allows everyone to exercise the most fundamental human right, that of free-will

what this would require is simply the ability for a person who reaches legal age to make the choice and from there the way in which they hold resources (i.e. from a legal standpoint) determines which side they are on and what their purposes in life are, and what they can and can't do regarding resources..capitalists will continue on as usual accepting full well that capitalism is and always has been a game where winner takes all (control of resources) and losers go bankrupt and start again..for the rest of us, we don't need to play that game, but we accept we can't have the rewards, and what's more we do not contribute to the business cycle - we exist alongside it, but not a part of it..the co-existence of these systems would create a tri-lateral arrangement where one party is government, the other the capitalists, the other the socialists (assuming socialists is the best term to describe it - i prefer custodians, but anyway)..under such a tri-lateral arrangement human needs are only treated as commodities in the capitalists camp - financial assets would not exist in the socialists/custodians camp..government is intermediary or the go-between so to speak because it can fulfill all roles

in a strange type of irony, socialists want the rewards of capitalism (control and wealth) but do not want to accept the risks...capitalists want government to butt out of everything and yet demand they spend inordinate amounts of resources in protecting their precious rewards..these two competing systems are wasting everyone's time by fighting one another and demanding that the other side give in, instead of seeing that the best policy is to allow them both the co-exist under different systems

what is most disappointing however is that it appears even most socialists, but especially economists, still cling on to this idea that all humans have certain attributes, which in and of themselves are really only fit for capitalism - such as we all make goals and want to achieve them (do we all?), that we all want to participate in markets (do we all?), that we all want to exchange our time for something else (do we all?), that we all want to specialize in one field (seriously?) that we are all rational maximizers of satisfactions (really?), we all have unlimited wants (do we?), and worst of all, we all want to own property (wrong!)..these things are not inherent in all of us but are conditioned into many of us..for those in which they are inherent, they are the ones who will gravitate toward capitalism

only when economists of all kinds let go of this idea that we all have these attributes and that they are inherent in us will they be able to see other models which can co-exist alongside capitalism - but they wont and this is probably why I never get responded to... :)

Tom Hickey said...

I think Marx got this essentially right.

No social order is ever destroyed before all the productive forces for which it is sufficient have been developed, and new superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society.

Mankind thus inevitably sets itself only such tasks as it is able to solve, since closer examination will always show that the problem itself arises only when the material conditions for its solution are already present or at least in the course of formation. In broad outline, the Asiatic, ancient,[A] feudal and modern bourgeois modes of production may be designated as epochs marking progress in the economic development of society. The bourgeois mode of production is the last antagonistic form of the social process of production – antagonistic not in the sense of individual antagonism but of an antagonism that emanates from the individuals' social conditions of existence – but the productive forces developing within bourgeois society create also the material conditions for a solution of this antagonism. The prehistory of human society accordingly closes with this social formation.

What Marx could not see from his historical perch in the 19th century was the impact advanced technology would have in expanding the potential for distributed prosperity and increased leisure.

The world is now in late-stage capitalism and the global order is breaking down, suggesting that the time is nigh for the next iteration in the historical dialectic as a new mode of production — the digital — begins to unfold in addition to the agricultural and industrial.

We are not there yet and conditions suggest there there will be considerable travail involved in the "phase transition" between ages.

It took WWI to finally bury the previous system based on monarchy and landed aristocracy.

It appears to me that we are at another tipping point owing to the rise of inequality as a consequence of late-stage capitalism, an environmental crisis that is culminating in climate change the portends to change the game in ways that are unimaginable, the rise of advanced technology, and a world that will soon be dominated by digital natives that "think different."

Stay tuned.

Big opportunity along with big challenges.

Tom Hickey said...

Oops. I forgot the Marx citation.

Preface to A Contribution to the Critique of Political Economy

ANC Driver said...

Thanks for sharing. This part stood out for me.

Marx highlighted an excellent point which it would seem most economists would not be able to accept:

"My inquiry led me to the conclusion that neither legal relations nor political forms could be comprehended whether by themselves or on the basis of a so-called general development of the human mind, but that on the contrary they originate in the material conditions of life...."

"In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness. At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto."

One experiences this on a personal level today by how impersonal everything now is. We are forced into individualism (whether this means individuals, professionals, workers, legal bodies, govts etc), against our better instinct of desiring to form mutual trusts, in order to avoid any potential legal liability. We are legally obligated to compete against one another in order to fulfill the law. An irony in itself.

Egmont has also demonstrated this through his expose of the structural axiom set, i.e. the structure that is given by the axiom set does not adapt to behavior, behavior has to adapt to structure.

If economists actually got out of the way and stopped steering politicians then multiple modes of production could co-exist.

The non-profit sector already has the foundations (due to its legal relations with resources) to become a mode of production and to co-exist alongside others, its primary problem is that it is still stuck within the political and economic confines of capitalism primarily because human needs are still treated as commodities under non-profit relations which negates the effects of being non-profit.

"The world is now in late-stage capitalism and the global order is breaking down, suggesting that the time is nigh for the next iteration in the historical dialectic as a new mode of production — the digital — begins to unfold in addition to the agricultural and industrial."

The digital age, the third industrial revolution, is demonstrating the antagonism Marx speaks of. I see this with my children who are subject to individualism at school and at work and yet come home and do the exact opposite and network and share almost everything. But because everyone assumes and is fixated on this idea that we can only ever have one system and one mode of production and one set of legal rules and one way to treat human needs, then antagonism and social unrest will always be present.

Proudhon saw otherwise, and could see multiple modes of production co-existing. Mills is the only one who saw what one of those multiple modes could look like.