Coming Soon:

The following books by Robert Paul Wolff are available on Amazon.com as e-books: KANT'S THEORY OF MENTAL ACTIVITY, THE AUTONOMY OF REASON, UNDERSTANDING MARX, UNDERSTANDING RAWLS, THE POVERTY OF LIBERALISM, A LIFE IN THE ACADEMY, MONEYBAGS MUST BE SO LUCKY, AN INTRODUCTION TO THE USE OF FORMAL METHODS IN POLITICAL PHILOSOPHY.
Now Available: Volumes I, II, III, and IV of the Collected Published and Unpublished Papers.

NOW AVAILABLE ON YOUTUBE: LECTURES ON KANT'S CRITIQUE OF PURE REASON. To view the lectures, go to YouTube and search for "Robert Paul Wolff Kant." There they will be.

NOW AVAILABLE ON YOUTUBE: LECTURES ON THE THOUGHT OF KARL MARX. To view the lectures, go to YouTube and search for Robert Paul Wolff Marx."





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Saturday, May 4, 2019

AND OFF WE GO


I am delighted to see that my MMT post has triggered a lively series of comments.  I have a good deal to say in response and in further elaboration, so let me get started.  By the way, Tom Hickey obviously understands all of this vastly better than I do, so I invite him to weigh in whenever he sees me going off the rails.

MMT is simple, easily stated, and absolutely counterintuitive.  That is true, I find, of many powerful ideas.  MMT turns upside down everything that we think we understand about the most familiar thing in the modern world:  money.  It is not complicated, it does not require a grasp of differential calculus to understand, and yet what it says strikes us as just plain wrongheaded.

Let me begin with LFC’s vigorous and utterly sensible comment.  Here it is:

“To simplify things, let's boil matters down to one dollar. The Treasury Department prints out one dollar. According to the post, the government has thereby incurred a debt; it has issued an IOU, a promise to pay. But a promise to pay *what*? What exactly has the government promised to pay and *to whom*? It's not as if someone with a dollar in his or her wallet can call the Treasury Dept. and say "I have a dollar, I have an IOU issued by you [the government]. So you owe me! Pay up!" If someone called the Treasury Dept and said that, the person at the other end of the line would presumably start wondering about the caller's mental health. So in what sense is a dollar bill a *promise to pay* by the government (as opposed to a piece of paper that, by accepted social convention, can be exchanged for something of value, though admittedly these days a single dollar bill can't be exchanged for much)?”

Strange as it may seem, LFC has it exactly right.  Let us assume that deep in the bowels of the Treasury Department is a bright, well-educated career official with a somewhat puckish sense of humor.  [Washington DC is full of such people, as David Palmeter and my sister, Barbara, discovered when they taught in the OLLI program there.]  When LFC calls the Treasury Department, he is routed to this career official, who says, “Yes sir, you are quite correct.  If you will come to the following address, the Treasury Department will be happy to pay the debt it has incurred to you.”  So off LFC goes, and when he knocks on the door, the Treasury official admits him and she says, “If you will present the IOU that we issued, I will be happy to redeem it.”  LFC, somewhat belligerently, we may imagine, takes out the dollar bill and presents it to her.  She examines it carefully and ascertains that it is indeed a genuine IOU issued by the United States government.   After having LFC sign some papers, she hands him … a dollar.  LFC splutters, and says, “But you have just given me back a dollar, which is another IOU.  How is that paying the debt you have incurred?’  And the Treasury official points to the place on the dollar where it says “This note is legal tender for all debts public and private.”  “That’s it? says LFC.  “You pay your debts with your own IOUs?”  And she replies, “Yes.  That is what it means to have a sovereign currency.”  As Wray wryly observes [I assume this is an old joke in MMT circles], if you go to the Queen of England to cash in a five pound note, she will hand you … a five pound note.

All of this is trivial, to be sure.  It took me only 1119 words to say in my post, and if I had had to, I could have gotten it down to a tweet.  But trivial though it is, it seems not to be understood these days by anyone in Washington [except AOC and her colleagues, but that is another matter.]  Even really smart people like Obama seem not to have grasped it.  Oddly enough, it used to be understood by economists as different in their policy preferences as Milton Friedman and Paul Samuelson, or so Wray writes.

So all right, it is a little weird, but suppose we agree that it is true.  Then what?  Well, as my son Patrick observed, MMT is not a theory, it is an analysis.  Absent considerations not part of the analysis, MMT does not imply any particular concrete policies.  But it does refute certain supposed constraints on possible policies.  In particular, it shows that it is literally never the case that the government does not “have enough money” to pay for something it wants to do.  And in Washington these days, that is a pretty big cudgel with which to beat off naysayers.

This is not the end of the matter, it is really just the beginning.  In my next post, I will try to say some useful things, drawing on some ideas I first encountered in a fine old book by an old friend, David Schweickart.

25 comments:

s. wallerstein said...

Often people say that the government does not have enough money to pay for, say, Medicare for all, when it is obviously spending trillions of dollars on new arms. That is just bad faith. It also is the case that billionaires, who should be heavily taxed, pay little taxes, due to both loopholes and low income tax rates and that money should be used for social programs such as Medicare for all. No problem so far.

However, as I understand it (and I have never studied economics), when the money supply increases behind a certain point, inflation occurs and then hyper-inflation, which wipes out people's savings, etc. The fact that an undue increase in the money supply produces inflation has nothing to due with the fact that money spent on arms should be spent on social services.

Venezuela seems a clear case of country which in an effort to fund laudable social programs to help the poor, without resources to do it (when the oil prices fell) increased the money supply and set off a hyperinflation, now over a million percent a year.

Jerry Brown said...

Dear Professor Wolff,
Thank you for your analysis of Wray's book. I agree that you have identified what I have come to consider one of the fundamental arguments of MMT. Yes, MMT is a theory about money- how it works, what gives it value and why, who gets to create it. A lot of it is not new which part doesn't really matter much if it is correct. And if it is actually incorrect?

Well there are a whole lot of economists who say just that but they have enormous difficulty explaining just where and why it is incorrect. Usually the smarter ones eventually end up admitting that what MMT says is actually correct but they will phrase that admission something like 'it is technically correct but I believe it misleading'. Or 'unimportant'. Or they pretend they knew it all along anyway so what's the fuss about.

It's kind of fun reading some of these 'explanations' from the more standard economists. And as you say- MMT "shows that it is literally never the case that the government does not “have enough money” to pay for something it wants to do." And that really is a big deal for people who really didn't understand that before.

And you are absolutely correct that Tom Hickey knows this stuff. I've been following his commentary for years and have learned a lot about MMT as a result.

Tom Hickey said...

In clarification, MMT is actually many things:

1. Institutional analysis and operational description. Money is part of an institutional complex whose foundations are legal. Money is not a "thing." It is a human creation and it based on arbitrarily set rules. These rules are chosen for a variety of reasons that can be reduced to practicality.

Incidentally, real goods are not money. If they are used in exchange the exchange is barter exchange and not monetary exchange. This would be true of a bullion-based system, for instance. International trade has been the only bullion-based system that has been in use historically over significant periods of time. International trade was settled in gold bullion until Nixon shut the gold window in August 1871.

Gold coins are not "bullion" since their value is established by the face value stamped on the coin rather than the value of the metal's weight. This difference is called "sovereignty."

"Money" as a concept and social construct must also be distinguished from tokens for money, which Wray calls "money things." "Money buys commodities; commodities don't buy money." Goods and services are exchanged for money in a monetary production economy. (Money is not a commodity in that is not produced for sale.)

MMT analyzes both state money and credit-generated money by commercial entities, commercial banks in particular, but not exclusively.

This analysis is based on institutional arrangements (formal rules, customs, etc.) and practice (operations). The former is largely conceptual and the latter a matter of actual hour to hour application.

Many people erroneously conclude that this analysis and operational description is MMT. But there's more — much more.

continued

Tom Hickey said...

continuation

2. Macroeconomic theory. Scientific theory is about providing causal explanation that can be checked against data. As a macroeconomic theory MMT offers a causal explanation of monetary production economies based on their underlying institutional arrangements. MMT is therefore historically based rather than an idealization of "universal laws"using formal models. In contrast to conventional economic methodology also, it doesn't base causal explanation on "microfoundations" like rational choice theory.

MMT's institutional analysis results in an understanding of the foundations of exchange (commerce in a monetary production economy) in terms of law, accounting rules, money & banking, finance, the relation of economics and finance, the relation of economics and finance to social and political theory and science, and systems analysis. These foundations have a strong influence on the way an economy and financial system works, and this can be analyzed and explained causally. This is the basis for an institutionally based, historical macroeconomic theory (rather than a formal stylized one).

For example, the equation of exchange is MV=PQ (also written PT), where "M" is spendable money, "V" is money velocity or turnover, "P" is the average price (price level), and "Q" is quantity of goods sold ("T" means transactions). This is an accounting identity rather than an equation as a function. It is indisputable in that it is a tautology that results from the rules of double-entry accounting practice.

Milton Friedman's monetarism assumed V and Q to be constant, so that change in the amount of spendable money would result in a change in the price level.

But Keynes had already observed in the General Theory that V and Q are not constant. Velocity depends on "liquidity preference" and the ratio of sending/saving desire. These are changing factors and may depend on conditions that economists can identity. Keynes sought to do so in the GT. This resulted in the discovery and articulation of important causal relationships that can turn the "equation" of exchange that is really an identity into an actual equation in a macro theory rather than merely an accounting identity. This is an important basis fo Keynesian economics, and MMT is an outgrowth of Post Keynesianism in addition to Institutionalism, with some Marxian influence, too.

MMT is a macroeconomic theory in addition to an institutional analysis in so far as it imputes causality that can be checked against the facts based on hypothesis formulation and historical data. It can be confirmed or disconfirmed through forecasts. It's forecasting record it good.

continued

Tom Hickey said...

continuation

3. Policy formulation. Macroeconomic is a "policy science" in addition to being a theoretical science. Economic policy is derived in part from applied macroeconomics.

It is generally agree that the "holy grail" of macro wrt policy is economic policy that resolves the trifecta of growth (effective and efficient use of real resources that are available or can be made available), full employment (no useable human resources left idle unnecessarily), and price stability (stable price with neither excessive inflation or deflation). Macroeconomists have generally thought that this trifecta is not resolvable. Only two of the factors can be optimized at the same time. For example, presently the strategy is to use unemployment to control inflation. That is, inflation rate is a target and unemployment rate is a tool. This is accomplished by redefining unemployment to define it down to give the appearance of full employment.

A key piece of MMT is the job guarantee. Some thing that is is merely a policy option, but MMT economists argue that it is key to MMT as macroeconomic theory used as a policy science in that it allows for optimization of all three factors in the trifecta, something that conventional economists' theories rule out.

In summary, the resolution of the trifecta is implied in the institutional analysis (affordability is not an issue, real resources is the constraint), explained by the macro theory, and implemented through the macro theory as a policy science.

As Warren Mosler like to say, "MMT is bulletproof." But only if the entire things is taken together as whole (system). Asked if MMT can be implemented piecemeal, Mosler responded, "Yes, but don't blame me if inflation results." The package is tightly designed.

The bad news is that this is somewhat complicated and arcane, in addition to being counter to the prevailing narrative reinforced by the "experts." The person in the street is likely going to wait for "experts" to bless it.

The good news is that MMT economists now have the ear of influential insiders, and some key people are starting to figure this out. Mosler has been talking this up on the insider for decades, since the early 90s, and now second-generation MMT economist Stephanie Kelton has become a "rock star" and advisor to politicians on the left, as well as key people in government, finance, and business.

So there is hope that the neoliberal ship is headed for the rocks and when the next recession hits, the US and world will be ripe for change. But, of course, powerful forces oppose this in the same way they did Marx and Henry George.

Some on the left also oppose MMT as merely stopgap measure that prolongs capitalism, much as some of the left opposed Keynes getting in the way of a socialist solution at the time. There's a good deal of poor Marxist, Marxian, and socialist criticism of MMT out, but there is also some decent critique by people that have attempted to understand MMT based on more than a superficial study of it. Peter Cooper at heteconomist.com is the best and has written much more than anyone else on this. He has a PHD in economics and has deep understanding of both Marx and MMT. If you are a Marxist, Marxian or socialist interested in MMT, head to his blog and read the archives. He has also been generous in answering questions.

end

Paul said...

‘In particular, it shows that it is literally never the case that the government does not “have enough money” to pay for something it wants to do.’

Again, I think this is false in the only important sense it could have and true only in a deeply trivial and even misleading sense.

Without serious class struggle to take back the means of production expropriated by the rich, the government simply cannot ‘afford’—in a robust sense—social welfare programs. They can print he money and spend it into existence—fine—but if they do so without taking from the rich, inflation will spiral out of control and destroy people’s lives and livelihoods.

Now, if we accept a super narrow and technical definition of ‘afford’, then sure, the government can afford it. But as I tried to outline in a comment on your previous post, all that seems to do is mislead people.

I really think the danger is in obscuring the necessity of class struggle.

Tom Hickey said...

@ s. wallerstein

The commonly heard (shouted, actually) objection to MMT is "run-away inflation," "hyperinflation," "Weimar," "Zimbabwe," and "Venezuela." These are straw man arguments since all these cases have been shown to result from exceptional circumstances that ended with money printing (literally) but did not begin with it.

There is also the objection that old Keynesianism resulted in the inflation of the 70s, but that was largely due to two factors: 1) the US losing self-sufficiency in oil production and the ensuing OPEC oil embargo, and 2) the Vietnam War, wars being inherently inflationary. This was used at the time to institute neoliberalism and reduce labor bargaining power in order to improve the capital share by reducing the labor share and thereby increase falling profit rate. Paul Volcker increased the interest rate into the double digits, choking the economies and increasing unemployment. Unions were also targeted at the time to reduce labor bargaining power. But the pressure of the oil price rise was already being countered by the deregulation of natural gas, a resource in which the US is rich.

The inflation objection is a canard and the virtually unlimited spending on military, intelligence and related proves that. The GOP knows this. The Democrats no so much, so they get suckered into curtailing pursuit of their objectives for the sake of "affordability." It's now becoming a bad joke recalling a Peanuts cartoon in which Lucy continuously snatches the football when Charlie Brown tries to kick it again — and again, and again.

Since WWII the US economy has been heavily depending on military spending. Ike even warned about the effects of this as he left office back then. Military spending is purposely allocated across congressional districts to increase political resistance to change. It has thoroughly corrupted the country, as Ike warned.

The US economy can not only afford this spending without inflation as recent experience shows, it can expand a lot more, too, eg., to include universal health care, tuition-free education, etc. New spending on public investment creates new supply to meet demand resulting from the increased spending. Public investment that increases domestic supply of goods and services is different from military spending, which doesn't.

What can't be done is to address climate change without sharply adjusting business as usual owing to the constraint of material systems and the challenges of scaling up new technology to replace the old.

There is no financial reason for the FICA tax that funds Social Security. FDR admitted this and explained that if SS were an insurance plan that people paid into like an annuity, politicians would not be able to abolish it as easily as a pure transfer program, even though in reality it is one. The FICA taxes that offsets it doesn't actually pay for it at all. It just controls for inflation that could result. MMT economists are in favor of abolishing FICA and using taxes needed for inflation control to discourage undesirable behavior like negative externalities that lead to pollution.

This is much more complicated and wonkish than I can get into here but take my word for it, the MMT economists are well aware of objections and either anticipated them or addressed them. They have done so popularly in blogs, talks (some available on podcasts and Youtube), and also professionally in articles and working papers, most of which are freely obtainable, e.g., at Levy Institute.

Dean said...

Two really rudimentary (as in potentially dumb) questions:

1. What's "modern" about MMT?
2. "Money is not a 'thing.' It is a human creation and it based on arbitrarily set rules."--What "thing" is not a human creation based on arbitrarily set rules? (This is a philosophy blog, after all.) Isn't a chair a "thing," but also a human creation deemed a "chair" (rather than, say, a bunch of nailed-together pieces of wood) based on an arbitrary convention? Mr. Hickey's point, if I'm following him, is that money is more like a system of legal relationships than like, say, a tool, an object to be used to achieve some result. It is, as he says, a social construct.

Finally, obviously Nixon eliminated the gold standard in *19*71. A slip of a digit.

Tom Hickey said...

@ Paul

You are making assertions. Let's see your model and data, or a reference to one that can be critiqued. Otherwise, this is simply a statement of strongly held beliefs that are simply assumption-based with no proof, no evidence. If you want to make a claim credibly, you need to be prepared to back it up with citations, or defend it yourself.

Of course, this is possible. But eventually the debate gets down to one of four alternatives — 1) victory for one and defeat for the other, 2) agreement to compromise, 3) admission of undecidability, or 4) agreement to disagree. But that is after open inquiry and debate.

This is hugely important in light of current affairs and we need to get to the bottom of it rather than just fire assertions and counter-assertions at each other, all of which may be erroneous in terms of reasoning or data, or based on cognitive bias like ideology, or poorly thought through, or lacking relevant information. This criticism is meant to be constructive and not aimed at anyone in particular. We ned to be dealing with data-based reasoning that can be constructively critiqued, or else answering each others' questions.

Richard Feynman famously said that the purpose of science is to keep us from fooling ourselves and we are the easiest ones to fool (owing to confirmation bias, for example).

In this case, there is no good evidence that the US economy cannot expand to include desirable programs like universal health care and tuition-free education without incurring excessive inflation. The US either has the resources for this or can being them on line in a fairly short time if the funding is there, which is what investment is for. There are more serious issues relating to addressing climate change but they are real rather than financial and we need to address them too, by changing behavior.

Increasing taxes won't be needed for most of this in the existing analysis, and present taxes can be shifted to be more productive than presently, as well as reducing undesirable behavior.

continuation

Tom Hickey said...

continued

Addressing inequality is a social issue more than an economic one, but it is also an economic one that needs to be addressed for optimization. Economically, this would involve taxing away economic rent as "windfall profit," that is, gain from ownership rather than productive contribution. Economic rent includes financial rent, land rent, natural resource rent, and monopoly and monopsony rent, as well as socialized negative externality. We also need to redirect the (hugely) excessive use of real resources by the military to domestic use.

My view is that taxation needs to be reconfigured to address rent, but it is superior to preempt rent and rent-seeking institutionally, e.g., legally, to the degree possible and then to tax away the residual.

This is not difficult once thought through. The difficulty is encountered "politically" in the sense that political involves power. This is a whole other discussion that brings in sociology, anthropology, social & political theory, political science, psychology, evolutionary theory, etc. in addition to economics. This is a discussion the world badly needs to have and thankfully it is beginning in earnest after being marginalized for a long time owing largely to the attempt to counter the influence of Marx. Now this is no longer possible.

But rather than dismissing the new on the basis of the old (conservatism) or rushing into the new "where angel fear to tread" (radicalism), we need to contemplate getting from where we are now (where we don't want to be) to where we collectively want to be as a society given what he have to work with — population resources, ideas, institutions, and knowledge & skill. MMT shows that "affordability" of funding is not the issue, and neither is inflation, which we have adequate tools to address fiscally instead of using monetary policy based on interest rate setting that has proven rather ineffective and productive of skewed results. Fiscal policy can be tightly targeted while monetary policy uses a shotgun approach, for example, although overall it benefits the have and not the have-nots.

end

s. wallerstein said...

Paul (I assume that it's the same Paul) linked to this article a few threads ago, a thread that had less traffic, so I'll link to it here.
https://jacobinmag.com/2019/02/modern-monetary-theory-isnt-helping

It's very convincing. I've never studied economics and so I'm not going to argue about the subject here, but if I had to opt at this moment, I'd opt for the point of view expressed in the article, which is very critical of modern monetary theory.

My situation is like that you face when two doctors disagree and you, the patient or the patient's family, has to opt for one or the other with very little knowledge of medicine.

Still, some arguments are more convincing than others.

David Palmeter said...

Prof. Wolff’s example of me or someone like me taking a dollar bill to the appropriate official of the Treasury Department, demanding payment for an IOU, and getting, in return, just another IOU exactly like the one I turned in is an accurate description of where we are today.

But both Prof. Wolff and I are old enough to remember when some dollar bills had “Silver Certificate” written across the top. If I’d turned in one of those, I would have gotten paid in silver. A few decades before that, when mankind still was being crucified upon a cross of gold, I could have gotten some gold. This leads me to wonder:

Is MMT dependent upon the fact that today, all of our currency, as only some of it was half a century ago, Federal Reserve Notes?

Jerry Brown said...

David Palmeter, no MMT can be used to describe the policy options that are available under a gold standard or under a fixed rate currency regime. There are just less options available if the monetary authority (government) is determined to continue pegging their currency to a commodity or to another currency. Therefore MMT advises not to do that.

Jerry Fresia said...

Before giddiness sets in, one ought to read Doug Henwood's piece in Jacobin
on MMT:

https://jacobinmag.com/2019/02/modern-monetary-theory-isnt-helping

Tom Hickey said...

@ Dean

Thanks for correcting the typo.

The other questions are excellent for a philosophy blog and my degree is in philosophy. I got into economic and finance since, like Marx whose degree was also in philosophy, I realized that approaching social and political theory can only be done along with taking economic and finance into account. That led me to MMT.

"Philosophy aims at the logical clarification of thoughts." Ludwig Wittgenstein, TLP 4.112. I would agree with that, especially as LW developed it in the PI.

A lot of the problems being discussed here and there are many, many more in economics, finance, politics, etc., are based on fuzzy thinking. Term's like "money," "inflation," and the like are especially problematic. MMT economists caution to be very specific, operational if possible, in dealing with them.

"Money" is one of those weasel words that leads to a lot of confusion.

One of the confusions is confusing money as a concept (abstract) with "money things" like coins or bills. Money things represent "money" in a system of language games determined by distinct rules (laws, for example), background rules like customs, and presumptions. This leads to the false assumptions about gold or silver being money or being the only "real" money. This leads further to all sorts of issues. So it becomes necessary to clarify this use of terms and the concepts they represent.

"Money" is usually taken to be mean "medium of exchange" and so it seems intuitive to conceive of money as the money things as tokens used in monetary exchange. But acting as a medium of exchange is only one function of money. The functions of money are usually listed as 1) unit of account, 2) medium of exchange, 3) store of value and 5) record of deferred payment. These are all important functions in economics, finance, and commerce.

"Money" is a high level abstraction that can be considered in terms of a set of sets or as a complex set of "language games" in Wittgenstein's sense. This one term covers a lot of ground in these games where it has different uses. So in the abstract money is a something quite amorphous and plastic. The mean is fluid, which leads to ambiguity.

Money is said to be a social construct in the sense that the use of the abstract concept is highly dependent on institutional arrangements and operational realities. Money things are only a small subset of these varied uses. Moreover, these games change by changing the institutional arrangements that constitute the rules of the games. For example, falling markets turned around during the crash when the accounting standards board changed the rule of marking financial assets to market to permitting marking to model. This instantly removed a lot of risk.

continued

Tom Hickey said...

continuation

Money is not a "thing" in that there nothing that precisely defines money as a concept, e.g., operationally. This means that the use of "money" in a statement can always be deconstructed into something more specific by reducing the level of abstraction.

In the broadest sense of money's function as a unit of account, money is created as someone's liability in relation being to someone else's asset. Hyman Minsky pointed out that anyone can create money as a liability, the problem is getting someone else to accept it as an asset. The government does this by requiring use of its own liabilities to pay taxes, for instance. Banks can do it based on trust in their meeting fiduciary responsibilities coupled with their access to the central bank as lender of last resort to clear payments, and government-backed deposit insurance. This is all clearly institutional but it requires that people also have familiarity with the c concept of money as a high-level abstraction. This concept need not be explicit. Most people are not aware of the ramifications but use the concept successfully anyway in playing the money game, because the rules are clearly laid out and for the most part it just involves following suit.

There is a large body of literature on money and theory of money is a quite controversial. So what I am asserting here is largely the MMT view. One's view of money is determinative of the kind of economics that one builds on these assumptions. The Keynesian view, of which MMT is a subset, emphasizes money as a unit of account and rejects the view that a commodity numeraire like gold is the "real money." Marx's view of money and Austrian economics are both based on a commodity theory of money, although different. These different views about money are key pieces of the foundation of different economic schools. The neoclassical view is that money is "neutral," that is, of no influence in economics, so it is not important to consider. (Yes, they really think this and this is the dominant view. No wonder they missed the gathering storm.)

Wray has written as much as most prolific writers on the subject because money is ground zero in a monetary production economy, which is the chief subject of study in MMT.

Dean asked: What's "modern" about MMT?

It's a joke.

My second book, in 1998, provided a different view of sovereign spending. I also revisited the origins of money. By this time I had discovered the two best articles ever written on the nature of money—;by Mitchell Innes. Like Warren [Mosler], Innes insisted that the dollar's value is derived from the tax that drives it. And he argued this has always been the case. This was also consistent with what Keynes claimed in the Treatise, where he said that money has been a state money for the past four thousand years, at least. I called this "modern money"; with intentional irony—;and titled my 1998 book Understanding Modern Money as an inside joke. It only applies to the past 4000 years. — L. Randall Wray, MODERN MONEY THEORY: How I came to MMT and what I include in MMT

end

Tom Hickey said...

@ Jerry Fresia

After Henwood read the following responses from the MMT world.

L. Randall Wray, Response to Doug Henwood’s Trolling in Jacobin

Bill Mitchell, Marxists getting all tied up on MMT

Nathan Tankus, Rohan Grey, Scott Ferguson, and Raúl Carrillo, Modern Monetary Theory (MMT)—A Response to Henwood

Pavlina Tcherneva, MMT Is Already Helping

Ellis Willingham, Inflation: Money as an Epiphenomenon – A Brief Rebuttal of Henwood

Some not-MMT responses:

Matias Vernengo (Post Keynesian, not MMT), MMT and its Discontents: Again (Wonkish and Longish)l

Here is Marxist economist Michael Roberts on it, Macro modelling MMT

Steve Randy Waldman, Three levels of controversy over MMTl

As you can see, Henwood stirred up a hornet's nest. There's a lot to learn from such debates (even if some may strike one as diatribes).





Jerry Brown said...

Paul @ 12:09- this is how I look at it. MMT shows how the US government could use policy to fully employ all workers at a decent living wage. Which in my opinion would be a vast improvement over our current system and especially compared to when the economy goes into a recession.

Now maybe it is true that people who have the option to lead a dignified working life are not as likely to focus on a class struggle or insist on a revolution. Actually- it is probably true that they aren't. But would you deny that opportunity to decent work just to increase the likelihood of some revolution that may or may not improve things some time off in the future? Cause that's one of the things I think you are arguing and I think it is a bad argument if that is the case.

Your other argument is that the poor and the working classes suffer primarily because the wealthy consume too much. I don't necessarily disagree with that argument in some circumstances. Where supply of a good is strictly limited (such as land) then consumption by the rich means less consumption available for everyone else. But how many goods and services are strictly limited in that regard?

MMT shows one way that we can make many better off without necessarily reducing the living standards of the wealthy. Why not use that option if it is available? It seems like an easier political fight to me. And it would reduce the 'relative' advantages of the wealthy over the poor. And nothing in MMT says that if we get to a state of full employment and inequality is still too outrageous, like it is right now, nothing there says we should not take from the rich. I would rather have that fight then- when everyone who wants a job can have one. It's a stronger position to bargain and fight from.

Dean said...

I did not suspect the ironic deployment of "modern," but I did have an odd sense that a special intention prompted it, perhaps because "modern" is surely one of the most generic of terms.

I will have to think (and read) further to grasp how money not being a clearly operationally defined concept renders it somehow distinctively susceptible to confusion, i.e., as opposed to being merely susceptible as a word to multiple usages, which is a characteristic common to all sorts of concepts.

I have always idealized economics in such a way that I imagine one party somewhere in the world transferring to one other party somewhere else some slight amount -- one cent, one dollar, $53.17 (or their equivalents), and so forth -- and thereby settling at once all accounts, satisfying all obligations. Clearly, IANAE. But if that were to happen, what would happen next?

Tom Hickey said...

@ Dean

I will have to think (and read) further to grasp how money not being a clearly operationally defined concept renders it somehow distinctively susceptible to confusion, i.e., as opposed to being merely susceptible as a word to multiple usages, which is a characteristic common to all sorts of concepts.

A key example of this is the MMT concept of nongovernment net financial assets. Many economists miss the point of MMT since they don't understand this concept. It is a concept that follows from accounting, and most economists are trained in advance applied math but not in accounting, other than in a very basic way. Warren Mosler was taking to Larry Summers once and started in on reserve accounting at the central bank. Mosler reports that Summers said that he did not understand reserve accounting.

The MMT concept of nongovernment net financial assets arise from the accounting. All accounts involving private transactions in the nongovernment sector always sum to zero as an identity owing to the rules of double-entry. But when government interacts with the private sector it adds assets to the private sector through spending and subtracts them by taxation. As a result, fiscal operations affect the net financial assets of non-government in aggregate. Thus a government fiscal deficit is the nongovernment surplus and the cumulative deficits are the national "debt" of the government that is simultaneously the national savings of net financial assets in aggregate by nongovernment, which is a key component of private wealth. Failure to understand how this works results in obsessing over national "debt" whose flip side is national wealth. But what about the US debt that China holds, you may be thinking. That is just saving that China accumulated in selling its real assets in the US and which it chooses to hold in time deposits at interest instead of leaving them in an interest-free deposit account. When China want to spend those dollars or exchange them, the US government just converts them back into deposits. Again, all the obsessing is over nothing.

I have always idealized economics in such a way that I imagine one party somewhere in the world transferring to one other party somewhere else some slight amount -- one cent, one dollar, $53.17 (or their equivalents), and so forth -- and thereby settling at once all accounts, satisfying all obligations. Clearly, IANAE. But if that were to happen, what would happen next?

Actually, your example is an illustration of how double-entry accounting works. Even the minutest flow is accounted for immediately so that all accounts are always in balance. This immediacy is especially the case in a fully electronic system operated with scanners, for instance. There is no lag in posting in such a system. But operationally, the banking system only has to be in balance at the end of the day. each day and intraday lags are allowed.

Your example is similar to "consolidation" and "aggregation" in economics. For example, all banks can be consolidated into one bank, since credits and debits in the entire system must sum to zero after netting. MMT consolidates the Treasury and central banks accounts as the government account.

In conventional economics, all consumers are aggregated into a single representative agent and that agent exchanges with all firms aggregated into a single firm.

Another way to think about flows is to take a single flow and follow it through the system, even though in reality these flows are aggregated operationally almost immediately.

While this can be helpful as a heuristic, it breaks down if pushed too far, since it is a simplification for convenience.

But if we don't simply complicated and complex, it is difficult to get a handle on it. The trick is to simplify enough to capture what is relevant with out leaving out factors that are relevant. Not a simple task when constructing economic models of large systems like national economies.

marcel proust said...

Strange as it may seem, ... As Wray wryly observes [I assume this is an old joke in MMT circles], if you go to the Queen of England to cash in a five pound note, she will hand you … a five pound note.

Oddly enough, it used to be understood by economists as different in their policy preferences as Milton Friedman and Paul Samuelson, or so Wray writes.


I recall James Tobin making this exact point in the first term of first year of graduate macro economics back in the early 1980s.

Anonymous said...

@Jerry Brown

You wrote this in reply to Paul:

But would you deny that opportunity to decent work just to increase the likelihood of some revolution that may or may not improve things some time off in the future?

With due respect, I think that is an unfair question. Paul is not denying anybody anything. For one, because that would be beyond his power, even if that were his intention.

What Paul is doing is expressing his skepticism about MMT and its Job Guarantee being a definite answer to the problems of capitalism. Personally, I think that is a reasonable skepticism.

Yet Another AnonyMouse

Enzo Rossi said...

Crude question: does MMT work as advertised if the government also licenses banks to create those IOUs?

Robert Paul Wolff said...

I believe so, but ask Tom Hickey!

Tom Hickey said...

@ Enzio Rossi

Sorry to be tardy getting bank.

Yes, it works the same way. Banks are effectively agents of the government that the government grants a franchise to extend credit denominated in its currency, which increases the supply of spendable money. In exchange for this franchise, including access to the central bank as the government's fiscal agent that acts as lender of last resort to ensure that the interbank payment systems clears, banks agree to government supervision and regulation.

The degree of supervision and regulation is determined by the government and this is a political issue that is decided by who the government appoints as its regulators and how they view the relationship of the government to the private sector. For example, Marriner Eccles, appointed by FDR, ran a tight ship. Alan Greenspan, not so much, and, of course, Congress repealed the Glass-Steagall Act. MMT economists point out that institutionally the government creates the banking system as public-private partnership and determines how it is operated. Banks, of course, attempt to influence governments to use as light a touch as they can.

This is highly significant since changes in the money supply have a direct influence on price stability. Although it is not the only influence, it is a major one. MMT points to Hyman Minsky's analysis of the financial system in approaching this.

For an up-close look at money and banking from the MMT POV see Eric Tymoigne's draft text on M&B, available at New Economic Perspectives. (It has not yet been published). On Minsky and MMT, see L. Randall Wary, who is one of the foremost scholars on Minsky, having been his PHD student.