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Source link: http://archive.mises.org/16854/the-upside-down-world-of-mmt/

The Upside-Down World of MMT

May 9, 2011 by

Modern Monetary Theory (MMT) is a hip economic/financial paradigm apparently sweeping a world unsatisfied with mainstream economics. FULL ARTICLE by Robert P. Murphy

{ 384 comments }

David B May 20, 2011 at 8:33 am

I would like to add, both in humor and in truth, that it is an operational reality that David B is NOT in a balance sheet recession. This is due to the fact that while other people were over leveraging, i was not. I was saving.

Now, you can argue that it doesn’t matter, but I will just repeat back to you that in the REAL WORLD, David B is not in a balance sheet recession.

And I will say this “operational reality” over and over and over again, to make new hip school of journalism sound economically insightful.

Tom Hickey May 20, 2011 at 9:32 am

You don’t seem to get that there is a difference between micro and macro.

Colin Phillips May 20, 2011 at 10:36 am

“Oh, Micro is Micro, and Macro is Macro, and never the twain shall meet.” – Kipling, paraphrased

David B May 20, 2011 at 10:20 pm

You don’t seem to get that there is only one Economics, and that macro is nonsense.

For a hip new school, you guys sure copy a lot of Paul Samuelson’s worst garbage.

Warren Mosler May 22, 2011 at 5:19 am

Macro and micro do tie together, to the penny.
And ig the monopoly issuer of the currency runs a deficit, net financial assets of everyone else will increase by exactly that much.

And if the federal budget deficit is o, net financial assets remain unchanged.

Yes, you could increase your savings but it would necessarily come from someone else

And serious austrians agree.

They understand what are called fallacies of composition.

Just like if there is a given amount of gold it can only shift from agent to agent.

And they also understand the ramifications of govt established monopolies.

The study of those things is what macro is all about.

Tom Hickey May 21, 2011 at 9:43 am

Well, if Austrians think that macro is nonsense, how to any of you get PhD’s as recognized schools. Last time I looked, there were a lot of macro requirements? Do you have your own universities? Or do you just make things up?

Silvano May 21, 2011 at 2:36 pm

Macroeconomics should be microfounded. That’s the point if you want to be consistent. Austrian Business Cycle Theory is well connected with the analysis of direct and indirect exchange. Austrian may and do disagree with neoclassical in the way they model the behaviour of the rapresentative agent and do disagree with the way mainstream economists connect the aggregation of microeconomic models with their macroeconomic representation. Austrians enphasize the subjective and psychologial dimention; for Austrians there are no data and fixed constant relationships. But paraphrasing your words “what kind of PhD’s did you get” if you think that you can talk about macro ignoring micro? How can you prescribe a policy without having any idea of how individual and group will react?
I’m able to describe like water flows in a Modern House, like you can describe how money flows (in nominal terms) but I don’t claim myself a physician nor my pratical skills about fixing a tube make me a scientist. Social engineering is just a pretence of knowledge.

Tom Hickey May 21, 2011 at 5:39 pm

I was replying that to the statement ” macro is nonsense” made by David B on May 20, 2011 at 10:20 pm. Macro is not “nonsense,” and no one who thinks it is will ever be considered a serious economist. Different views of macro exists, admittedly, but what serious economist thinks that “macro is nonsense?”

Neither is macro scaled up micro. Government is not on the same level as the other sectors, domestic private and external, because government is the currency issuer and the other sectors are currency users. This is key to a proper understanding of macro. It is also important to distinguish between a currency issuer that is operationally constrained (convertible/fixe rate currency) and one that is not (non-convertible floating rate currency).

MMT claims is that understanding interagency interaction of the monetary authority (Treasury and central bank) and its relationship to the commercial banking system and the financial sector, especially, and also to the domestic private economy, and the ROW is essential for a correct understanding of macro. Of course, that is not all there is to macro or to the MMT approach to macro. But it is where MMT differs from most other approaches.

David B May 21, 2011 at 8:54 pm

If all the mainstream Keynesain economists are complete morons, why would I care if I have their respect?

Do you think I really care if Paul Samuelson’s prodigies think I am not worthy of their consideration?

And why is MMT so interested in currying favor from people like that?

You start from the premise that no one else (mainstream included) understands how money works, and then you borrow theories from people that you claim have no idea what they are talking about. Why? So you can be taken seriously by the same people you think have been wrong for over 40 years?

I couldn’t care less what a mainstream economist thinks of me or any of my ideas. They’re freaking dipsh*ts.

Ralph Musgrave May 22, 2011 at 12:25 pm

“Macro should be micro founded”???? That idea indicates a serious lack of understanding of economics. The WHOLE POINT of the distinction between macro and micro is that at the macro level an entire new set of relationships exist that you’d never guess just from looking at things micro.

The classic example is the idea (popular prior to Keynes) that in a recession, wages fall, which induces employers to hire more people, which allegedly cures the recession. As every basic economics text book makes clear, that idea (i.e. “supply and demand”) does not work at the macro level.

Silvano May 22, 2011 at 3:37 pm

The analysis should be consisten. That’s all. It could be difficult, (neoclassical DSGE are very unsatisfactory) but if you avoid the argument you aren’t a social scientist. Just a good journalist. Even if you think that “micro is micro” and “macro is macro” you should: a) prove it, b) explain where there is a decoupling, c) explain why and how it happens. “Keynes thought us that it’s not so” is just an unfounded ipse dixit.
You speak just about aggregate datas, as if they should be living entities. “Effective demand” doesn’t thinks, has not its own life. First of all, it’s an abstract concept, like the natural interest of rate of Wicksell. Aggregate demand rely upon the behaviour of everone. Surely the “atomistic” view of individual is false, but you have to study the relation between individuals and groups, how they interact, etc. before stating “macro is macro” and “micro is miscro”.
Finally, Government acts within the boundaries of society, not outside. You can’t steer society.

Tom Hickey May 22, 2011 at 4:44 pm

Where is government in relation to the domestic private sector and the external sector aggregated in micro? Micro is the study of the behavior of households and firms, while macro is concerned with national economic behavior wrt sectors and aggregation. What applies in micro may not apply in macro due to the fallacy of composition.

According to the MMT analysis of monetary economics, there is a key distinction between the currency issuer and currency users. The currency issued by government (including reserves and cash) is exogenous, while credit created by banks and other financial institutions is endogenous. Because the currency created by government has no corresponding liability in non-government, government deficits result in an increase in non-government net financial assets. All credit created in non-government has a corresponding debit in nongovernment and nets to zero.

Through fiscal policy government transfers real resource to the public sector to advance public purpose. Fiscal policy has an exogenous effect on non-government that affects the economic behavior of non-government both in aggregate and at the micro level. Aggregate demand is a macro concept. It translates into household and firm behavior in terms of effective demand v. notional demand.

Warren Mosler May 22, 2011 at 6:23 pm

That’s only because the currency itself is a monopoly

Otherwise markets would clear, including labor, assuming flex pricing

Imperfect comp is what causes unemployment particularly when there is a govt monopoly at work

And all should agree with that

Tom Hickey May 21, 2011 at 10:33 pm

MMT rejects Samuelson’s work as “bastard Keynesianism.” Samuelson combined Keynesianism and Neoliberalism into New Keynesianism, which MMT also rejects. MMT is Post Keynesian.

David B May 22, 2011 at 12:24 am

Ok, then admit that. As far as descriptive work of Fed operations, I think you guys are great. But that’s not economics. That’s journalism.

When you move past descriptive work and start discussing theory, you are Keynesian, and as such it makes me quite annoyed that discussions of theory end up with MMT supporter saying “operational reality.” There is no operational reality to post-Keynesian theory. It no more “imaginary world” than you make out Austrian School Theory to be.

A little more honesty, a little less arrogance, and a lot less disingenutiy would serve MMT very well.

Daniel May 22, 2011 at 1:35 am

That’s why I previously called for its adoption by the public sector; it would generate a great deal of misery would, hopefully, serve as a lesson

Warren Mosler May 22, 2011 at 5:32 am

Mmt might be more accurately called pre Keynesian. :)

And I was viscously and personally attacked by many mainstream post keynesians in the 1990′s and many continue to do so.

Mmt today says in the US today taxes function to regulate aggregate demand, and federal borrowing to alter the term structure of rates, and not inherently and or operationally to raise revenue per se.

I include the fed and tsy as agents of govt for this analysis.

All recognizing the dollar as a public monopoly.

And all for better or for worse

David B May 22, 2011 at 6:36 am

Warren,And I was viscously and personally attacked by many mainstream post keynesians in the 1990′s and many continue to do so.

That’s a badge of honor around here.

Mmt today says in the US today taxes function to regulate aggregate demand, and federal borrowing to alter the term structure of rates, and not inherently and or operationally to raise revenue per se.

But does MMT say that Aggregate Demand is an accurate theoretical framework from which an economist should analyze economic problems? This is my main point of contention with MMT supporters. Aggregate Demand does not represent the “real world” in contrast to Austrian theories – which several MMT supporters in this very thread have castigated as “imaginary” economics. Aggregate Demand is not “operational reality.” It is a theoretical framework, and I believe it to be a faulty one.

I include the fed and tsy as agents of govt for this analysis.

Only the most hard core Fed apologist still maintains that it is an independent entity.

All recognizing the dollar as a public monopoly.

You call it a monopoly, we call it a counterfeiting machine backed by force. No dispute here. It is in what we do with this fact that our difference lies. We both recognize this operational reality.

But once you move past that descriptive aspect and into proposal, MMT has also moved beyond description and into theory, whether you guys are willing to admit that or not. So far, no one seems willing.

And all for better or for worse

In respect to economic calculation and liberty, clearly it is for the worse. The gold standard did not die becuase the economy evolved beyond it. It took an army of filthy bureaucrats and politicians to kill it. That was clearly for the worse, and every growth of the police state and imperalism should serve as a gruesome reminder.

And that, my good sir, IS an operational reality.

David in Qatar

Warren Mosler May 22, 2011 at 6:57 am

Aggregate demand is best thought of as the posture of the currency issuer.
Yes, it’s a major factor, as the currency issuer is a monopolist controlling both supply via his spending and/or his lending, and nominal demand through his taxing.

It’s the dogs and bones story. Send 100 dogs into a room with 95 bones in it and 5 dogs come out boneless. The dollars to pay taxes come only from govt spending and/or lending when you drill down to the bottom of it, and in fact that’s what makes it all work, again for better or worse. Taxation is necessarily coercive and the govt then makes the economy scratch and claw to get the net dollars we need to pay taxes and net save dollars if we so desire.

As for the Fed, for all practical purposes it’s a public purpose entity. The officers are govt appointees, it’s mandate is congressionally determined, and all profits are turned over to the govt. I know about the vestigial shareholders. I’m one of them. I get 6% interest on a very small investment and nothing more and certainly no semblance of control whatsoever

Warren Mosler May 22, 2011 at 6:58 am

And when I venture into theory I say so

David B May 22, 2011 at 7:38 am

Warren,

Aggregate demand is best thought of as the posture of the currency issuer.
Yes, it’s a major factor, as the currency issuer is a monopolist controlling both supply via his spending and/or his lending, and nominal demand through his taxing.

I am hesitant about what to infer from this statement. My first reaction is that you believe government manipulation of the currency is good because it alters the individual demand scales of market participants.

This idea would run direclty counter to Austrian Theory about the role of prices in the market. If prices are formed from subjective value scales and imputed up to higher order goods, altering demand through currency manipulation is foolish and dangerous no matter how rosy your intentions.

In other words, the prescription of regulating currency to impact demand (or Aggregate Demand, if you prefer) will cause more harm than good, since it will distort the signals that market actors rely on to make decisions about the use of economic resources.

I understand the basic Keynesian/Malthusian/MMT Aggregate Demand story, but to call it the only descriptive analysis is deceitful. Aggregate demand is not a valid starting point for describing economic reality from a Mises/Rothbard point of view. Human action and subjective value scales are descriptive from this viewpoint.

So if the two schools are not going to agree on a starting point, it’s easy to see why they talk past each other.

My final question would be this,

If MMT has learned anything, it is that mainstream economic theory offers little value for understanding our world. Why then would MMT borrow so heavily from mainstream theory (Aggregate Demand, Excess Capacity, and in general, a Positivist Methodological Approach)?

It’s the dogs and bones story. Send 100 dogs into a room with 95 bones in it and 5 dogs come out boneless.

Assuming every dog eats one. I’m not sure what this has to do with economics, however.

David in Qatar

Ralph Musgrave May 22, 2011 at 12:39 pm

I totally fail to see why altering aggregate demand distorts prices, as long as the extra demand is not injected in a blatantly distortionary way. For example if government printed and gave loads of money to alcoholics and sports car enthusiasts, obviously there’d be an unjustifiable increase in demand for (and a rise in the price of) alcohol and sports cars. And some of the ways in which our dim-wit politicians inject extra demand are almost that stupid, unfortunately.

However, if demand is injected in less directional fashion (e.g. via a payroll tax reduction, advocated by Warren Mosler), there is no reason for any distortion. As to where the total amount injected was grossly excessive and caused inflation, there MIGHT some sort of distortionary effect, but I can’t think why on the spur of the moment.

Silvano May 22, 2011 at 4:07 pm

You fail because you don’t have a capital theory, or because your capital theory underscore sectional prices and fail to grasp how heterogeneous is the capital structure. And you seem to be completely unware of the effect of interventism. Let’s admit for the sake of discussion that a “benevolent” central banker avoided a process of cumulative deflation (an Austrian Economist that read Wicksell, Mises and Hayek in a proper way shouldn’t ignore that there could be this possibility in a financial crisis), what did bankers learn ? Nothing, or better that it is possible to avoid “profits and losses” discipline. Lobbies can obtain huge streams of moneys and the less influent are more taxed and easely limited in their freedom. Time after time public expenditure distort prices more and more.

Warren Mosler May 22, 2011 at 6:42 pm

Let me suggest that theories of capital formation that recognize the currency is a public monopoly and that therefore all govt taxing spending and borrowing is necessarily distorting something, presumably for public purpose, should be more useful than those that dont

Silvano May 22, 2011 at 4:38 pm

@Mosler @Musgrave
If you don’t feel the need to coordinate the study of human action between men, the relationship between men and groups and the relationship between men, group and society your approach is flawed. But mostly do you rely upon methodological individualism or methodological collectivism? Do you agree with historicism and class analysis or do you agree with Popper (see “The Poverty of Historcism”, 1944) ?

From many points of view MMT seems to me very close to Circuitism of Schmitt (France) and Graziani (Italy) – endogenous creation of money by the gvmt, exogenous by the banking system, not neutrality of money, investment as logical antecedent of saving, etc. Do you know it ?

Silvano May 22, 2011 at 4:41 pm

@Mosler @Musgrave

If you don’t feel the need to coordinate the study of human action between men, the relationship between men and groups and the relationship between men, group and society your approach is flawed. But mostly do you rely upon methodological individualism or methodological collectivism? Do you agree with historicism and class analysis or do you agree with Popper (see “The Poverty of Historcism”, 1944) ?

From many points of view MMT seems to me very close to Circuitism of Schmitt (France) and Graziani (Italy) – endogenous creation of money by the gvmt, exogenous by the banking system, not neutrality of money, investment as logical antecedent of saving, etc. Do you know it ?

Warren Mosler May 22, 2011 at 6:45 pm

Yes I know the circuit group and many have modified their models to incorporate mmt the way some autrians have begun to do

A state currency is not neutral by design when it is a public monopoly and taxes are coercive.

Warren Mosler May 22, 2011 at 6:37 pm

It’s not about fiscal policy being good or bad
It’s the tool selected to provision govt
It’s highly and necessarily distortive
It works by being distortive
Soldiers, the legal system, and other public infrastructure are distorted out of the private sector, presumably for public purpose
Provisioning govt is always and necessarily distortive
The private sector then has to play the cards it’s dealt by govt confiscation via fiscal policy.
And that’s the agg demand story
Agg demand is about residual nominal spending power after govt does it’s thing

If, for example, from inception, govt doesn’t spend enough to cover the tax liability it imposed, it has introduced a default condition into it’s imposed monetary system that’s a contractionary and deflationary bias.

Mmt doesn’t borrow from anyone. Again, I came up with it independently after my first 20 years as an insider in monetary operations

Silvano May 22, 2011 at 7:44 am

@Mosler
The Treasury is the Fiscal Agent and the Fed (as almost all the Central Banks) is the Monetary Agent. No doubt and no serious libertarian can deny that who got the monopoly of the strenght can enforce the monopoly as money production.
But what you suppose is tha Government is almost a benevolent authority where the people working in do simply their best “to protect and to serve”. Government obviously INTERFERES with aggregate demand. IT DOES NOT “FIX” IT. There is no fine tuning. People can rect to incentives in an opportunistic way, and obviously can offset the efforts of politicians when the latters start to act in a way that they can be easily incorporated into their expectations. At the same time too much discretion can have a “regime uncertainity” effect, preventing people from trade.
Even with its monopolies, government is always under the effect of economic laws. It is not a supernatural entity: it couls be a “big player”, but until the means of production’s market is not fully abolished and a commanded economy established, goverment is into the market even if it is the issuer of the currency. It seems also that your supportes have no theory of capital at all. The endogenous process of reproduction of real capital is not government pushed. Capital doesn’t beget capital, nor Capital + fiscal stimulus beget more capital. You may have full employement and bad soups, i.e. beautiful statistics data with no real improvement in output. People work to live better, not to pay taxes. They are forced to do it.
You seem to ignore that people can reallocate their portfolio: they can sell USD and buy YEN, EUR, CHF, gold or whatever they want. Obviously not all the people, but surely middle-upper classes and very rich people can. And even in socialdemocratic countries like Sweden the top 10% controls more than 60% of the wealth. Riches can avoid (or enjoy, when they are in friendship with government) the redistributive effects of the printing press. Common people can only waste time trying to avoiding the effect of a crazy printing press, or in the worst case “to vote” with feet going elsewhere.
Everywhere and everytime government taxes what is more easy to tax and less expensive to harm: payrolls, real estate, etc.

Warren Mosler May 22, 2011 at 6:53 pm

Agreed on monopoly

Agreed govt interferes, and by design

Agreed govt subject to real economic laws and subject to real economic constraint

I understand both real and financial capital analysis and that full employment could still result in mass starvation, for example, etc

I am continuously aware of fx fluctuations and write about them regularly

I am also aware of the abuses of govt which I also write about

warren mosler May 23, 2011 at 9:18 pm

also, all aggregate demand, as defined, originates with govt, the issuer of the currency.

as a point of logic, there is no one buying anything with $US until after the US govt originates both the concept via the tax liability payable in dollars, and then spends its dollars into existence.

That is, there might be demand for goods and services in exchange for other goods and services, and/or other currencies that already exist, but not in terms of US dollars without the US govt cranking up nominal demand via taxation and supply via spending and lending.
And, as a pure monopoly, only the issuer/taxer can keep that nominal system in whatever balance it keeps it in.

So yes, the govt more than interferes with aggregate demand, it originates and controls it, again as a point of logic, and for better or for worse.

Tom Hickey May 22, 2011 at 9:53 am

“Aggregate demand is not a valid starting point for describing economic reality from a Mises/Rothbard point of view. Human action and subjective value scales are descriptive from this viewpoint. So if the two schools are not going to agree on a starting point, it’s easy to see why they talk past each other.”

Yes, we disagree over foundations and method. The way this is decided in science is through description based on observation and testing of hypotheses whose premises are general descriptions, hence, are falsifiable. As I understand Austrian economics it is based on principles that are taken as intuitive. As I am sure you know, this methodology is often criticized as being philosophical rather than scientific.

The basis of MMT as a macro theory is observation of how the government interacts with the domestic private sector and the external sector through the sectoral balance approach. Taxes, saving, and net imports constitute demand leakage. Government has no control over the saving desire of either of the two other sectors. If the saving desire of one of these sectors is not offset by the other, then if government does not offset, there won’t be enough income to result in the effective demand to purchase all the goods that the economy is capable of producing and the economy will either underperform or the domestic private sector will have to lower its saving and increase its consumption and investment. This is observable through national accounting identities and reported data.

Warren’s consistent point has been that if the economy is underperforming owing to demand leakage, then taxes are too high. If there is demand-side inflation when the economy is at full capacity and cannot expand to meet demand, there will be inflation (continuous general price increase). This is the signal that taxes are too low. Supply-side inflation is a different matter. Most recent inflation has been the result of the manipulation of oil prices, the Saudi’s being the swing producer — again, as Warren has often pointed out.

Silvano May 22, 2011 at 4:43 pm

@Mosler @Musgrave
If you don’t feel the need to coordinate the study of human action between men, the relationship between men and groups and the relationship between men, group and society your approach is flawed. But mostly do you rely upon methodological individualism or methodological collectivism? Do you agree with historicism and class analysis or do you agree with Popper (see “The Poverty of Historcism”, 1944) ?

From many points of view MMT seems to me very close to Circuitism of Schmitt (France) and

Warren Mosler May 22, 2011 at 7:01 pm

My starting point has been to try to show how economic drag has been introduced by fiscal policy, as evidenced by unemployment that wouldn’t be there without govt, and to present options to minimize that govt induced drag.

So let’s agree on that first and then move on?

Tom Hickey May 22, 2011 at 7:11 pm

“From many points of view MMT seems to me very close to Circuitism of Schmitt (France)”

Scott Fullwiler: “There is no debate, at least among actual chartalists and actual circuitistes, that I can see, on whether bank money is endogenous/horizontal. We all agree on the monetary circuit or endogenous money. In fact, there’s very little difference between the entire paradigm put forth by chartalists and circuitistes/horizontalists like Marc Lavoie and Mario Seccareccia.”
comment at Garth Brazelton’s here.

See also:

Bill Mitchell, Money multiplier and other myths, billy blog

L. Randall Wray, The Origins of Money and the Development of the Modem Financial System, Working Paper No. 86. Levy Institute

You may also be interested in looking at Wray, Government Deficits, Liquidity Preference, and Schumpeterian Innovation Working Paper No. 99

Warren Mosler May 22, 2011 at 6:55 pm

Its not about govt policy being stimulative but more about options to reduce the drag from govt fiscal policy

Silvano May 22, 2011 at 9:14 pm

Yes, but the main problem is that Wall Street has been bailed out. Deficit matters because total debt is very high compared to GDP. I may admit that considering the role of dollar in the world financial system, United States have an advantage. But when the ratio Debt/GDP start to rise Government has few choices (if it wants to be less disruptive). Even if you look a country like Sweden, that surely it’s not an anarco-capitalist nation, you could see that they learned the lesson. From 1960 up to 1990 they started to sacrify efficency in favour of ideology going close to bankrupt. Now they manage their budget very cautiously.

When Debt/GDP is very high:
– politicians have strong incentives to be financed directly from the Central Bank and to spend money (with consequences in term of prices, economic activity, logrolling and corruption);
– the effects of small changes in the rate of interest are boosted;
– Central Bank is more than ever conditioned by the Treasury (i.e. by politicians and lobbies)
– Government can impose a strong “financial repression” in order to inflate domestic debt without hurting foreign creditors (i.e. hurting middle class).
And many other collateral effects.

I didn’t mean that you based your work on Circuitism, I just noted strong similarities. Graziani and Bellofiore would be nice to read, they’re competent professor, but philosophically they’re too marxist. Too much politically engaged (the same could be told of some Austrian, to be fair).

warren mosler May 23, 2011 at 9:12 pm

Hi,

You comments on the deficit miss numerous aspects of actual monetary operations given our current institutional structure.

have you read ‘the 7 deadly innocent frauds of economic policy’
at http://www.moslereconomics.com/?p=8662/ ?

All that about debt to gdp misses the point.
Problem is the govt, the currency monopolist, has distorted things with their taxed advantaged ‘demand leakages’ like pension contributions and compounding, ira’s, insurance and other corporate reserves, etc. to the point where the norm has to be relatively large federal deficits to fill the spending gap.

So currently, for the size govt we have, and not that it’s the right size, we are grossly over taxed.

Also, what the central bank does matters a lot less than you think for most aspects, and a lot more than might realize for others.

Silvano May 24, 2011 at 7:41 pm

When I say that deficit matters I mean exactly because of price level and exchange rate. You can be lawfully solvent with a debased currency. Hyperinflation is not so automatic as often feared by many Austrians: you should push the cumulative process very very fast. And usually it happens when hard money is created out of thin air in a “fast and furious” way.
Anyhow even if you are the currency monopolist you are linked to your past decisions. As bigger you are as less flexible you are in your “real” choices. Just a small parenthesis about the impossibility of socialism argument. Many Austrians overemphasize it, but many MMTers ignore it. Mises’s argument is not about consumer goods, it’s about the ownership of the means of production. There is a strong difference. In the first case Government mostly wastes output (with tax & spend, or spend & tax if you prefer, schemes), in the second case Government can’t have a reliable price system and has no knowledge about preferences: to mime a free market is not like having a free market economy (Hayek’s argument). Obviously with a big Government you can have both problems even if not in their strongest form; i.e. wastes and some islands of calculation chaos. Real economy is not a trading desk: don’t overrate social engineering.
I read “the 7 deadly innocent frauds of economic policy”: I think in many cases you overemphasize the nominal and aggregate aspects (I think also that sometimes you do it purpousely to show how many quoted “PhD’s” don’t understand how the system works). I suggest you to consider this fact because many of your readers can became more “moslerian” than you. Ex. if you allow people to retire too early (45 y.o.), many will stop working and producing: it means less output and less real goods. I imagine you could agree on this. But someone can think that “defict doesn’t matter” and “Social Security is OK” so where is the problem? Wanting or not you can really give the impression that your thought can be summed up in “print, plan, spend and be happy”. This is a dangerous message.

warren mosler May 24, 2011 at 7:48 pm

I think we agree.
:)

I wrote the book to straighten the world out on how the nominal works in an attempt to save us from ourselves.

I tried to bring it all back to the real world when i went into the trade gap, social security, my end notes, etc. but yes, that got less ink than the nominal

Silvano May 22, 2011 at 9:40 pm

@Mosler.
The political gap is much more political, than theoretical. There is also a “taxonomic” problem. Each one use words that the opposite almost hate. A brief summary of shared topics:
– The cumulative process of Wicksell;
– The enphasis about the not neutrality of money;
– The Cantillon effect and the redistributive effect of monetary policiy;
– The analysis of FRB;
– The Mises – Hayek business cycle, as a monetary, endogenous process that throw the economy out of aquilibrium.
Important differences:
– The origin of money (Knapp & Keynes vs Menger & Mises);
– saving before investment vs investment before savings;
– money multiplier.
– J.M. Keynes (aggregate demand, multipler, IS-LM, etc.)
Authors too much “political” to be accepted, even if there could be something to learn:
– Rothbard for MMTers;
– Minsky for Austrians.
Author less political that should be more studied:
– J.A. Schumpeter (the Austrian less known by Austrian);
– Buchanan (the father founder of Constitutional Economics for MMTers and people who trust so much Government).

Tom Hickey May 23, 2011 at 9:34 pm

Minsky was a student of Schumpeter, and Randy Wray, one of the early academic developers of MMT, was a student of Minsky.

roger erickson May 24, 2011 at 7:50 am

In this debate, while not interested in either AE or MMT per se, I’ll side with Warren Mosler, since he’s simply pursuing descriptive operations, regardless of where it takes him. That’s a winning trade to follow.

David in Qatar: “If MMT has learned anything, it is that mainstream economic theory offers little value for understanding our world. Why then would MMT borrow so heavily from mainstream theory (Aggregate Demand, Excess Capacity, and in general, a Positivist Methodological Approach)?”

It sounds like AE philosophy is built on an individualist or Libetarian viewpoint, while MMT accepts social aggregates as distinct entities. The solution to those differing perspectives lies outside the superficial field of economics, and requires indirection for a solution. That’s one area where physics/chem/biology & programming agree.

Here’s the well known 1970′s statement from IBM [paraphrased from memory]:
“For every intractable problem in software programming, there in a solution, and that solution will involve an additional layer of indirection.”

That’s a reasonable re-statement of thermodynamics, reverse-entropy & the theory of evolution, and explains why complex aggregates grow, including social species, nation states and economic markets. Such systems depend upon massive inter-dependencies that are the very basis of scaling system size & adaptive capabilities. Austrian Economics seems to deny those aggregate inter-dependencies, and hence rejects the concept of aggregate demand.

That’s a valid question that usually gets answered in high school. Are valid answers known?

First thought: If so, why not reject the concept of “cellular demand”, “physiological demand”, and aggregate “gradient” effects at any other scale? Effect of gravity on interplanetary navigation? NASA has learned & mastered those effects by trial & error, based upon centuries of astronomical data gathering.

You’ll find that embryologists, ecologists, cell biologists, physicists, anthropologists & sociologists will also all acknowledge the incontrovertible evidence of emergent properties such as aggregated demand. Probably political scientists as well.

The evidence for gradient effects from summed inter-dependencies as real emergent forces in complex aggregates is overwhelming.

Why do Austrian Economists to deny their existence? Superficial ideology? Sounds like unnecessary baggage that only distracts from your campaign strategy. To me it sounds like AE is trying to scale value-based tactics and strategies. If so, why not openly explore whatever options offer, and recognize all existing influences. Aggregate demand from aligned, coordinated campaigns and strategies is something to be embraced and mastered, not simply denied.

If you deny the effect of emergent properties such as aggregate demand, then you can obviously deny any part of reality that you want, but the only rational thing to do is seek discriminating tests that will improve operational performance. Ideology is a useless distraction that only delays adaptive operations, regardless of the strategic framework.

Why not just say “lets find out?” All evidence shows that we have zero predictive power, yet seemingly unlimited adaptive power (if we’d only let go of our ideologies).

In this debate, while not interested in either AE or MMT per se, I’ll side with Warren Mosler, since he’s simply pursuing descriptive operations, regardless of where it takes him. On planet Earth, that’s been a winning trade to follow, for about 4 billions.

If you don’t like the operations currently labeled MMT, call it something else. Just don’t waste time not participating in deciphering emerging operations. Remember the part of “zero predictive power?”

Silvano May 24, 2011 at 7:53 pm

Wait, you can use aggregate datas to describe economic facts. But description is not prescription and society it’s not a laboratory. And no one denies herd behaviour or other mass effects. Otherwise Armani and Valentino won’t be so rich !
And a good description doesn’t imply a succesfull exogenous intervention. There are no constant economic relationships. World is not linear. It’s “fractal” whould say N.N. Taleb. .

Min June 15, 2011 at 2:53 pm

“And gosh it sure looks like if the government were to reduce its budget deficit, then the private sector’s saving would necessarily go down.”

I believe that the MMTers view things the other way around. That is, the decisions of the private actors to save or invest are the main causative factors, and the gov’t budget deficit or surplus is largely the result of those decisions. An example is that austerity measures intended to reduce the gov’t deficit may actually increase it.

They, like you with your Robinson Crusoe example, focus on the real economy, and, IIUC, say to let the deficit take care of itself. Focusing on the deficit can constrain the options of private citizens and hinder the real economy.

Philip Pilkington August 29, 2011 at 4:40 am

“After my admittedly brief exploration, I have concluded that the MMT worldview doesn’t live up to its promises.”

This is a very dodgy critique. Let’s run through some of the obvious problems with the language used — as I think it is the CLAIMS made by this article that are the key problem rather than the actual arguments.

(1) MMT is not a ‘world-view’ in that it is not ideological. Austrian School economics is obviously ideologically motivated and that’s fine (as long as we take it to be the political project that it is and not a neutral theory — so, more akin to Marxism than to physics). However that does not mean that the other theories you critique are ‘world-views’. You may see them that way because of the way you view the world but that does not make it so.

(2) Far more importantly, if MMT is a ‘world-view’ I’d expect that it would be fairly comprehensive. So, how you comment on the entire world-view after admitting to only engage with it briefly? The above quoted sentence is, in some ways, internally self-contradictory. Or, at the very least, admits to shortcomings and then makes outlandish claims. This is very dodgy critique.

(3) Your attack on the sectoral balances is an obvious strawman. You set it up as if it is at the heart of some sort of ‘theoretical’ or ‘normative’ approach that MMT sets out to show. Now, while you may be inclined to reason in this manner — which you’ve shown with your discussion of government inefficiencies and the like — that doesn’t mean MMT adherents do. Indeed, you don’t actually lay out where they ‘confuse’ these two things. ALL THEY SAY IS THAT THE TWO SIDES HAVE TO BALANCE. Any ‘theory’ after that is separate.

Your attack is the equivalent of me picking up a maths book and claiming that because it says ’2+2=4′ it is engaged in tautology and therefore the whole book must be stupid. The sectoral balances model is just a tool. It simply helps to understand other aspects of the money system. That’s all. Just like 2+2=4 is just a tool. But you use this admitted tautology to imply that the rest of MMT might be similar.

That’s a VERY strange argument to make. In fact, it’s what an adult criticising a child might refer to as a ‘smart-ass argument’. Imagine trying to explain maths to a smart-ass child and they simply say that 2+2=4 is meaningless and so they’re not coming to class anymore.

Philip Pilkington August 29, 2011 at 4:51 am

Of course the sectoral balances approach can say a million different things. It is not a ‘story’ in itself. It’s just a tool. Like an equation.

But because of the presentation of his piece the author has everyone scrambling to figure out how MMT economists attribute ‘causality’ to the sectoral balances approach. THEY DON’T. THE AUTHOR HAS JUST SUBTLY IMPUTED THIS TO THEM.

All the sectoral balances model does is… balance. Don’t hunt for causality in it. Don’t take this author’s explanation of causality as an explanation of the model. The model is just there to give us a clear picture. But it can give us a very clear picture, especially when we apply it empirically (rather than forcing his own narrative into it, as this author does).

Looking at, say, the Japanese balances we can see what’s happening in the economy:

http://bilbo.economicoutlook.net/blog/wp-content/uploads/2011/02/Japan_sectoral_balances_1981_2010.jpg

We can see how the composition of income is made up. We don’t need to ‘narrativise’ this to find it useful. It just is.

I suspect that the author of this article is strongly confusing theory with accounting and both of these with analysis. I suspect that he is not used to doing analysis and is more prone to engaging in theory. Thus he tends to confuse and conflate the two.

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