Modern Monetary Theory (MMT) is a hip economic/financial paradigm apparently sweeping a world unsatisfied with mainstream economics. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/16854/the-upside-down-world-of-mmt/
The Upside-Down World of MMT
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Cue a few hundred comments.
That’s one point for Inquisitor…
Only 253 here and 177 on Bob’s blog. Good, but hardly in free banking territory
This just underscores why economics has such a poor image among more rigorous fields, like physics. When I see G-T=S-I, all I see is something completely arbitrary. By what basis is this true? If you’re going to use a mathematical equation, you must be able to demonstrate that it’s true. What testing went into this equation to reach the equation? Or is it just another climage change model that only works if you ignore the observations? However, we can say without a doubt that MMT is false because, despite the dramatic increase in government deficit spending, savings has not increased. There should have been an in-kind increase of $1 trillion per year in savings over the past two years, yet this hasn’t surfaced as reality.
Economics is not a simple equation. There is, at minimum, 1 variable per economic actor (1 per person, 1 per company, 1 per organization, etc), that variable changes without warning or predictable frequency, means something different at any different moment, and can never be held as a constant. Complex systems cannot be boiled down into simple equations.
By creating G-T=S-I, MMT just put itself into the crank category automatically. There is way too much going on in an economic system to be able to crush it into 4 variables that perfectly balance out to one another. The operation of money can’t be boiled down into a simple equation any more than particle physics can.
All sorts of scientific fields use identities that are true by definition, there’s nothing wrong with that. The issue is using them properly.
Only after being discovered by rigorous experimentation and testing. No serious practicioner of a science will throw out an equation, demand it is true, never test it, and attack people who test it and call it false. MMT, like many other kinds of economics, are attempting to create a simple equation with untested symbols for an operation that has never been demonstrated to be true. Claiming that savings is nothing more than government deficit spending is an incredible leap to take without any kind of serious observational testing.
G-T=S-I is gibberish. It doesn’t mean anything. It isn’t anchored in any kind of reality. All equations represent something going on. It’s the same as if a mathematician just created a bunch of symbols, put an equal sign between them, then decided he discovered a new equation. Cute symobls, but what does it mean and how did you discover that’s what is going on?
When I see nonsense like GDP = C + I + G + (X — M), all I can think of is if someone calling themselves a chemist came up with this equation:
AtomA+AtomB=Q
Q is some undefined mess and, by tautological results, will always be whatever AtomA and AtomB are, whether they actually bond or not is another matter. It’s meaningless nonsense just like the GDP equation and anything that MMT guys are pumping out. GDP is just a number, a meaningless number because it doesn’t measure anything beyond the mashup of other meaningless numbers. That’s what G-T=S-I is, four meaningless symbols mashed together arbitrarily because someone deigned it so.
Grapes – Titanium = Silver – Iowa
See? If we grow more grapes than we mine titanium, we could grow our silver stock and get rid of Iowa. Can I have a movement behind me and have major universities fund professors to attack anyone that disagrees with me?
If government shut down tomorrow and people ceased saving entirely, I’d believe it. But people ceased saving long ago despite the massive deficits that this government has created annually. That’s enough to send the entire MMT world into the trash bin.
> Claiming that savings is nothing more than government deficit
> spending is an incredible leap to take without any kind of serious observational testing.
Yes, and in essence that argument is wrong as Murphy mentions. However, it’s wrong because it involves misinterpretation of the equations not because the equations themselves are wrong or useless.
> G-T=S-I is gibberish
No it isn’t. It’s correct, as Murphy mentions.
> All equations represent something going on.
No they don’t some are identities, this is one of them. They are not necessarily useless, though this one probably is.
The circular flow GDP equations are useful in other situations. The variables that I, S, C, G, etc signify are carefully defined. Look up a elementary macroeconomics textbook and you’ll find the definitions.
Note this has absolutely nothing to do with the question of whether real GDP growth is a good estimator of growth in real wealth.
Not useless at all. It tells you how financial assets flow in our financial network, pretty much as electricity flows in an electric network.
Remember, there are no people or stuff or exchanges of stuff in economics. It’s all about “flows” and “sectors” and it’s just like plumbing.
No Bob, you are wrong as usual.
There are people, stuff and exchanges in economics.
Those exchanges determine the flows, like in any other network.
If your sticky mind ignores those flows it is just ignoring reality.
The problem with the internet: it’s harder to tell when someone’s joking or being sarcastic
Oh my God, this is annoying.
IT IS GIBBERISH! No one has yet proven that the is a corresponding relationship between government deficits and private savings. If this was true, then the savings rate in 2005 should be higher than the savings rate in 1999. But guess what? Despite having LOWER deficits in 1999 (debt grew a paltry $19 billion in FY99), the year had nearly triple the savings as in 2005, where debt was enormous. 1969 had an inflation adjusted $18 billion surplus, yet the nation still managed a savings rate of nearly 9%. If that equation was even remotely true, 1969 should have a negative savings rate.
http://research.stlouisfed.org/fred2/data/PSAVERT.txt
http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php
I just took a simple observation and PROVED to you that the formula is nothing but bullshit. This is why I compared it to popular climate science. In the world of MMT, what happens out in the real world apparently takes a back seat to made-up on the spot models.
If that model has any value, it would show that this year, which as the highest deficit as a % of GDP since WW2, will be the best savings year since WW2, yet we’re only managing half of the 1984 levels when the deficit was at 19% GDP.
MMT reeks of ivory tower economics. Sit in a chair, write up formulas, then nod your head in a job well done, never once going out to see if that’s how the world works. Formulas are developed after observing the world, not beforehand.
> IT IS GIBBERISH!
No it isn’t you simply don’t understand it.
> No one has yet proven that the is a corresponding
> relationship between government deficits and private savings.
Yes they have. The equation we are discussing is true *by definition*, I don’t need any empirical evidence to prove it. Asking for empirical evidence only shows that you don’t understand the issue. But, as Bob says it doesn’t claim what the MMT proponents think it does. What MMT proponents call “net private savings” isn’t a quantity with a useful meaning in this context. That is the point of Bob’s article (have you read his article?).
What “net private savings” really measures is the breakpoint of spending between investment and government spending. One way of putting it is:
Private Saving + Government Saving = Private Investment + Government Investment.
(Of course calling government spending “investment” is often dubious. For our purposes here though it simply means that the spending isn’t consumer spending).
It becomes clear then that the relationship:
“net private savings” = Private Savings – Private Investment
Isn’t really important.
> Despite having LOWER deficits in 1999 (debt grew a paltry $19 billion in FY99),
> the year had nearly triple the savings as in 2005
Your examples concern gross private savings not “net private savings”.
> MMT reeks of ivory tower economics. Sit in a chair, write up formulas,
> then nod your head in a job well done, never once going out to see
> if that’s how the world works.
Well I agree with you there. Notice, I’m not defending MMT here and haven’t being in this discussion.
You are doing a disservice to your own point of view, and the general Austrian viewpoint, by not understand the issues here.
It’s the “by definition” part being hung up on. Anyone can invent a definition for something and argue around it. It doesn’t change the fact that the definition is wrong.
First, probably a typo on your part, but governments don’t save. The formula is government spending + investment = saving + taxation. That’s how it got flipped around into G – T = S – I.
G – T is obviously the deficit for the year.
S – I is gibberish all by itself considering savings and investments can be one and the same the Robinson Crusoe example is both saving and investing at the same time. If MMT was right, there was no investing, just saving (and huge deficits from the island’s governing body). You can also save without investing (cash in a can), and can invest without saving (printing cash or offering an unbacked IOU). Saving and investing aren’t distinctly separate concepts and are interchangeable with one another depending on the circumstance. Or does MMT have a definition they has no basis in reality for those two variables?
Also gross savings? Net savings? Savings net of what? Liabilities? If that’s the case, the formula is still gibberish considering that would make net savings a negative number over the past decade despite deficit spending given the mortgage glut.
I saw that equation as being merely a way of dividing things up, thus it’s not a statement of reality, merely a description of how reality has been divided up for the purpose of discussion. That’s why the various things mentioned are unequivocally true: they are merely the result of shuffling these defined parts around and noting what arrangement you get. It’s like with Austrian economic principles that look at things in a way that clarifies the underlying processes, only in this case, the clarity is apparently misleading, and this equation really shows something different than it seems to, as Mr. Murphy elaborates on.
J Murray,
After reading your last reply I’m not sure that our views really differ that much.
> S – I is gibberish all by itself considering savings and investments can be one
> and the same the Robinson Crusoe example is both saving and investing at
> the same time.
The Robinson Crusoe example is direct investment. One person is foresaking current consumption from income, and the same person is investing that resulting good surplus in industry. In the modern world we are mostly concerned with what Mises calls “Capitalist Saving” whereby one party foresakes consumption and another separate party invests the resulting surplus. A loan contract of some sort allows this to take place. However, a careful GDP statistician will include direct investment of the type Bob describes in the investment component of GDP.
> If MMT was right
As I’ve said several times in this thread, I’m not trying to prove that MMT is right. I’m discussing the GDP identity.
> You can also save without investing (cash in a can)
Well, with a fractional-reserve banking system bank balances and bank are loans to the bank, so they are investments. Only fiat notes and coins are not. However, you’re quite right, a person may save by directly holding fiat notes and coins, or by holding goods. I think Mises calls this “simple saving” or “primitive saving” somewhere. As far as I know practical GDP don’t actually measure this, but conceptually it is included in with investment.
> and can invest without saving (printing cash or offering an unbacked IOU)
Yes, that right. And I agree that national income accounts don’t consider this.
> Saving and investing aren’t distinctly separate concepts and are
> interchangeable with one another depending on the circumstance.
In national income accounts “Savings” represents the lending side of the situation, and “Investment” represents the spending side of the situation. For example, suppose you loan me $500, in this case you are saving. I then loan that $500 to Bill. Bill then spends that $500 on capital goods for his business. In this case you have saved $500 and Bill has invested $500. (And I have done neither, I have “dissaved” to exactly the extent to which I have saved). This isn’t an MMT definition, it’s standard economics.
> Also gross savings? Net savings? Savings net of what? Liabilities? If
> that’s the case, the formula is still gibberish considering that
> would make net savings a negative number over the past decade
> despite deficit spending given the mortgage glut.
I think Bob has described clearly what the MMTers mean by “net savings”. You can’t throw mud at them by redefining it in a different way.
The correct criticism is that the MMTers definition of it doesn’t make much sense. When the MMTers talk about “net savings” they mean “savings net of investments”. That is, there are some number of dollars worth of capital goods invested in this period and there is some number of dollars worth of new savings in this period. MMTers believe it is healthy that the latter outweighs the former. In truth, as Bob says the only purpose to saving is to provide for investment. That means that ideally the two should be equal.
> First, probably a typo on your part, but governments don’t save. The
> formula is government spending + investment = saving + taxation.
> That’s how it got flipped around into G – T = S – I.
You’re right here the equation I gave was wrong.
J.Murray claims some sort of REALTIONSHIP has to be proved to validate the above equation. Wrong: the equation is simply an accounting identity. It is true by definition.
Many equations certainly do involve relationships. But notthe above one. I do not need to prove a relationship to write an equation that expresses the idea that the weight of two three Kg bags of rice is equal in weight to one six Kg bag of rice.
>Yes, and in essence that argument is wrong as Murphy mentions. However, it’s wrong >because it involves misinterpretation of the equations not because the equations >themselves are wrong or useless.
MMT has never said that the private sector cannot save without government deficits, they say that (in a closed economy) the private sector cannot Net Save without government deficits.
What do you feel is incorrect about this?
Current, just noticed your other posts. No need to reply here.
Current, just noticed your other posts on this topic. No need to reply here.
mdm,
I guess I don’t see why that insight is useful, or new. The private sector’s savings and investment will only not be equal if they are made unequal by use of government force, and? Why is “saving more than you invest” a good thing?
From my limited(NB!) experience with Austrian economics, it would seem that the equalisation of savings and investment would be a good thing. I see savings as delayed consumption, and it is that gap between the consumption levels that allows investment to exist. If a society consumed absolutely everything it produced, there would be no resources left for investment.
So this idea of “net saving”, (where “private saving” is “private saving minus Investment”) seems to me to be this: The quantity and structure of resources have not changed in the economy, as a result of this government deficit spending that is “necessary” to allow for net saving, all that’s changed is that government has put more cash in the hands of households now, by going into debt which will be paid off in the future.
To me, this does not change the resources in the economy, just people’s choices get messed with. Their chosen ratio of consumption to savings is distorted – those who are the direct beneficiaries of government deficit-financed money make an excess profit (they are able to get more money for their output), and those that do not receive it find that their savings are now a claim to a smaller proportion of the total resources of the economy (same resources/more money = higher prices = your savings can buy less), and so they need to save more to achieve their desired ratio of present consumption and savings.
So, to me, the government going into debt to allow for the purpose of private surplus savings is only justifiable if we can find some justification for the idea that households will tend to choose the “wrong” ratio of present consumption to savings, thereby implying that, assuming an unbiased, well-informed and altruistic government, the government should be messing with people’s preferences. Is there such a justification within MMT?
Please note that I am not an economist and have no special status on this site as a representative of Austrian Economics. I’m just asking this question to help clear up my understanding.
Colin,
Don’t worry about your limited experience. I’m only a student myself. Thanks for the reply. I have to be quick, so just a few things:
I suppose the answer is because MMT follows Post Keynesians and Keynes in seeing savings as a demand leakage. Most agents will if it is at a sufficient level it will reduce demand in the economy, and most agents will save part of their incomes. There isn’t a channel in which this savings goes to investment, because simply banks don’t lend from deposits, bank loans create deposits, in other words, whens create a credit that is convertible into government currency. The level of savings is not a constraint. Because of this, there needs to be an entity which will satisfy the savings desire of the private sector in order to alleviate the demand deficiencies.
MMT and Post Keynesians view the causality of savings investment as investment -> savings. Investment does not require prior savings so long as the economy is not operating at full capacity.
>I see savings as delayed consumption, and it is that gap between the consumption levels that allows investment to exist. If a society consumed absolutely everything it produced, there would be no resources left for investment.
I agree with this, but only if the economy was operating at full capacity. In such a situation you would get ‘forced savings’.
>those who are the direct beneficiaries of government deficit-financed money make an excess profit (they are able to get more money for their output)
I’m not sure what the MMT position is but I am sympathetic idea of the cantillon effect. Ideally what I would like to do is work within a stock-flow consistent framework and absorb ideas from both Austrians and Post Keynesians.
MMT doesn’t deny that government spending can be wasteful and inefficient. But they seem the huge pools of idle labour as being the greater waste (particularly considering the impact that has on worker productivity, and the social ills which result from being unemployed). Implicit in this is firstly, adjustment after a credit bust is slow, and secondly, there is no reason to assume that the economy will return to full employment (i.e. no involuntary unemployment).
At the end of that paragraph you suggest that price inflation will be the outcome, I don’t believe this to be so. So long as the economy is operating below full capacity there is no reason to assume that the economy cannot absorb the increased government spending by increasing production, rather than adjustment occurring through prices.
>So, to me, the government going into debt to allow for the purpose of private surplus savings is only justifiable if we can find some justification for the idea that households will tend to choose the “wrong” ratio of present consumption to savings, thereby implying that, assuming an unbiased, well-informed and altruistic government, the government should be messing with people’s preferences. Is there such a justification within MMT?
If there is a recession the government budget will go into deficit no matter what, and debt will accumulate. The rest of your paragraph assumes from channel from savings to investment which MMT rejects (remember too that Post Keynesians don’t see interest rates as coordinating investment and savings, and they reject the idea that banks lend from deposits).
MMT doesn’t accept that governments are these rational institutions. States are highly flawed institutions which have the tendency to be controlled by the powerful elites within a society. But so long as we operate in the current framework where states are the currency monopolist, then the policy prescription by MMT is that the government’s role is to stabilise demand fluctuations in the private sector. Is there the potential misallocation of resources, malinvestments, and bias to special interests? Definitely, but I believe that the potential consequences of allowing a private sector to deleverage by itself with the accompanying debt-deflation as being a worse outcome, with no clear time line on how long the ‘adjustment’ process would take. I scared quoted adjustment become it implies that there is some tendency to revert to equilibrium, debt-deflation is not a negative-feedback loop, but a unstable positive feedback loop, which ripples throughout the private sector, affect everyone (particularly workers) regardless of their role in the credit expansion.
Hope I have been clear.
mdm,
Thanks for the response, it is very helpful in explaining what the position of MMT is. I’m still struggling with the “why” side, as opposed to the “what”, but I suspect this can be remedied by further reading.
First, “net save” is a meaningless term. Explain what that means, exactly.
Second, if government buys debt from China, or buys debt from the private sector, how is that saving vs putting it elsewhere? It’s arbitrary to select government buying resources off the market as this “net savings” invention vs someone else buying the same resources and using it for a different purpose. As noted many places here already, I fail to see why renaming the national debt as “net savings” makes it a good thing. You might as well rename the national debt “rainbows and unicorns” for all the good it will do. It’s still debt, calling it rainbows and unicorns won’t cause it to sprout mythical horses and pots of leprachaun gold.
Besides, nothing is being “saved” at all with government debt, it’s just creating a liability and immediately spending the proceeds. Saving implies reserving current incomes for some future use, government debt doesn’t satisfy this requirement as the “net” continues to increase year after year, thus indicating the savings are never used for anything.
There is no magical happenings when Uncle Sam sells a Treasury to a pension plan and uses that money to fund welfare payments or buy bombs. The only difference between that pension buying Treasury notes vs buying a bond in a manufacturing firm is that the manufacturing firm actually produces something of value.
“When I see G-T=S-I, all I see is something completely arbitrary. By what basis is this true?” – by the basis of elementary mathematics (and if you need “proof” get an introductory text on macroeconomics, it’s not exactly rocket science; hell, even probably an introductory text on accounting would do).
The problem is not in the equations (they are correct, cold, invariable, constant and oblivious to their critique), it’s in their inter interpretation. I guess you really need to go again through Mr Murphy’s article.
And no, MMT did not “create” G-T=S-I any more than say Carl Friedrich Gauss created 2+2=4.
2 what + 2 what = 4 what?
2H2 + 2O2 = 2H2O
2+2=2 right there in the basic chemistry of water formation.
C3H8 + 5O2 = 3CO2 + 4H2O
1+5=3+4
I could go on all day like this.
There is no such thing as elementary mathematics. 2+2=4 is only there to explain the concepts of basic addition when all contextual meaning is stripped from the number.
A number isn’t a thing, it represents a thing. 2 M&Ms + 2 M&Ms may equal 4 M&Ms, but that’s only a context in which 2+2=4.
G-T=S-I is elementary school mathematics, I agree, but it only works when you strip all meaning from the four variables. That’s why I mean it to be arbitrary. It doesn’t mean anything and has never been shown as an operation on how the world operates. Here, I can do it, too:
V+Q=J-R
If V increases with Q held constant, J must also increase or R must decline. That is always true. But you’ll notice what those four variables stand for, let alone if that relationship is even true, is something you’ll just have to take my word on. I’m a scientist.
Oops, calculation error (I haven’t refreshed, bet someone already caught it).
2H2 + O2 = 2H2O
Still, 2+1=2 still proves the point on context.
Also, another fun one:
$2 labor + $2 material = $6 because it’s a new product.
$2 labor + $2 material = $3 next year because everyone who really wanted it already has one
$2 labor + $2 material = $8 the year after that because it was showcased on the Ellen DeGeneres Show and everyone who didn’t have wants one now because it’s the next big thing.
the equations are identities, they are true by definition.
Blah blah blah, bare assertion, hope person being responded to lacks intellect and takes it as truth without evidence, blah blah blah, repeat again.
Isn’t S and I the same thing?
Overall yes, but if you split out government and private savings then you get the equation mentioned. It’s similar if you split out “Google Savings” as Bob mentions.
Great Article
Nice analysis! MMT’s are to learn that defining terms so that your side automatically wins a debate is neither clever nor honest.
It’s odd that MMT’s would say the their equation means that government surpluses would destroy private net savings and accept no alternate interpretations whatsoever.
For the government to run a surplus, T must be larger than G, which gives us a negative number on the left hand side. In order to have a negative on the right, I must be larger than S. That doesn’t mean that S must disappear completely; it could remain constant as I grew. In that case, the government would be doing the investment, which is weird, but it might be paying down debt.
And as Murphy points out, government spending is not the same as private spending. Private investment increases wealth. Government investment is either consumption (spending on infrastructure) or it is nothing but paying down debt which can reduce T in the future.
Another problem with MMT’s is their inability to think beyond one step. For example, a budget surplus might increase investment in the short run, but then what? What happens next? A budget surplus would cause people to demand tax cuts and eventually eliminate the surplus.
So what happens when S – I = 0? Savings would equal investment, which is what Austrians have always wanted. For sustainable growth, ex-ante savings must equal ex-ante investment. (ex-post savings = ex-post savings by definition).
And if the state ran no deficit or surplus, then an increase in I requires an increase in S. However, you can’t increase S by increasing I. This is one example of where the equation doesn’t always match with reality. Cause/effect doesn’t run both ways. Cause/effect runs only one direction – from S to I.
“Government investment is either consumption (spending on infrastructure) or it is nothing but paying down debt which can reduce T in the future” – that’s obviously not true on at least two accounts. First, government investment (in the *real* meaning of the word investment) is possible, as evidenced by the fact that the governments (yeah, not literally your average prime minister, but neither do you when you invest in industrial equities) around the world routinely build factories that are highly productive. Second, infrastructure normally is not consumption; even if it is built extremely inefficiently, it at least creates some added value for the interested real estate owners; consumption never creates any added value.
Even when governments build factories, the investment is not anything at all like private investment. Government investment in factories is often mostly waste because states invest for political reasons and not for economic reasons. Proof lies in the fact that almost no government owned enterprises ever break even, let alone make a profit.
Infrastructure investment, like road building, can potentially be investment. But again, such “investment” is always done for political reasons, usually to repay campaign contributors. That’s why the US is awash in roads and bridges to nowhere. Most infrastructure “investment” is a waste in that 1) it was unnecessary, 2) it was too expensive and 3) opportunity costs.
There are many state-owned enterprises that are quite to very profitable. An example is one of the largest producers of copper and silver in the world, KGHM (a company based in Poland, my home country).
It’s true that there are many inefficiencies related to state investing, but there is absolutely nothing in the theory that precludes such enterprises to function profitably.
Define profitability, and put it into the context of Bastiat’s Seen and Unseen. Is that the best use of the time? Who is getting the profit? Is that the most economical use? Could someone else do it better?
Just because something is profitable doesn’t mean it’s the best use of resources or isn’t inefficient.
Please observe that Bastiat’s analysis makes judging ANY enterprise impossible, be it private or public company, on the basis of its functioning alone. How do you know that your neighbor, running his highly profitable pharmacy, would not be better off smuggling drugs? You don’t. However, what can be clearly seen is the sustained generation of economic surplus without getting into unreasonable debt – the clear sign that the enterprise is sustainably profitable. The metrics to judge enterprises on this basis mostly do not depend on the type of the company – public or private.
And, by the way, what use can a copper ore have as an alternative to … hmmm … extracting copper?
“Please observe that Bastiat’s analysis makes judging ANY enterprise impossible, be it private or public company, on the basis of its functioning alone. How do you know that your neighbor, running his highly profitable pharmacy, would not be better off smuggling drugs? You don’t.”
Of course you do. Investors would simply look at alternative investments and if these were deemed more profitable than the current one they would send their capital there. With state owned enterprises, that option does not exist.
CT, of course you don’t. Don’t fall for the pretense of knowledge.
After all, if the market would always choose optimally, there would be no cases of mass speculative hysteria like the tulip mania, right? And, well, there would hardly be any mispricing on the market, and hardly a chance to exploit one for profit. Hardly any arbitrage…
Actually, tulipmania coincides with Holland debasing its currency and the Bank of Amsterdam offering free coinage, that is, the free conversion of bullion into coin
“CT, of course you don’t. Don’t fall for the pretense of knowledge.”
“With state owned enterprises, that option does not exist.”
Therein lies the problem.
KGHM is traded on the Warsaw Stock Exchange, isn’t it? So it is still state controlled? I do not know the details, just curious, but I am nearly certain it is traded.
There is something in theory that precludes state enterprises from functioning profitably: the problem of economic calculation, as presented by Ludwig von Mises.
KGHM is listed on the GPW since 1997. It’s true that it’s not controlled by the state any more – I should have checked before posting. The Treasury owns only 32% equity as of today, after privatizing a 10% stake in 2009. I should have chosen the Lotos Group as an example: Polish Treasury is the main shareholder and quite actively controls the firm; with ROA of 4.4% and ROE 10.9%, it’s standing is indeed at least decent.
So there are some minor exceptions?
“Cause/effect runs only one direction – from S to I.” In a one period model. But the economy is a multiperiod one.
Good point! I would be happy if MMT’s would take the analysis out one period. But if you go more periods, then investment causes greater consumption and investment in the long run. But you have to start with savings; it’s impossible to start with investment.
Essentially, you are describing the production possibility frontier. Starting with greater investment (less consumption) we push the PPF outward and make increased savings and consumption possible, but only in the long run.
Exactly. Something MUST be produced before it can be consumed.
I have to say that MMT, and other doctrinaire Keynesians who assume that government deficit spending always means that there is private savings(which is true, at least at the time of issue), but later argue that private saving cannot exist without government deficit spending are engaging in one large fallacy of composition.
Excellent analysis, Mr Murphy!
Apparently it is so difficult to understand that in the economy there are two accounting systems: one for financial (nominal) accounting and one for real resource accounting. The difference between them is enormous. And the two converge only at full employment/real resource utilization. So many straw men are built by “professional” economists who do not understand the difference. So yes, in G – T = S – I, the G can crowd private sector. But MMT has written so many words that this crowding out (real accounting) happens as inflation (financial accounting) when economy hits real resource constraint. And until we get to that point the the higher G and budget deficit (financial accounting) satisfies private sector net savings desires by utilizing more real resources (real accounting). It is unbelievably tiring to even attempt to write one more in the endless line of hopeless rebuttals.
Try starting with one.
In macroeconomics I’m a supporter or monetary disequilibrium approach. That means I agree with you about real/nominal differences and that they are perpetuated by sticky prices.
But, tell me why should I bother with a complex system like MMT? I don’t need that to discuss monetary disequilibrium and how nominal changes affect real output and employment, I can use money supply and demand, the money quantity theory and the equation of exchange.
Apparently it is so difficult to understand that in the economy there are two accounting systems: one for financial (nominal) accounting and one for real resource accounting. The difference between them is enormous. And the two converge only at full employment/real resource utilization. So many straw men are built by “professional” economists who do not understand the difference. So yes, in G – T = S – I, the G can crowd private sector. But MMT has written so many words that this crowding out (real accounting) happens as inflation (financial accounting) when economy hits real resource constraint. And until we get to that point the higher G and budget deficit (financial accounting) satisfies private sector net savings desires by utilizing more real resources (real accounting). It is unbelievably tiring to even attempt to write one more in the endless line of hopeless rebuttals.
G is in different units that T, S, and I. Bob makes that point.
Great article, Robert. I dealt with these guys about a year ago on the website of Mike Norman, the guy who tried to laugh Peter Schiff off a show in 2007 after Schiff said that a housing bust was imminent. I went head to head with Norman several times—he could not defend his positions upon being backed into a corner. He eventually ran away and didn’t come back, except to tell me to go away from his site or he would block me. However, two of his starry-eyed followers (he only had 9 or so that were there daily) kept trying to convince me of this “holy grail.” We went in circles because they didn’t want to focus deeply on what I was saying but somehow believed their arguments made sense. This economics is based on Chartalism and it does not add up, obviously.
Don’t know about Mike Norman who as far as I know got only recently in the MMT camp. But most MMTers see a too small government deficit that pushes the private sector into deficit as eventually leading to a financial crisis because it becomes over-leveraged.
I’ve heard people who implicitly hold to MMT argue that governments cannot go insolvent etc. I’m surprised to see just how flimsy the basis of their “critique” of austerity is.
Their critique of austerity is that both the government and the private sector cannot deleverage at the same time. Do you agree that they can? If you do please explain how.
The point about insolvency is that a government whose currency is pegged to another currency or commodity faces no financial constraint, but it may face political or real constraints.
Could it be that GDP = C + I – G + (X − M)? (an attempt of a joke). But seriously, either economic calculation by government is possible, and then there is no problem, or not possible, and we do not know what G is. And we know it is not possible.
This is a really good article, quite deserving of a response from an MMT supporter. However, if the comment thread on this blog gets too negative or aggressive, MMT supporters will be scared away.
I really hope this doesn’t happen.
This is an open invitation to MMT supporters: Please go through the article and point out where it goes off track. There is an entire community of regular readers on this site that see things in a similiar way to Murphy. If your arguments are logically presented, we will listen. We will challenge you on certain points, sure, I hope you would expect nothing less from a healthy discourse.
Can you explain to someone who “buys” Murphy’s conclusions above, where they go wrong? That is, can you provide a persuasive argument for MMT, assuming that your audience has no exposure to MMT other than the above article?
Nice try Bob, but no cigar.
It’s a good thing you accept the accounting identity Private Net Savings = Government deficit as a fact instead of trying to deny reality like Bob “Sticky wages” Roddis. It’s a shame you don’t seem to realize what it means: when government runs a surplus then the private sector runs a deficit, so the private sector stock of net financial assets diminishes, which is also a fact.
So when the government runs a surplus the economy can only grow if the private sector gets increasingly into debt which is unsustainable and will eventually lead to a collapse in aggregate demand in order to repay the debt. This is what happened in the US before the crisis, the private sector got itself into to much debt, and now is slowly deleveraging.
Had you really tried to acquaint yourself with MMT basic concepts properly, you also would have learnt that in our fiat money world:
- there is no crowding out from deficit spending, that’s just a remnant of gold standard thinking.
- investment creates savings, not the other way round. Banks don’t loan deposits, loans create deposits.
PS: Crusoe can only net save coconuts if the monopoly supplier of coconuts (coconut trees) increase their deficit.
Mammoth: “when government runs a surplus then the private sector runs a deficit,”
So where does the surplus go? Either the state will pay down debt, or it will stash the money in a bank account. Either way, it will reduce interest rates and allow businesses to borrow more, thereby increasing investment and growing the economy.
Or the state reduces taxes, increases personal/business after-tax incomes, and that lead to greater investment. So investment does not remain constant if the state runs a surplus.
Mammoth: “This is what happened in the US before the crisis, the private sector got itself into to much debt, and now is slowly deleveraging.”
The “surplus” was very tiny and ran for a year or so in the late 90’s. That’s not enough to justify the excess leverage of the 2000’s.
And you won’t get anywhere on this site trying to sell aggregate demand as the driver of growth. I just ain’t so!
About the surplus:
- paying down debt is just replacing bonds with reserve deposits as financial assets of the private sector.
- it makes no sense for the government to stash money in a bank since it can credit any bank account whenever it wants.
- given the deficit in the US current account in the 2000s, the government deficit was too small and the private sector was in deficit, hence its increased leverage.
“the government (…) can credit any bank account whenever it wants.”
An excersise for you: how did it work out in Weimar Republic? Zimbabwe?
If it’s so simple, why bother having taxes? Let’s just print the money we need and all will be a-ok!
According to Mosler, the purpose of taxation is to control inflation. While the government prints up the funny money which might lead to inflation, its brilliant taxing schemes suck it all back and make things right again (because government employees have extra special and unique knowledge of how things really work):
The government taxes us and takes away our money for one reason – so we have that much less to spend which makes the currency that much more scarce and valuable. Taking away our money can also be thought of as leaving room for the government to spend without causing inflation. Think of the economy as one big department store full of all the goods and services we all produce and offer for sale every year. We all get paid enough in wages and profits to buy everything in that store, assuming we would spend all the money we earn and all the profits we make. (And if we borrow to spend, we can buy even more than there is in that store.) But when some of our money goes to pay taxes, we are left short of the spending power we need to buy all of what’s for sale in the store. This gives government the “room” to buy what it wants so that when it spends what it wants, the combined spending of government and the rest of us isn’t too much for what’s for sale in the store. @ p. 27
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
See. Nothing to worry about. No Cantillon Effects, no pricing process or economic calculation problems. No distortion of the price, investment or capital structure. No problems of “knowledge in society”. Don’t worry, be happy!
Mosler is describing operational reality. He’s not offering you a theory on how he wishes it works. Nice try though…
“Mosler is describing operational reality. He’s not offering you a theory on how he wishes it works. Nice try though…”
Um, no, he is trying to describe a function of taxation and failing to fully articulate all the factors at work. Nice try though…
I agree it’s all highly distortive.
In fact, that’s the point.
The currency is a public monopoly
Taxation is coercion.
Spending ‘forcibly’ moves real resources from private to public domain.
So we agree?
Weimer Republic industrial production was basically annexed after the War. Its currency lost value because much productive capacity was aimed at enriching other countries. I’m not going to give a history lesson here. Zimbabwe is the only relavent current example, and again, deficit spending did not cause hyperinflation, though it highlighted it. Land reform, huge unemloyment, unstable govt with rampant cronyism, civil unrest…many variables that made currency useless. Stopping taxes will kill any currency, this is well-stated in MMT reads. In fact, it is tax that gives currency value (if there is no tax, then people wouldn’t need an income in dollars to pay it, then people wouldn’t recognize the govt. currency as having buying power).
If nothing else, we Austrians know that taxes are what give value to not only money but to life itself. Boy, these MMTers are sharp.
Jason M: Have you had a chance to watch “Deadwood”, an HBO show? It will be worth your while, a mildly entertaining introduction to the Austrian theory of money. Different than the one you hold. If you care to learn, that is.
That’s true only if you define money as the purely fiat scrip emitted by the government. Then the issue is trivial: of course the value of money goes to zero as soon as the backer of it, the strong arm of the govt goes away or is sufficiently weakened, and I don’t think you need the elaborate pages and pages of “MMT” to understand this.
Now, it’s not true that all money always was like that, right? Or were the gold and silver coins of 19th century somehow less “moneyish” than the “money” we have today?
“replacing bonds with reserve deposits” expands the money supply by increasing reserves. That reduces interest rates and spurs investment.
“t makes no sense for the government to stash money in a bank since it can credit any bank account whenever it wants”
You’re thinking of the Federal Reserve, not the federal government.
“given the deficit in the US current account in the 2000s, the government deficit was too small and the private sector was in deficit, hence its increased leverage.”
You’re dodging the point. The point was that the tiny government surplus created private borrowing. Your saying the private sector was already in debt because of the trade deficit, but that wasn’t the point of the article or your post above. The tiny surplus was not enough to create massive private borrowing by itself and it added little to existing debt.
Net Domestic Private Savings = G-T + X-M
Hence the government deficit must be at least as big as the current account deficit in order to offset it, otherwise the domestic private sector will be in deficit and increasingly leveraged in order for the economy to grow.
This is a pure assertion based on restatement of a formula. As Murphy pointed out, you are not addressing the underlying theoretical framework that goes into explaining the formula. This doesn’t even begin to make sense, come to think of it. Why must the government “offset” anything, eh?
Read carefully, I didn’t say the government must offset anything.
Just stating that when the government deficit is not big enough to offset the current account deficit then the private sector is in deficit, that is, its stock of net financial assets decreases. There is no way around it, it’s just a circuit.
But you are right, arguing against this fact does not even begin to make sense.
You have cause/effect backwards. That’s the problem with trying to invent economic theory from simplistic equations. The current account deficit finances the budget deficit. Of course, the current account deficit wouldn’t exist if the private sector saved enough for the federal government to borrow, but they don’t so the feds have to borrow overseas.
But in order for foreigners to have the dollars to loan the feds, they have to sell something to us. That causes the current account deficit.
fundamentalist, you have the logic backwards.
Foreigners sell stuff to the US in order to obtain dollars.
If they don’t want to spend enough of them and prefer to save them then the US will have a trade deficit, enjoy the imported goods, and foreigners will have dollar deposits which they can later buy Treasury bonds.
The US government does not need to borrow dollars from abroad since it is the monopoly issuer of them.
See: http://moslereconomics.com/mandatory-readings/the-innocent-fraud-of-the-trade-deficit-whos-funding-whom/
>So where does the surplus go? Either the state will pay down debt, or it will stash the money in a bank account.
If it pays down debt then it is changing the composition of private sector financial assets. There is no change in the actual flows, the private sector is just losing interest earning financial assets.
If the latter, this can either be in the central banks balance sheet or TTL accounts.
>Either way, it will reduce interest rates and allow businesses to borrow more, thereby increasing investment and growing the economy.
This doesn’t follow. Is the central bank no longer maintaining its target rate? In actuality a government surplus puts upward pressure on the overnight rate, central banks and the treasury coordinate their operations to offset this effect.
>The “surplus” was very tiny and ran for a year or so in the late 90’s. That’s not enough to justify the excess leverage of the 2000’s.
The other side of the equation is the foreign sector, which combined with the governments balance equals the private sector balance.
Something I’ve often thought of is, because the government’s balance is primarily endogenous determined, a private sector credit expansion would actually push the govenrment’s budget into surplus, causing a squeeze on the private sector’s net financial assets.
“the private sector is just losing interest earning financial assets.”
No. People aren’t stupid. If the feds pay down debt then the private sector will reallocate to corporate debt, the stock market or real estate. However you imagine the feds using the surplus, the end result will always be greater private investment. There are hundreds of routes the money can take, but it always will end up as greater investment.
“In actuality a government surplus puts upward pressure on the overnight rate, central banks and the treasury coordinate their operations to offset this effect.”
So more money in the system causes interest rates to rise? That’s one screwed up monetary system when an increase in supply raises prices.
“a private sector credit expansion would actually push the govenrment’s budget into surplus”
That’s just too screwed up to deal with. Where do you think the government gets its money? And don’t say it prints it because it doesn’t. The operations of the Fed and the government are kept separate for a reason. The government has to tax or borrow. So if the private sector saves less, the federal government has to borrow overseas or raise taxes.
A government surplus removes money of the system.
The rest of your post is also backwards.
Bottom line, people ARE stupid.
>People aren’t stupid. If the feds pay down debt then the private sector will reallocate to corporate debt, the stock market or real estate.
The problem is that these government bonds provide a tool that allows the private sector to measure risk, manage their portfolios and provides a risk-free financial asset. In countries where governments almost pay of there entire debt, there is a huge outcry from the private sector, and the government ends up issuing the bonds anyway. BTW, I’m not suggesting they SHOULD do this, just that this is what happens. Also you can’t compare corporate bonds with government debt. The financial sector definitely doesn’t.
>So more money in the system causes interest rates to rise? That’s one screwed up monetary system when an increase in supply raises prices.
This point really shouldn’t be controversial, you’ll find it in a lot of central bank papers on how they manage government debt. End of day, there is an outflow of money from the private sector which is an inflow to the government. If the outflow leaves the banking system deficient in reserves, then the overnight rate will continue to be bid up until the central bank provides the necessary reserves to clear.
BTW, I honestly fail to see how you’re including the accumulated government surplus as a stock of money in the private sector. The treasury’s account at the central bank is not a part of measures of the money supply.
>That’s just too screwed up to deal with.
If investment is increasing, and profits are being generated, then the governments revenues are increasing. So long as the government’s expenditures don’t increase, this will cause a reduction in the government’s deficit, and potentially a surplus. The government budget is predominantly an endogenous variable – it is determined by the state of the economy (private sector).
>Where do you think the government gets its money? And don’t say it prints it because it doesn’t. The operations of the Fed and the government are kept separate for a reason.
The treasury and central bank are two institutions of the government. If we consolidate there accounts, we have the consolidated government account. Currency is located on the liability side, and it is what is used to pay taxes and purchase government bonds. Because no other entity has (that particular) currency as its liability and because that currency is what is necessary to pay taxes, then the government gets its money simply by spending it into existence. The ability of the private sector to pay taxes and purchase bonds, logically requires the government to issue these liabilities (either by treasury spending or central bank loan).
“printing money” is a term that has been carried over from the gold-standard and Bretton Woods era. it is inapplicable to our current monetary system. Now you are obviously using the term to say that the central bank is purchasing government bonds from the primary market. I’ll say two things: firstly, even though this is a rule the government does frequently go around this rule. (this is important as it highlights that it’s simply a political constraint). Secondly, the transaction is unimportant, its equivalent to the transaction between a husband and wife in a household.
>The operations of the Fed and the government are kept separate for a reason. The government has to tax or borrow.
In actuality central banks and the treasury coordinate their actions daily. In the US this may involve manipulating Tax and Loan accounts and the Treasury’s account at the FED. The FED’s ability to maintain its target rate requires the treasury and FED to work together, as flows to and from the treasury can potentially impact the overnight rate (this is known as the reserve effect).
>So if the private sector saves less, the federal government has to borrow overseas or raise taxes.
Can you please explain how this follows?
At the end of the day the following point stands, either the treasury must spend or the central bank issues a loan before the private sector or foreign sector can purchase a bond. No one else can create the currency.
There are no “sticky wages”. Only sticky minds.
http://www.youtube.com/watch?v=qXCvZ0cWM-w
After the inflationists have caused a funny money-induced bubble collapse, the inflationists think that average people are too dumb to set their own wages and prices and once again need the helping hand of the inflationists (and their SWAT team) for another go-round.
“when government runs a surplus then the private sector runs a deficit”
Prove it.
It’s false, but not for the reason you think it is
Here’s the proof from the financial flows in the economy:
Net Private Savings = Government Deficit
A formula can’t prove itself. That’s a bare assertion fallacy. I asked for proof, not a circular argument.
That IS the proof. The formula states what happens with the money flows in the economy.
Once again, a formula can’t be proof in and of itself.
Here:
Beef = Ice Cream
I just proved that ice cream is made of beef. The formula says so, that’s the proof.
Again, the formula states what happens with the money flows in the economy.
It’s not an MMT invention, it’s basic economics. If you don’t understand it, it’s not really my problem.
What MMT simply does is emphasize the fact that a government surplus equals a private sector deficit and how this means increased indebtedness in a growing economy.
It doesn’t prove anything. This is a legitimate mathematical proof:
http://www.heliconrefs.com/Legendy1965.htm
Where is that? I’ll even accept providing data over a long period of time (say, the last 100 years) that demonstrates that the two are in a perfect, unchanging relationship with each other. If one side increases by X%, the other side increases by the exact same amount without fail, without exception. The data can’t be in it’s final form, all raw information must be provided and the steps taken to get to that point must be available as well. This is how real science operates, from working journals chronicling the entire thought process from initial hypothesis to final demonstration, including all false steps taken along the way and adjustments to the hypothesis to fit the new reality. From what I’ve gathered from simple Google, it doesn’t. If I can find contradictory data in 5 minutes (see above the two lists comparing savings and deficits and how they have no relationship with one another), the whole body of “theory” has little hope of standing up to any kind of serious scrutiny.
You do nothing than keep telling me that the formula is all we need, data supporting it be damned. From what I can see, none of that kind of scrutiny even exists. MMT seems to be a final “answer” that was arrived at without any kind of testing at all. Axioms and theorems aren’t dictated ahead of time, they’re discovered and chronicled.
A serious scientist would be thrilled to provide all the data to support the equation. Only a hack will tell you the equation stands alone and proves itself.
I told you, the formula just follows from writing down the money flows between the different sectors, the same way you can write down the equation of the electricity flows in an electric circuit. Someone’s income is someone else’s expenditure. That’s all.
|Private Net Saving| = |Government Deficit| is true simply because the private sector can’t lend to itself or borrow from itself, and the government can’t lend to itself or borrow from itself. If a private firm takes out a loan from a private bank, then the private sector as a whole isn’t running a deficit or surplus because the increase in investment is offset by an identical increase in saving within the private sector. There is no corresponding internal activity for government (agencies don’t lend to each other), and if the government spends its tax revenue on private products, there is simply an exchange of present goods for present goods. On the other hand, if the government wants to spend more than its tax revenue, it has to seek out lenders, all of whom are part of the private sector. Thus, when the government runs a deficit, there is saving within the private sector which is not offset by private investment, resulting in “net private savings.” The identity makes less sense when the government is running a surplus, but it still holds if you’re willing to stretch the definitions a little. Essentially, it’s an accounting tautology based on the fact that there exist both private and government sectors. It’s true, but uninteresting.
A. Agencies do lend to each other. Constantly. This is how the Social Security pot, for instance, works. Surpluses are loaned to other agencies via Treasuries. Inter-agency transfers and loans are also common.
B. Defining the purchase of government debt instruments as “net private savings” is arbitrary. Pull back out a bit further and the entire system is back into that “impossible to lend or borrow to itself” conundrum you think is a problem. Government isn’t some entity that exists on some different plane, it must exist in the economy with all other actors and compete for the same resources. Buying a Treasury isn’t any different than buying a corporate bond. You’re exchanging immediate satisfaction (saving) for future cash flows and a final lump payment of the principle. If we pull out to the Planet Earth level, there is no savings because the residents of Earth are apparently incapable of lending to themselves, as if we’re just one giant hive mind collective. There isn’t some interplanetary government lending us cash, but then we’d have to pull out to an intergalactic, then some multiverse government to engage in deficit spending, and on and on into infinity.
Even if we assume for a moment that saving and investing are unique concepts that don’t overlap, the whole “theory” still assumes that any money not immediately used for consumption automatically lands in private investments and that all money not used for consumption, taxation, and private investment automatically lands in some sort of government debt instrument. All I need to destroy this joke of a theory is pure anecdotal evidence – I have a few large jugs filled with loose change I’ve been collecting for years because my Jimi wallet doesn’t have a change pouch. Any coins that I end up from those rare cash transactions end up in the jug. This money is neither invested nor is it being used to fund Uncle Sam’s excessive spending binge. I added money to this jar when there was a surplus and the volume of deficits have zero impact on my decision to add anything to this jar. And since I have zero debt (I don’t believe in debt that doesn’t generate an associated cash flow to pay it off with), this is a net increase in my private savings.
Really, all that equation amounts to is a goofy method to say, “Ya, the Federal Government borrowed $14 trillion so far” and I guarantee that the total “net private savings” will match, penny for penny, all the government debt from federal down to local. Trussing up the national debt as “net private savings” doesn’t change the fact that it’s still debt, that it’s not savings because the government has no intention of ever paying it back, and it’s hardly private since a large chunk of it is owned by foreign national governments.
Exactly right. “Net private savings” is something that only exists if we arbitrarily split an economy into discrete government and non-government sectors, just like the current account only exists if we split the world economy into domestic and foreign sectors. Neither of these accounts has anything to do with economic theory–they’re merely creations of accountants.
Bonkers.
“Prove it.”Split the whole economy into two parts: Party 1 (P1) and Party 2 (P2). Profit of P1 equals loss of P2. Equivalently, surplus of P1 equals deficit of P2. Be it government, google or coconut tree.
A surplus is an inflow, a deficit is an outflow.
If we have only two sectors (A and B) then:
When sector A is experiencing an outflow, the Sector B must be experiencing an inflow. Otherwise we must ask, where is the outflow going?
It’s the same idea behind why not every country can run a trade deficit at the same time.
“PS: Crusoe can only net save coconuts if the monopoly supplier of coconuts (coconut trees) increase their deficit.”
I think that is the key element of MMT – that money can only come from the government because only the government can force people to pay taxes, thus making it valuable. Is that correct?
According to the strict MMT definitions, it’s true. But it depends on the quite awkward definition of money as a pure fiat instrument; the reasoning becomes quite trivial – you can’t have any money without government generating it because, hmm, money is defined as neccesarily being generated by the government.
And of course it misses a myriad of theoretical problems – among them the assumption that the government paper is riskless and that the monetary expansion is not offset, for example by the effects on interest rates, by losses in some parts of the economy.
The key element of MMT is to state that the coconut trees’ deficit in coconuts is determined by Robinson Crusoe’s desire to net save coconuts.
Trees don’t have a deficit of anything. The key element of MMT is nonsense. They seem to forget that the economy includes real goods trading hands, real wealth that can expand or contract fully independently of money, fiat or otherwise.
Not in a monetary economy. Of course you are free to move into an island and play Robinson in a non monetary economy. But I am afraid all the islands have been bought with money already. Maybe the Greeks will sell you one for your coconuts.
So wealth equals money? If the government doubles the money then real wealth instantly and automatically doubles too? Quick, to the printing press!!!
Idiot.
No Anthony, poor clueless sod, that’s not what it means.
I think he’s really trying to say that MMT is a theory based on a 100% VAT tax . . . any increase in value of items due to individual work belongs to the government, then if you are allowed to keep the profits of your labor, we call that government spending.
yes, government has a currency monopoly.
All final transactions in a monetary economy that are not settled by direct exchange of goods (barter) are settled in the unit of account/medium of exchange, which in modern economies is the currency issued by the government. Final settlement occurs in cash or bank reserves. Only the Fed can issue notes and only the Treasury can issue coin. Checks are settled in the interbank market in bank reserves and only the Fed, which is a government agency in this regard, can create bank reserves.
Yeah, but those coconuts are real, aren’t they? You can’t put the cart before the horse. Make up all the fancy equations you want, but real goods must be produced before they can be consumed, or invested, or spent or anything else your imagination would like.
You wanna consume before the goods are real? Good luck with that! Look around, see where it’s got us?
Govt spending adds net financial assets to the non govt sector
Taxing reduces them
Govt borrowing is an exchange of financial assets
So if you define non govt savings as dollar denominated financial assets, they can only come only from the issuer of dollars
What are you defining as “net financial assets”? The only net financial assets added to the private sector are increased asset prices. None are added to the real economy. Government spending is mostly consumption. Consumption is a using up of wealth, not a creation of it.
Can you explain your theory in a barter economy where a medium of exchange does not exist?
It’s essentially looking at the private sector’s balance sheet and look for financial assets which do not have a counter part liability (by definition a financial asset must have a liability).
Net financial assets means that one sector has accumulated a financial asset without there being a matching liability in that same sector.
Warren,
Is it true that MMTr’s believe that money can only originate through state intervention (via taxation)?
No. MMTer’s argue that money is a financial asset with a matching liability. Anyone can create money the key is getting your liabilities accepted. The banking system creates acceptability for its liabilities by denominating them into state money.
In the MMT framework there is a vertical component, with government money and a horizontal component with private sector credit (which is normally denominated into state money).
Historically I imagine that money may have originated through both public and private institutions.
I would say the $US is defined by the tax liability, as is the yen, etc.
That is, the $US is the thing that the US govt. accepts as payment.
The $US has no independent existence.
As for ‘money’ there are more definitions than there are monies, so to answer I’d need to know your definition.
“Govt spending adds net financial assets to the non govt sector” – this is extremely problematic as, among others, it assumes that marginal spending does not influence rates enough to offset the extra assets by the drop in value of existing ones. And don’t even mention computing the effect in real terms. If it were true, Zimbabwe would be a world superpower by now.
Why would anyone want dollar denominated assets if the producer of those assets is going to brake with the tax rate and use spending as the accelerator? Even if said producer could not go bankrupt what would the market interest rate be for an investment where expanding debt and limiting revenues was the solution to avoiding default?
MMT people say that this is because they will make you pay taxes with that asset. On the other hand, unless they shut down convertibility to other currencies, once they control the currency in an arbitrary fashion, you should not hold that currency — more or less exact description of where we are now in the U.S. And if they shut down convertibility, they shut down production and trade so much, they will, like the communists in the Soviet Bloc, eventually figure out they are better off with some convertibility, as output increase compensates for loss of control (then again, there is North Korea as a counterexample). In any case, gold is money, everything else is an ersatz, but prices of ersatzes do not always go down, they fluctuate depending mostly on the policies of the ersatz coinage monopolist. Hence we all are forced to become speculators, because of arbitrary powers over legal tender. Chesterton observed a hundred years ago that the reason for simple and honest laws is to protect simple honest people from abuses by skilled manipulators. Too much to ask for as far as money is concerned, apparently, according to MMT and Keynesians.
And that proves what? Are you saying that if the government doesn’t print money that no money will exist? Remove all dollars from existence and all the products that have been produced still exist. The only thing people would have to do is come up with another form of money to continue with indirect exchange. Your theory seems to boil down to if the government doesn’t print dollars you won’t have any. Who cares? We want money privatized and would prefer to get rid of fiat money anyways.
“Your theory seems to boil down to if the government doesn’t print dollars you won’t have any. Who cares?”
You will care when you get your tax bill.
The more you learn of the original MMT material, the more bizarre it becomes.
The Chartalists/MMTers were influenced by Georg Friedrich Knapp (March 7, 1842 – February 20, 1926). Knapp was a German economist and founder of the chartalist school of monetary theory, which takes the statist stance on money, claiming that it must have no intrinsic value and strictly be used as governmentally-issued token i.e. fiat money.]
http://en.wikipedia.org/wiki/Georg_Friedrich_Knapp
Mises eviscerated Knapp back in 1917 noting that his views were acatallactic, meaning it’s a universe with no people and no people exchanging goods, services and money.
http://www.econlib.org/library/Mises/msTApp.html#Appendix%20A
In Warren Mosler’s famous book (The Seven Deadly Frauds), he explains how neat it was for the imperialist British to “monetize” the local subjugated Africans:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops. @p. 26
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
MMT guru Bill Mitchell claims:
“The general reasoning failure that occurs when one tries to apply logic that might operate at a micro level to the macro level is called the fallacy of composition.”
http://bilbo.economicoutlook.net/blog/?p=3225
I guess we’re all too dense to understand the alternate logical universe of macro.
I guess we’re all too dense to understand the alternate logical universe of macro.
No Bob, you are.
It’s always nice to see mature, well reasoned discussion at work.
I would make one suggestion, though. Rather than telling someone that they are too stupid to understand something, why not see if you can explain it with a little bit more clarity, or with better illustrations of the key points? Winning someone over to your point of view is much more satisfying to all parties than the petty snobbery of presuming that everybody that doesn’t see things your way is inferior to you. This is a lesson I had to learn myself.
“If you can’t explain it to a six year old, you don’t understand it yourself.”
— Albert Einstein
He (Bob) started it…labelling it bizarre. Its just operational truth seeking, its not a political or ideological witch hunt.
There is a difference between me thinking that your theory is bizarre, and me calling you stupid for not understanding my theory. One of those, I consider rude, the other I do not. That is the reason for my comment, not because I fear Bob is the subject of a witch hunt.
“He started it” is the worst excuse for misbehaviour there is.
Sorry but there is no point in answering Bob Roddis in a mature way.
For you Austrians out there, note that the MMTers will never bother to comprehend even basic Austrian concepts. Here’s proof that MamMoTh does not understand either the concept or problems of economic calculation:
Bob Roddis says:
Economic calculation will be seriously impaired by fiat money expansions and contractions. This will more seriously impact long term projects. Basic ABCT.
Reply
MamMoTh says:
My calculations aren’t. If people are too thick and get their calculations wrong so be it.
http://consultingbyrpm.com/blog/2011/05/my-critique-of-mmt.html/comment-page-1#comment-15925
The simple explanation is that MMTers are just primitive Keynesians who think they have discovered a way to repeal the law of scarcity. In their minds, Keynesian management of “aggregate demand” really truly works and it isn’t even constrained by a lack of real goods and services in the real world. The latter idea is what they view as their amazing discovery that we just can’t fathom.
There is no point in arguing with these people.
Me too. I’m so dense that MMT makes no sense.
GDP = C + I – G + (X − M)
Intro econ texts will often take this equation and say something like “Assume all other variable remain constant and the government increases spending.” But how can that happen? Where does the state get the money to increase spending? The extra money must come from one of the other variables in the equation, or the money stock must increase.
It’s strange how few economists get
The major problem with that equation is it concerns itself entirely with the movement of money, not the subjective value the actors in the economy enjoy. Two scenarios:
a. The price of everything doubles next year, but you can only buy the same amount as your salary also doubled.
b. The price of everything halves next year, but you can now buy twice as much because your salary remains the same.
Under scenario a, the GDP doubles but you only enjoy the same amount as last year. Under scenario b, the GDP has 0% growth, but you can enjoy twice as many goods and services because a major boom in industry allowed everyone in the country to double their output at their given salary.
I’d prefer to live under the 0% GDP growth situation in b than the double GDP growth in situation a any day.
Mr Murray, please, get past the intro to the intro to macroeconomics. Somewhere around page 5 you should find the GDP deflator discussed
There’s your problem, you buy into people who actually think economics can be cut into macro and micro, treat them differently, and pretend that every individual in the system can operate one way yet the overall system operate in a completely different manner.
There is no such thing as macro and micro economics, just economics.
Any more appeals to authority you want to drop here?
No, I don’t buy into any economics. I just don’t start criticizing the simplest concepts without getting to page 5 of the intro text
J.Murray has pointed out that “Page 5″ is fundamentally flawed and has illustrated why. Care to actually explain why it is not?
What’s flawed about the GDP deflator? Sure, you can claim that inflation actually is 10% and not the 2% the govt agencies measure it at, or -10%
But how does it make the concept itself flawed?
The deflator and GDP are actually the ingenious tools invented in the old times, better as per your leanings, of gold standard. How about that? They can’t be entirely flawed as such!
The concept is flawed because there is no such thing as a general price increase or decrease to deflate it against. Price changes have hundreds of different factors influencing them and two products will only change in price in the same percentage by pure coincidence. There’s nothing rational to use as a deflater, there is no general basket of goods because no two people buy exactly the same things. I bet you my refrigerator will not contain the exact same contents as anyone else making the same amount I do. My house will not contain the same items. We won’t use the same amount of gas because we’ll have different vehicles and drive different mileages. We won’t consume health care the same, use the same amount of energy. Anything that is the same is pure happenstance and isn’t going to be similar over a broad group of individuals.
Because there isn’t a universal “basket of goods” and the prices of goods don’t all change lock-step with one another, there isn’t an inflation adjustment that can be performed. Anything that is performed is a grossly unreliable assumption because it’s based on grossly unreliable assumptions.
What good is the change in the price of eggs to me if I don’t buy them? What good is the change in the price of a 10 lb container of protein powder if someone else doesn’t buy it?
Your basket of goods is unique to you, so the change in price from one year to the next is different for you than it is for me. Therefore, there is no “aggregate” inflation to adjust GDP by.
Treating macro as though it need not be backed up by micro is indeed a fallacy.
However, simple use of the GDP equation doesn’t involve that fallacy. The national income equations, such as GDP/GNP can be as course-grained or fine-grained. An economist can (at least theoretically) break down G, I, C, etc into individual constituents dealing with each individual and firm.
Apply causation to the GDP equation is an entirely different thing. That can involve the fallacy you describe. See the discussion between Krzysztof Ostaszewski and fundamentalist above.
That’s what I’ve been getting at. All mathematical formulas have a purpose and meaning behind them. That meaning has to be valuable to the observer or it’s just garbage. GDP lacks any kind of valuable meaning. All it does is add up all the dollar valued transactions, adds in exports, then subtracts imports, and throws out the number. But why should anyone care what that number is? The purpose of an economic system isn’t to make the GDP go up, it’s to satisfy wants and needs and do so with greater efficiency and variety as time goes on. This is not reflected in a simple GDP number.
Holding all else the same (I know, this isn’t possible in reality, but if unlike the mainstream, I’m not going to say this is something we can just manipulate at will to get desired end results, it’s only an example), if you double your output, your salary stays the same and everything you produce is now half as expensive. If you earn $65,000 from selling 10 widgets this year then figure out how to make twice as many units per day with half the materials per unit, sell each for half as much, and still bring down $65,000 that year, your GDP growth was a whole $0. Economists would call this a horrible year for the country despite the fact that twice as many people could buy your product this year as opposed to last year and that now 30 people enjoy your product vs 20 people if the economy was truly stagnant. From the perspective of where it counts, the economy improved 50%, but the GDP says it was stagnant. I know this is rare in reality because reducing cost usually results in greater growth in the industry in raw currency units earned where halving the cost can possibly quadruple the sales.
Instead, we have a number that is filled with meaningless junk. Why should transfer payments have any bearing on an economy? The economy didn’t grow because government took $1,000 from one person and gave it to another person. If the original person spent $1,000 of his own money, it registers as $1,000 in GDP. If the government takes that $1,000 and gives it to someone else, it registers as $1,000 then again as another $1,000 when spent. Yet the economy via GDP “grows” the more it engages in transfer payments. I certainly don’t celebrate every time government has a ditch dug and filled in again, but it still shows up in that GDP despite the plot of land being unchanged in net. Or raking forests. Or building monuments. Or roads to nowhere.
Even in a 100% government free economic system that had no G component, I doubt GDP would be all that useful since it misses out on the nuances that can make the number reflect an economy that is better or worse than in reality. All it’s good for is an early warning indicator of problems, and even then, the warning only goes off if the number goes down, and that can frequently be a false alarm. It misses problems if the number goes up. A fire alarm is useless if half the time it goes off, there’s no fire and when there is a fire, it only works half the time.
GDP requires so much work to extract meaningful information that it would be easier to just find that meaningful information without calculating GDP at all.
So we don’t all get lost while hacking through the dense jungle of MMT “facts” (“no theories, just facts!!!”), be aware that they haven’t a clue about ANY Austrian School concepts or historical narrative. Even assuming that they could pull off their various statist money-injecting/withdrawing gymnastics, the problems of the pricing process and Cantillon Effects would still be present and on steroids. MMTers are oblivious to this type of basic and simple Austrian School analysis. Further, to the extent they even have an economic theory after describing their version of the Rube Goldberg plumbing system that is a fiat-based central bank, the “theory” is the most simple and eviscerated version of Keynesian aggregate demand management.
Bravo, Professor Murphy! Maybe this will finally make that ubiquitous “AP Lerner” clown shut up.
I see a fallacy:
GDP = C + I + G + (X — M).
If G includes “money borrowed by creating money out of thin air” then GDP can be increased indefinitely. The problem is that doing this devalues the dollar. Then rigged deflators are applied.
The equations of economics should not be country specific.Try doing this analysis in Zimbabwe. It also does not take into account the international aspect. Companies these days do not necessarily invest domestically. What if part of the “G” is passed through to private companies who then invest it overseas?
Would this equation be true for, say, the State of California?
The monetary value of GDP can be increased indefinitely. The real value of GDP cannot. See my post
http://traderscrucible.com/2011/03/29/solvency-and-value-insolvency-and-debasement/
We cannot go broke, but we can debase the currency. This is well accepted in the MMT community. The questions we ask are along the lines of “how much debasement is worth how much extra real growth”, and at what point does additional debasement not result in more real growth, or even result in negative real growth.
Perhaps you have a different idea about the answers to these questions than we do. But you are confusing real and nominal growth, and it makes talking with you really difficult.
“Try doing this analysis in Zimbabwe.” It still worked in Zimbabwe. They “chose poorly” (if you get the Indiana Jones reference) on the debasement/real growth curve.
Remember that MMT says that recessions are CAUSED by budget surpluses and that we need fiat money and government debt (perpetual deficits) to cure unemployment. Thus, one of their BIG IDEAS is a government job guarantee. From “Full employment abandoned: shifting sands and policy failures” by William Mitchell, Joan Muysken:
The final section of the paper outlines an alternative view of macroeconomic theory and policy opportunities. This view flows from a detailed understanding of modern monetary systems in which the use of fiat currency provides the monopoly issuer, the federal government, with opportunities to pursue full employment without compromising price stability. We show that the obsession held by federal governments around the world that budget surpluses demonstrate fiscal prudence is both nonsensical and extremely costly. Once we understand how the surpluses relate to sectoral flows in the economy, it follows that active macroeconomic policy is essential to maintaining full employment. We argue that a central plank in modern macroeconomic policy settings should be the introduction of employment guarantees, which we term the Job Guarantee (JG). We show that the introduction of a JG provides the basis for pursuing full employment and price stability. The JG is also the minimum that a government can do in relation to its obligations under the international human rights treaties discussed earlier.
http://arno.unimaas.nl/show.cgi?fid=14937
This is where they are coming from and where they are going.
I propose we all chip to somehow make MMT official monetary policy of governments around the world.
That way, when MMT drives us into the ground instead of keyenesianism, they start getting a clue.
No need to. MMT describes how monetary policy already works.
(actually, AE is a more apt description of reality, but I digress)
What I mean is that MMT be adopted as official policy, that is, governmental decisions be based around perscriptions of MMT.
No, MMT actually describes how spending and taxing by the government actually works.
AE is still stuck in a gold standard world that only exists in countries that are not monetarily sovereign, like the Eurozone countries and those who run pegs or currency boards.
By the way Net Private Savings = Government Deficit also applies with a gold standard.
Under a fiat currency the government does not need to borrow in order to spend. It spends by crediting bank accounts. It then issues bonds in order to drain excess reserves from the banking system as an interest rate maintenance operation.
So without a government saving is impossible? And where exactly do you think the goods that the government bought come from? Did you perhaps forget that money is only useful insofar as it affects the distribution of actual goods?
Anthony,
In a modern monetary economy the private sector cannot increase its savings of net financial assets unless provided by the issuer, that is, the government.
Surprised? That’s the world you are living in. It’s not flat!
Again, this seems to indicate that MMT assumes a 100% VAT tax, and any profit you make on your productivity is from the benevolence of the government.
MamMoTh,
I think you are confusing “financial assets” for things that actually exist. Financial assets have meaning ONLY insofar as they represent real assets. All you accounting identities are useful only to the extent that they describe reality… and I think that if you really thought about it you would find that their connection to reality (in terms of actual goods) is tenuous at best.
Bob,
You are really the wild eyed guy I had in mind when I slammed Austrians.
The Jobs program is called the Employeer of Last Resort – the ELR – because that is what the program is. It’s a last resort employeer, when private markets aren’t hiring everyone that wants to work.
You should really learn more about this program. I don’t fully agree with it, but you should at least learn why its been proposed. One of the major reasons – perhaps the major reason – is that it seems much more effective in keeping prices stable. In other words, we could have lower inflation along with less economic volatility if we use a positive buffer stock of demand, instead of throttling demand with a legion of unemployed.
And yes, I am talking about effective demand, not wishful demand. I demand a flying car, but effectively, my demand for flying cars is zero.
Now that we’ve spent (wasted?) all of this time wading through the jungle of MMT thought, I think it’s about time for the MMTers (and the Keynesians too) to learn some basic Austrian School concepts. Cantillon Effects, the pricing process and economic calculation problems, distortion of the price, investment and capital structure, problems of “knowledge in society”, stuff like that.
I’m not going to hold my breath.
I know this stuff pretty well, and I could argue them from your side and you wouldn’t know I am an MMTer. You might say I was a novice Austrian, and point out a few distinctions I missed, but you wouldn’t know that I think Austrians are crazy because they are so anti-government. I very much doubt you could do the same with MMT.
Here you have a good argument on why investment PRECEDES savings:
http://blog.andyharless.com/2009/11/investment-makes-saving-possible.html
MMT says simply that you cannot make people invest. People invest if they see future demand. And they spend (demand) more when they have some cusion of financial assets. This is why S-I>0 may be helpful.
But Mr Murphy is right: S-I is simply the net (financial) assets that are left after investment was done, the uninvested savings. Thye have to come from the issuer of the currency (the govt.).
Hey guys,
Cullen Roche, who appears to be a prominent MMTer, has this to say:
http://pragcap.com/the-austrians-are-intrigued
I see the two schools of thought are talking past each other.
It’s a pity, but it is to be expected.
At least there is some dialogue, even if it is mostly mudslinging.
So true, I am not surprised either… Pity the whole thread mostly revolves around whether the accounting identity holds or not instead of discussing how meaningful or not it is and whether the way MMTers read it is correct or not.
Fine, yes, it’s true under the following conditions:
Government debt is redefined as “net private investment”.
and
Investment is defined as “any money not immediately consumed and not used to purchase government debt”.
So, yes, government debt is necessary to create government debt. That’s all it proved. Now why is this a good thing and why should MMT be taken seriously if this is one of the greatest truths it came up with? All it’s telling me is that without deficit spending, we won’t have people buying Treasury bills.
No, government expenditure is private sector income, and government taxation is private sector expenditure.
Government debt is just an interest bearing account at the Fed, and it’s a private sector net financial asset, as well as deposits and cash.
OP good.
In what way is MMT Modern? The message seems to be that there’s nothing wrong with the status quo for the last century. Come to think of it, why isn’t Argentina the powerhouse economy it should be having used exactly this system?
Argentina did comparably very well by dumping the gold standard (dollar peg) for the fiat currency:
http://www.guardian.co.uk/commentisfree/cifamerica/2010/may/18/greece-latvia
From May 3, 2011, a calm and fair minded critique of the Austrians by the MMTers:
These are not practical men, and yes, these Austrians are nearly all men. These are radicals, wild eyed idealists as dangerous as any state crazy Stalinist. When someone decides to ignore the fact that government basically equals civilization, but still claim that they follow reason as their guide, they are insane. No amount of logic can cover up the elementary observation that their hated of government must mean they hate civilization.
http://traderscrucible.com/2011/05/03/no-common-ground-between-austrians-and-mmt/
It’s true. People who deny the need for government are insane. We humans have never had any useful or peaceful society without government. Government isn’t sufficient for civilization – you certainly need more, but it’s necessary.
That depends on your definition of “government”. If you put even a very small effort in you could find several examples on this site of societies that flourished by the standards at the time with absolutely nothing resembling what people to day think of when they hear the word government.
Besides, anarchy is not a necessary conclusion of Austrian economics… Mises was not a anarchist.
Any example of such a society consisting of millions of people?
It seems a strange thought that, as the number of people in a community increases, the need to concentrate power in the hands of a few emerges. Why is there a critical number of people, above which, a government can be in possession of enough of the facts of a situation to meaningfully and altruistically improve the lives of people by forcing them to do things they otherwise would not choose to do?
Even if you do accept the above, does it necessarily follow that one of the things government should do with it’s omniscient insight into the factors of production is mess with people’s preferences for saving and consumption? Why?
not saying anything like that. No value judgement on government whatsoever. I’m just saying that humans create government as soon as a society gets over a few thousand people, and every large civilization had and has a government. It’s a “The sky is blue” observation, not a ” I wonder why the sky is blue” question.
As a related observation, when people get together, they truck, barter, and trade. To a lesser extent, they gamble. People love to trade – it may be hardwired into our brain. This is why I think very strong socialists are crazy.
TC,
You said “No value judgement on government whatsoever.” but also “Government isn’t sufficient for civilization – you certainly need more, but it’s necessary.”
How can you have no value judgement of something you assume is necessary? Is that not a contradiction?
Just give me an example a society consisting of millions of people without government.
Government in any modern democratic society should reflect its people’s preferences. But that is a political choice. MMT itself does not favour any particular political choice (some MMTers might though).
The government needs not to mess with people’s preferences for saving and consumption. The Job Guarantee supported by many MMTers deals only with the impact those choices have in the economy: unemployment and price stability.
“Just give me an example a society consisting of millions of people without government.”
Would that have constituted a formally logical argument against democracy preceding it?
Not assuming, observing. Big difference.
Hi Colin,
More on the same topic.
Not assuming, observing. Big difference. Maybe government isn’t necessary…Perhaps you guys are right. We just never see it in human society.
I’ve made a falsifiable claim, a scientific claim that civilizations create government as a necessary but not sufficient criteria. So far, nobody has shown me a large, prosperous civilization that existed without government, and certainly not one in the last 1000 years.
Perhaps we could have a non-government related large prosperous civilization. But why would you want to try and build something like that for humans without trying it in some small country yourself first and seeing how it really works? We seem to like government so much that it existed everywhere in the world for the last 1500 years where there is even a moderate gathering of people. It seems hardwired into humans.
No way TC. Even a school, a sports club or a company have a government.
Wow. MamMoTh understands the concept of voluntary, contractual, cooperative enforceable “governmental” agreements. Such agreements with the goal of protecting individuals and their property arewhat is envisioned in the massive libertarian literature on the subject. No chaos or Somalia. Anyone comparing such agreements to chaos or Somalia is an ignorant fool.
Wow. Roddis understands the need for governments and their need of SWAT teams in order to enforce voluntary, contractual, cooperative agreements.
Interesting analytical points on the potential cannibalistic effect of G on I and on net saving, as well as the possible bias in a government-centric net financial asset paradigm (versus Google centric, etc.).
But your final point on net financial asset/ net saving /fiscal sustainability misses the mark. Fullwiler’s paper on fiscal sustainability has the meat on this.
But lets say that the govt never repays its debt, that it merely rolls it over indefinitely: does it make sense to then include it without qualification in the measure of private savings?
yes – non government saving, to be more accurate – why not?
This debt will be an interest earning financial asset on the balance sheet of the private sector. It constitutes apart of their nominal wealth, and is hence savings.
Say that Paul is the saver, who defers consumption today, and Geoff is the borrower, who eats his lunch. Tomorrow, or perhaps some other day, Paul would like to eat Geoff’s lunch. That is the essence of saving from an individual perspective, after all–an intertemporal trade. If Geoff never repays the lunch (or effectively never repays the lunch, by rolling the debt), then it doesn’t seem right to talk about deferred consumption per se, because to defer is to postpone, and here Geoff has simply increased his consumption and the expense of Paul. Which is to say, there is only one side to the exchange.
Paul is given a dessert each day and will be returned a whole lunch at the end of the term of his debt. Don’t forget that when the government rolls over its debt, the identity of “Paul” changes. The private sector as a composite may never be paid back, and may retain net savings in perpetuity, but individuals obviously do or can be.
I’ve said it before and I’ll say it again – economics is really a very simple field in which no great reading or comprehension is required, other than common sense. The only time when deeper learning is required is in order to understand and then debunk the bizarre and (intentionally) complex fallacies put forward by charlatans.
Speaking of Rube Goldberg plumbing systems, I read that at some time in the post-WW2 period, the government of the UK created a huge hydraulic machine intended to model the British economy in order to help decide their fiscal policy. Has anyone a picture of description of this contraption? I wonder how all that worked out for them. Well, not really. I think I already know.
Does this not reveal the true purpose of the game? Stripped of all the academic mumbo-jumbo, what MMT and related theories represent nothing more than a thin veil of pretended science draped over a piece of good old-fashioned brigandage. You can talk about money flows all you want, but all that is really happening is that people are being threatened with confiscation, imprisonment and death if they do not hand over a large part of their property to an organized and violent mob. The MMT stuff is just a kind of brainwashing exercise invented to soothe the consciences of the robbers and also to propagandize the victims into acquiescence.
It’s easy to see that the African natives were being robbed, now how can we convince more people in our own countries that the theory and practice of central banking is no more sophisticated and no less harmful than a mugging?
What am I, my google slave? LOL
Phillips Economic Computer
I believe that the hydraulic contraption appears in this Ode to Keynes documentary, if you can stand it.
http://socialdemocracy21stcentury.blogspot.com/2011/04/documentary-on-keynes.html
Mmt pertains to monetary operations of the dollar, yen, euro etc
I don’t see any conflict with Austrian economics
Not so. The conflict is at the very core, because Austrians believe money is a creation of the voluntary sector of the economy in its process of development and evolution, while MMT says that money is a creation of central government. I welcome corrections from MMT proponents, but it seems to me this is a very fundamental disagreement. Furthermore, Austrians propose impossibility of government economic calculation, while MMT says that government creates money and then performs efficient calculations with it in order to guide the economy. There may be shades to these positions, but again, they appear rather significantly different.
You have to be careful about definitions of “money”.
MMT says that (credit) money is endogenous, the private sector does not need the govt to create these, but if we are talking about net financial assets (S-I not equal to 0) then the accounting says they need to come from the government. There is no way around the arithmetics. If the Austrian School claims otherwise, it is simply wrong by violating the accounting principles.
But the private sector CAN create as much (credit) money as it wants! It just always comes paired: asset-liability. You and the bank can create “money” out of nothing by you getting a loan: You get the million dollars of the deposit, but you need to issue a liability: sign a contract to repay the loan. The bank gets an asset (loan), but at the expense of a liability: it needs to credit your deposit account, this is bank’s liability. Such credit money can be created in infinite volumes by the private sector, but in such cases always created assets=created liabilities.
This is also my take on the topic. The disagreement is at a very fundamental level and results in irreconcilable differences.
I do feel that if the Austrians ever decided to relax their hatred of government just a bit, they are natural MMTers. The basics of the MMT paradigm are just simple descriptions of how money works if it is a fiat script. If you just take the basic accounting for what it is – a description and not a proscription – the concepts of entrepreneurship, economic calculation and, well 90% of the Austrian paradigm could be ported over and used very effectively with MMT basic accounting.
But the hatred of government clouds the thinking too much. For example, the idea of the impossibility of government economic calculation – how can this even be considered to be a useful thought? As far as I can tell, government always and everywhere accompanies human civilization. Economic theory needs to deal with what we see in reality, not what we wish to be true.
Impossible is a strong word. Very strong. And it seems to ignore that we do see some governments work better than other governments.
TC, so did you actually read any Austrian work, say “Human Action”, or at least Mises’ essay on impossibility of economic calculation? Are you aware of that debate at all: who debated, what the positions were, and why? Because it sounds like you are completely ignorant of the whole issue, yet you lecture Austrians. If this is such nonsense (“how can this even be considered to be a useful thought”), why were marxists and some keynesians so keen to prove Mises wrong? And why did Mr. Heilbronner so famously write: “Mises was right.”?
And accusing Austrians of some ingrained “hatred of government” is actually nonsense. Whatever strong feelings they show, they articulate their reasons. I have disagreements with some of those reasons. But the reasons are most certainly worthy of understanding.
Being this dismissive, why exactly would you be in this forum? Is the forum really this powerful that any ideas here must be nipped in the bud? If so, that’s most interesting.
As I constantly repeat, it’s clear that the MMTers have no familiarity whatsoever with basic Austrian School concepts nor with basic free market contractually based voluntary arrangements for roads, police, courts, schools etc…. I read Rothbard’s “For A New Liberty” in 1973.
http://mises.org/rothbard/newlibertywhole.asp
This stuff is just not that complicated.
As I have said, we’ve spent considerable time learning their wacky theories. It’s about time they learn ours.
You didn’t learn anything. Not even how to lower your sticky real wage.
“Being this dismissive, why exactly would you be in this forum? Is the forum really this powerful that any ideas here must be nipped in the bud? If so, that’s most interesting.”
This is beyond hilarious, because I am about the least powerful person you might meet. I don’t have much impact on the world beyond making a good living for my family, and coaching baseball with my boys. Nipping it in the bud? I’d say that Austrians have already grown into an anti-scientific kudzu.
But on top of that, I’ve read a decent amount of Hayek. I know when I hear something is impossible, I tend not to believe it, especially if someone uses logic and not empirical evidence to prove impossibility. See, all it takes is one example of government performing an economic calculation to prove the this idea wrong. And there is lots of government out there. It might be really difficult for governments to perform economic calculations, but impossible is a tall claim, especially if the government decides to employ private enterprise in some fashion.
I am especially against people claiming the impossibility of governments performing the economic calculation when they are admittedly anti-scientific. When there is nothing you can show to someone that would make them change their mind because they deny the scientific method, it makes for a useless discussion. It’s like arguing with a person who thinks Astrology is practical knowledge.
Unknowable, that’s a different story. There are things we cannot know, because they happen in the future, and we don’t have enough information today to make an informed decision.
I am pretty sure you’ll come back with something that is not possible to prove wrong, and therefore non-scientific, but claim it refutes me. And I’ll be here, pondering the depths of human hubris.
TC: You are seriously completely unfamiliar with the economic calculation issue. Really. Read about it. Even Wikipedia would be a good introduction. You really do not know what you are talking about, and this is something worth knowing.
I don’t think it is irreconcilable. Yes, the govt will not be able to calculate, so what?
S-I = G-T still stands. No saving financial assets without the govt.
If the govt is so clueless, we should make as much of the govt spending as possible to be automatic stabilizers: when the economy weakens, the govt doesn’t need to “know” it needs to tax less, the tax receipts are lower automatically. If the private sector wants to save financial assets, we should make an automatic mechanism for the govt. to have G>T, so that the govt doesn’t have a room for error (like now in UK, where the clueless Osborne wants G<T and the economy wants something else, the result is falling GDP).
Calculation debate doesn't lift the rules of accounting and arithmetic, I hope the Austrians agree
Scientifically divine exactly what I want to purchase on August 18, 2013, seal it in a vault, and see how accurate you are the day after.
Nope, pretty darn familiar with the economic calculation issue, and I love the idea in general. It comes down admitting the presence of some markets. In the presence of many prices, governments should be able to make economic calculations. Mises restricted his critique to pure socialism.
Upon reading the essay again, I have to ask if you’ve ever read it. It’s quite explicit in admitting that even horrible governments (re: USSR) will stumble through in the presence of lots of prices. Our government here in the U.S. should be able to make lots of decent economic calculations.
I like lots of markets, most markets even. I am not a socialist – though you would call me one because I like some government. I desire markets and would shudder at the thought of a world without markets. My blog is called the Traders Crucible, for gods sake.
Murphy said: “Scientifically divine exactly what I want to purchase on August 18, 2013, seal it in a vault, and see how accurate you are the day after.”
Can the private sector do it?
Wow.
I would say Austrians agree the $US is a creation of the US govt, the yen the creation of Japan, pound UK, euro, the govts over there, etc.
Nor is that to say that the private sector can’t and doesn’t create private liabilities that can function within various definitions of ‘money’ or, that if there were no state currencies, there might be other mediums of exchange.
And I think Austrians agree that the US govt’s economic policies can be disruptive and distort what the economy would otherwise be.
And I think they would also agree with me that govt policy is necessarily a distortion, and modifying it modifies the distortions.
For example, taxing is coercive, and distorts economic outcomes, as it forces the removal of $US from the private sector, forcing the private sector to offer real goods and services in return for the dollars it needs because of taxation. And then the govt buying of real goods and services to provision itself by exchanging the dollars the private sector needs distorts the real economy as those real goods and services are forcibly shifted from private to public domain
And Austrians also agree that there are some governmental functions that serve public purpose and require provisioning.
Austrians probably also agree that other forms of ‘money’ might better serve public purpose and are worthy of discussion.
So what’s the problem???
Thanks for giving us a heads up on MMT. R. Wray’s ‘classic’ on the subject is available here : http://library.nu/docs/CQZN4J8MVG/ but you shouldn’t expect too much…
1. GDP = C + I + G + (X — M)
2. GDP = C + S + T
3. C + S + T = C + I + G + (X — M)
In equation 2, the value for C is derived only using income from the year that the GDP in question is measuring. In equation 1, C includes spending using income from previous time periods that was saved. How can you cancel out C on both sides in equation 3… They are not equal.
It seems painfully obvious to me. Is there something I’m missing?
In equation 1, C is income and in equation 2, C is expenditure. When you spend 10$ it doesn’t matter if you earned them yesterday or last year. But yes as an individual you can increase your consumption spending your savings, which then becomes someone else’s savings.
It matters because the “uses perspective” defines C as the portion of national income used for(not, that came from) consumption. How is that necessarily the same as total final consumption spending?
What is spent as domestic consumption equals income from domestic consumption. It’s just transactions within the domestic private sector.
You would have to completely ignore the potential of previous savings. The proof also assumes that S = I and that the economy is a zero sum game which are both wrong. This would be better but it’s still not very good:
“^i” denotes that it’s value is derived from income to differentiate it
1. GDP = C + I + G
2. GDP = C^i + S + I^i + T
3. C^i + S + I^i + T = C + I + G
4. (C^i + S + I^i) – I = (C + G) – T
However, what the model demonstrates doesn’t change much, namely: “as the government borrows and spends more, the equation tells us we might see lower private consumption, rising interest rates, and real resources being siphoned out of private investment into pork-barrel spending projects.”
I am not ignoring anything. When you spend $100 in consumption it doesn’t matter if you earned it yesterday or last year. In both cases it is your expenditure and someone else’s income so it is added to both equations. Hope you get it.
You’re ignoring the direction of causality. The amount of previous savings held will affect how much of total final consumption in a given time period came from income earned during that time period. With higher previous savings, consumption from income would make up a smaller part of total final consumption spending than if they had no savings.
Example:
1. GDP = C + I + G
2. GDP = C + S + T
Z and X both have no savings. The government buys $50 of RDX from X and $50 of bread from Z. The government taxes them at 100% and redistributes what it bought to stay in power. GDP is 100. The models would represent this as:
1. 100 = 0 + 0 + 100
2. 100 = 0 + 0 + 100
In this case C would happen to be equal.
Z and X both have no savings. The government buys $50 of RDX from X and $50 of bread from Z. The government taxes them at 50%. Z buys $25 of RDX from X. X buys $25 of bread from Z. Both of them save the money left over after taxes. GDP is 150. The models would represent this as:
1. 150 = 50 + 0 + 100
2. 150 = 50 + 25 + 75
Again, they would happen to be equal.
It sure does seem like C in either equation measure the same thing, right? Well look at what savings can do.
Z has $100 of savings and X has none. Z buys $100 of RDX from X using his savings. X saves $50 of the money and uses $50 to buy bread from Z. Z saves that money. There was no government spending and no taxes. GDP is 150. The models would represent this as:
1. 150 = 150 + 0 + 0
2. 150 = 50 + 100 + 0
They are not equal! C does not measure the same thing in either equation by definition. Total final consumption spending vs income used for consumption spending. They are not the same.
Z has $100 of savings and X has none. Z buys $100 of RDX from X using his savings. X saves $50 of the money and uses $50 to buy bread from Z. Z saves that money. There was no government spending and no taxes. GDP is 150. The models would represent this as:
1. 150 = 150 + 0 + 0
2. 150 = 50 + 100 + 0
Wrong again. It seems you are mixing stocks and flows like Eli.
It’s
1. 150 = 150 + 0 + 0
2. 150 = 150 + 0 + 0
Overall savings didn’t change. Z saved -50 and X saved 50.
At the end they both have 50, totalling 100 like at the beginning.
WAIT! THERE’S MORE!
There is a basic dishonesty in the presentation of the MMT “program” by its advocates. They don’t mention that it is an attempt to rescue socialism from its pure implementation by Stalin. The Table of Contents to MMT guru Abba Lerner’s book “The Economics of Control” expresses his goal as an attempt to save SOCIALISM:
http://tinyurl.com/3h2qy7q
Recall that MMT claims it can control inflation by taxing back much of the diluted funny money. However, Lerner (1903-1982) was busy as late as 1980 constructing a Rube Goldberg type straightjacket of price controls:
“Lerner was bubbling over in novel policy proposals. For instance, his analysis of inflation led to an early advocacy of incomes policies (1947) and, later, his remarkable “Market Anti-Inflation Plan” (MAP, 1980). Heuristically, MAP proposes to “internalize” the costs of inflation by setting up a type of voucher system whereby a firm obtains a surplus voucher to increase sales if sales in that year fall before a particular aggregate target, while a firm whose sales growth exceeds the target will incur a deficit voucher. The rattlesnake juice comes with the market part of it: if a firm wishes to raise sales above target regardless, then it can buy surplus vouchers on the open market from firms who are selling below target. This extension of the marketplace to the very process of inflation, Lerner argued, would not only internalize the externalities of inflation but also be an effective way of controlling aggregate demand without losing the individual dynamism of entrepreneurial activity.” [@page 12]”
http://tinyurl.com/4rfk3jk
Individuals will have to buy the right to change prices from others who change their price in the opposite direction? Now there’s brilliant insight from a true economist. BTW, if inflation can be easily whipped with taxes assessed by magical, all-knowing bureaucrats, what was the purpose of Lerner’s mad price control scheme?
As we have seen from the last writings of Abba Lerner, total control of all prices by the fascist state is necessary to make the thing work (according to the advocates of the horrible system). MMT sees humans as rats in a maze and wants to control them while leaving them partially free to create stuff to be seized and redistributed. No wonder they hide their basic motives (and deny the law of scarcity).
O…M…F…G…
Seconded, this is pretty damning.
The origin of MMT is ‘Soft Currency Economics’ at http://www.moslereconomics.com which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago who sent me to Art Laffer who assigned Mark McNary to work with me to write it. The story is in ‘The 7 Deadly Innocent Frauds of Economic Policy’ at http://www.moslereconomics.com/?p=8662/
I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.
The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se.
In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political.
And everyone in Fed operations knows it.
First, when the world was on the gold standard most of the working class didn’t have any gold and if most working people needed credit they had to go to the Mafia. The middle class bubble was created by the unions and going off the gold standard.
Second, the international money traders keep the government in check.
Third, if the government goes goofy the smart people would move their assets off shore and as Libertarians, we don’t care about the rest, do we?
And how is beeing deeply net value negative and to their neck in debt – as is common for the lower and lower middle classes today – somehow superior to not having gold?
“Second, the international money traders keep the government in check” – wow! I really don’t think it’s the money traders that are to blame for the 50x dilution of the value of the dollar now, are they? Or for the fact that the government hand in hand with Fed decided, by printing new money, to bail out their Wall Street friends.
Well, that try at scapegoating was a very weak one. Try better next time.
See MMT for Austrians by Edward Harrison, an Austrian School economist who has integrated MMT.
how can one reconcile the nonsensical ideas of output gap and theory of capital/structure of production.
harrison’s got his basic austrian stuff wrong
Why don’t you read what he has to say. He is speaking to people like you.
i tried to do so. but i stopped at the point when he started discussing output gap.that fairy doesnt exist outside keynesian lore
Who cares what GDP equals? I am sure that all of MMT’s financial identities are tautologically true and I have no problem with any of them. They just don’t matter.
What matters is ACTUAL wealth, determined by the existence/distribution of ACTUAL goods and services. If in a given year there are more factories and a longer, more efficient chain of production then there were the year before, there was more investment. If there are fewer factories and shorter, less efficient production chains then there was a net consumption of capital and investment. What GDP says is irrelevant and it reveals nothing useful about the state of the economy.
If someone comes and explodes all the factories in a country and burns all the inventories, GDP would increase when the government goes in to debt to people to clear the rubble. The government’s huge deficits would by MMT’s definition lead to a massive increase in “savings and investment”… so what? Everyone in the country would be worse off, the actual physical savings in the country would be gone, and absolutely no rational individual would care that GDP went up, or that MMT’s imaginary “savings” increased.
GDP is a flow, not a stock. That’s why MMT dismisses any theory that is not stock-flow consistent.
“GDP is a flow, not a stock”… so do government deficits represent a flow of goods entering the economy? Or do they represent a flow of numbers through computers, which can increase without any regard to the actual quantity of goods?
Money is not wealth. If you understood that we might be in a position to actually have a fruitful conversation.
>Money is not wealth. If you understood that we might be in a position to actually have a fruitful conversation.
MMT realises this. Hence why they emphasise the importance of the real economy. They also say imports are a benefit, because you are importing real goods and services rather than accumulating IOUs.
Actually, as a result of factories being burnt down, the GDP would take a very steep dive, as production would be decimated. But yeah, the GDP basically measures flows and production. It’s a good measure, but not omnipotent.
And come think of it, the measurement of flows of products and services is in fact more “realistic” than the measurement of potential productivity. No one gets better off because a factory is built. Our well being increases only as soon as the factory starts producing consumer goods – and in a rather direct proportion to that production.
But the government could easily compensate for any decrease in money flow in the private sector by spending an unlimited amount of money as part of the deficit.
Also, “flows of products and services” are a more realistic measure of consumption… they are useless as a measure of savings and investment. If the government has a massive deficit to demolish the burnt down factories does that really represent a drastic increase in savings in the economy?
“Also, “flows of products and services” are a more realistic measure of consumption… they are useless as a measure of savings and investment”, hmm, let me think about it, how is GDP expanded… gross domestic PRODUCT, right? Now, why do you expect this measure of PRODUCT to be useful to assess savings and investment?
“But the government could easily compensate for any decrease in money flow in the private sector by spending an unlimited amount of money as part of the deficit.” – this is true only nominally (nominally, the govt can make GDP exactly any number it wants). It would be quite difficult to impossible in real terms.
Given that Robert Murphy by his own admission has only “briefly” explored MMT, I don’t attach too much importance to his criticisms of MMT. In fact the basic claim of MMT has completely passed him by – he doesn’t even mention it. This is that in a money economy demand will be deficient if the private sector saves too much money per month. Ergo in a recession, government must raise its spending (and/or cut taxes) so as to counteract the above demand destroying factor.
As regards his Robinson Crusoe story, it’s stark staring obvious that Robinson Crusoe doesn’t need government in order to save real goods. It’s a point that should be obvious to anyone with an IQ above the moron level, even if they’ve never studied economics.
Also Robert Murphy’s criticism of MMT relies heavily on a flawed point made by Nick Rowe. Murphy’s criticism/mockery of Rowe is fully justified. But this is not a criticism of MMT because Rowe is not leading light in the MMT movement.
Robert Murphy and Rowe are confused as to the distinction between saving money and saving real goods: the two are entirely unrelated. At least they are unrelated in the sense that it is possible for a household or firm (or the entire private sector) to save (or dissave) money at the same time as saving real goods, or running down their stock of real goods.
“demand will be deficient if the private sector saves too much money per month”, yeah, so basically the world is full of sociopathic masochists that get a hard-on from not working, not consuming and watching production suffer as a result. And lo and behold, here comes the omni-f*ng-potent government to save the day and impose the correct level of slave labor, errr, citizen’s duty of work for the greater common good, and oh, by the way some bureaucrats and their business friends that control the economy incidentally get a “little” rich in the process of enslavement, errr, regulation of the working class – but come on, this can’t be that bad, right? Oh, and by the way, there is no corruption EVER, bureaucrats are angels, there is nothing to see here, move along.
Just f*n give me a break now.
Ralph,
You said “demand will be deficient if the private sector saves too much money per month.” How is this deficiency defined? Is there a “correct” amount of spending, and if consumers don’t spend exactly that amount, the government must step in? How is the right level of spending determined? Vote?
Also, if spending in one particular month is “deficient” and the government does step in and save us from ourselves, does it matter what the government chooses to spend that money on? I know there’s the concept of a Job Guarantee, but what if one government chose to build a stockpile of bananas instead? Could they still achieve the correct amount of spending?
As I understand it, (and I’m not claiming to know this to be true, it’s just what makes sense to me right now), nobody saves in perpetuity for nothing, they save so as to have more to spend in the future. So, if spending is deficient in one month, that gives you useful information – that people are choosing to consume less this month in order to be able to consume more in future months. They are deliberately choosing to leave resources unconsumed temporarily, by withholding their money. In this, I realise that I am assuming that consumers see money as a claim on resources – the household has previously sold its labour for this claim on part of the output of the economy, and the financial position of the household represents the difference between their output and their consumption – maybe MMTers see things differently?
Why is this choice made by households – to consume less this month, leaving resources unconsumed for future months – wrong? Why should the government step in and increase current consumption at the expense of future consumption? I say at the expense of future consumption, because it seems to me that if a government goes into debt now, that debt will be recovered in the future, either through taxation, which must reduce household’s ability to consume (surely?), or through increasing the money supply, which should increase the general price level, meaning that past savings are worth less and can purchase less consumption.
I am not speaking on behalf of the Austrian School, I am not an economist, and I accept that much of what I’ve written may be wrong. Can someone point out to me where I went off?
Colin, Re your first para, the correct amount of spending is normally seen by economists as being the amount that maximises employment levels as far as possible without bringing excess inflation. It’s always a moot point as to exactly what that level is, but with the employment to population ratio in the US having dropped dramatically in the last two years, it’s pretty obvious that employment in the US is currently below the maximum possible level.
Now for your second para – does it matter what govt spends its money on. If the sole objective is to raise employment, then no: it doesn’t matter what govt spends its money on. Keynes made this point (jokingly) when he said govt could raise employment by paying people to dig holes in the ground and fill them up all day long. But obviously govt should spend on the normal “sensible” things: education, law enforcement, etc (and/or reduce taxes and leave money in consumers’ pockets so that they can spend on whatever they want).
3rd para. First, I shouldn’t have used the word “month” in my comment above. It implies that governments can fine tune economies with extreme accuracy, i.e. work out private sector spending EACH MONTH and compensate accordingly. I should have said something like “keep a constant eye on private sector spending”.
Re the rest of that para I don’t see anything wrong with what you said. Nor is there any difference, far as I can see, between MMTers and others here.
Re your 4th para, it is crucial here to distinguish between saving money and saving material goods, etc. As regards saving money, the choice by one household to save money, means less demand, i.e. it means unemployment for some other household or person. (Keynes called this “the paradox of thrift”.) And where someone wants work we should try to enable them to obtain work, by raising demand, shouldn’t we?
In contrast, if someone “saves” by spending money on a new kitchen rather than blowing the relevant sum on a holiday, there is no need for government to intervene. $X dollars spent on the kitchen will provide much the same amount of work as $X spent on a holiday.
On the subject of government debt and whether and how incurring such debt raises demand, this is a complicated area. Conventional economics says that governments can smooth out fluctuations in demand by borrowing plus spending when necessary, and when demand is excessive, doing the opposite, i.e. raising taxes and paying back debt. E.g. this article by Mark Thoma expresses this conventional view:
http://www.economist.com/economics/by-invitation/questions/do_triggers_and_other_fiscal_constraints_instill_prudence_or_refle
Incidentally, therein lies the flaw in your claim that when government pays back debt, this reduces the ability of households to consume. That is, governments should not pay back debt unless an economy looks like overheating: a situation where spending and consumption are at or above the level at which inflation becomes a problem.
Personally I think that government debt is one huge farce. I.e. I agree with the Abba Lerner (often said to be the founding father of MMT) namely that for demand regulating purposes, governments should simply create new money and spend it when more demand is needed, and if inflation looms, do the opposite, i.e. rein in money via extra and tax and “unprint” it or extinguish it. I set out my reasons here:
http://mpra.ub.uni-muenchen.de/23785/
See! We can’t live without government. Otherwise, we might take a trip when the government thinks we ought to build a kitchen. And we all know what might happen if we are allowed to make decisions for ourselves, don’t we?
There was no “ought” in any of that. In none of your comments have you shown any understanding at all that MMT is descriptive, not prescriptive. The only prescription in Ralph’s comment is that we should attempt to provide employment (the means of living) to all if we can. That this is desirable is surely axiomatic for any economics?
No, it’s not axiomatic to economics at all. This royal “we” is founded entirely within the notion that some group of people should centrally plan to ensure employment.
And it’s not as though this would be hard if this was their purpose. “We” could instantly draft all the unemployed into the military if we so chose, or pay them to twiddle their thumbs or whatever else. The “descriptive” part of MMT defines that if government spends (regardless of what it is on) during times of recession it will boost demand to some kind of self-sufficient state.
What this fails to take into account is that the demand it’s producing isn’t sustainable without continued propping up. As soon as the weight of government spending is taken out from under it there will be no continued real growth. There may be the appearance of growth, such as that which occurred in the 2000s in housing, but it’s not real and will evaporate when the conditions that created it are retracted.
MMT theorists pose that if we increase spending enough we can deal with most any recession of aggregate demand. But the problem with MMT theory, just as with Keynesianism is that it poses that the problem is aggregate demand in the first place, when aggregate demand decreasing is largely a symptom of the real problems (malinvestment, regime uncertainty, etc.)
Matthew, you are misinformed about MMT and/or do not understand introductory macroeconomics. MMT is a macro theory and macro deals with aggregates. These aggregates are divided into sectors. This is not MMT.; it is standare macro.
The equation, Y + I + G+ (X-M), appears in every introductory macro text. The national accounting identities that MMT uses were not dreamed up by MMT. They are standard macro.
These accounting identities are the formal structure of macro. The material aspect is the data. The data is reported in numerical amounts in the unit of account and in percentages of GDP. These numbers represent individual transactions of real goods when disaggregated, because this is where the data came from in the first place.
Certain formal relationships can be articulated from the accounting identities. What this implies is that since the data must conform to the accounting identities, then it is possible to project different states of an economy by changing the data in the model. For example, if national income (y), investment (I) and the external balance are held constant, and the desire to save (S) increases, then either the government fiscal balance goes into deficit to accomodate it, or the economy contracts, owing to falling nominal aggregate demand, since saving is defined in macro as income not spent.
I would say unemployment as defined as people looking for work paid in the state’s currency is necessarily a direct result of taxation.
In other words, if there were no taxes and no $US there would not be anyone looking for a job that pays in $US
And it is the tax liability that creates sellers of real goods and services trying to exchange them for the needed $US.
Govt spending then hires from those it caused to become ‘unemployed’ as defined.
If it doesn’t hire all the unemployed it created with its (distortive) taxation, the result is that much unemployment, again as defined.
Therefore it would be logical, and a policy option, for that govt to either cut the tax so they wouldn’t be creating more unemployed than they want to hire, or hire them with additional spending.
Given that the the largest ever government spending of this nature has brought about huge drop in labor participation over the last two years, a reasonable scientist would reexamine his/her premises. U.S. is following the same policies as in the 1930s, with very similar results. The Austrian alternative was what was done in 1920 and in 1946, at least those came the closest to what Austrians would prescribe. Results were different.Since I am Polish, I can frame the issue this way: The Keynesians (old and Modern) resemble the Polish Plumber, a central figure in French politics, who cut a pipe three times, and the pipe was still too short.In the meantime, real people in real economy are without work, the job market is the worst I have seen in the U.S. since I came here in 1981, and poverty is increasing at an alarming rate in the U.S. Interestingly, in the current crisis one country that did not follow the Keynesian script is the country of my birth, Poland, partly due to inability to act by the current government of Poland, and partly due to the fact that magnificent performance of the Polish Financial Supervision Authority resulted in no troubled banks or insurance firms in Poland. Poland is also the country that did not have a recession during this crisis.I, for one, hold that Keynesians are the creators of this poverty. All times when Keynesians policy prescriptions have been implemented to the greatest degree in the U.S.: 1930s, 1970s and now since 2008 (inclusive of 2008), have brought about stagnation, poverty, decline. In all cases the cries have been: We have not done enough.
Cut that pipe three times, still too short.
Unless the resulting poverty is the objective. Then the ideological fervor in support of these poverty-creating policies starts making sense.
Given that the the largest ever government spending of this nature has brought about huge drop in labor participation over the last two years
Which government spending? If you are referring to QE 1&2 then you should revise your understanding of the monetary system.
Countries that followed Keynesian policies (Australia, Korea, most South American countries) did well through the crisis.
Clearly, MamMoTh, your objective is not to discuss the issues. I will just remember what Sergeant Hulka (my kind of hero) did in “Stripes.”
Which issues?
BTW, when I said “spending” I meant spending (not expanding money supply), and when I said “government”, I meant “government” (not central bank). This may be rather shocking, I apologize, I did not mean the shock, I am not a native speaker, and not a Keynesian, so get confused like that. Sergeant Hulka (“Uncle Hulka?”).
I still don’t see the issues. I might be wrong but I don’t think the government spending was that large. Maybe you mean the deficit.
What’s the issue with those countries I mentioned that fared well through the crisis with a fiscal stimulus?
Ralph Musgrave claims:
In fact the basic claim of MMT has completely passed him by – he doesn’t even mention it. This is that in a money economy demand will be deficient if the private sector saves too much money per month. Ergo in a recession, government must raise its spending (and/or cut taxes) so as to counteract the above demand destroying factor.
Actually, Bob Murphy is well aware that MMT is attempting primitive management of “aggregate demand”. Hayek won the Nobel Prize for his work on the Austrian Business Cycle Theory which explains that government management of “aggregate demand” is the cause of business cycles. Been there, done that.
Mr. Musgrave’s blog is dedicated to the above-mentioned Abba Lerner. Once you’ve cut through the maze of MMT flows and stocks and sectors, you get to the meat of the matter:
In a recession, the government / central bank machine should simply create or print more money and spend it (and/or cut taxes). And conversely, if inflation looms, the opposite should be effected: money should be reined in via extra tax (and/or reduced public spending), with such money being “unprinted” or extinguished. Put another way, given a recession, government should “net spend” (i.e. spend more than it collects from tax or borrowing.
This method of adjusting aggregate demand and inflation dispenses with the distinction between monetary policy and fiscal policy. And since under conventional arrangements, governments are responsible for fiscal, while central banks are responsible for monetary policy, adoption of MMT would require a slightly different split of responsibilities as between governments and central banks. So what then is the new split of responsibilities?
The answer is to have central banks (or indeed any committee of independent economists) responsible for deciding whether inflation is sufficiently subdued to warrant more net spending. The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.
http://ralphanomics.blogspot.com/2011/05/modern-monetary-theory-implies-re.html
“The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.” Not a problem, right? In addition to the ABCT, Mr. Musgrave has apparently missed “The problems of Knowledge in Society”.
If “government management of aggregate demand is the cause of business cycles”, how come business cycles existed (e.g. in the 1800s) long before governments tried to control such cycles? They even had a credit crunch in Ancient Rome.
But I’m not saying government attempts to control cycles are spectacularly successful. I’ve put a chart on my blog showing the severity of cycles from about 1870 onwards for the US. See: http://ralphanomics.blogspot.com/2011/05/damping-economic-cycles.html
I also accept the Austrian point that trying to have government control cycles is riddled with pitfalls. E.g. while government control of cycles works in theory, in practice those in charge of the controlling are a bunch of incompetents and crooks. E.g. attempts to remedy the crunch in the U.S. have consisted of handing billions to Lloyd Bankfiend and friends (to over-simplify a bit), rather than channelling money to Main Street.
The USA government, as well as other, tried many ill-fated schemes to control money and credit. The Federal reserve bank is just one in a long line of attempts to establish a central banking scheme. All of which are failures.
Other examples are the government attempting to fix the exchange rate between silver and gold. This fixed exchange rate did not match up with the natural exchange rate internalltionally which caused people to take advantage of the situation and deplete the money supply by playing the artificial government-enforced exchange rates versus the natural international rates and engaging. Which, of course, caused another attempt at central banking eventually due to the ‘market failure’.
There are many examples like this. There were significant number of people at the founding of this country that mimmicked the crap that you see coming out of the Fed banking system today. All with similar results.
In other words:
The ‘classical austrian’ perspect of what caused business cycles was based on the history of such cycles going back hundreds of years. Government attempts at controlling markets, creating fiat currencies, and regulating business didn’t start in the 1930′s.
Ralph: You really did not read anything that Mises and Rothbard wrote about 19th century cycles or ancient Rome? You are posting this to the Mises Institute forum. This is like posting to a forum on Adam Smith and saying that there were no significant books on economics published in 1776.
I can’t help but wonder in dismay: Mises was the originator of the monetary theory of the fall of the Roman Empire (better Misesisans correct me please if I am wrong, but I am almost certain of this), and you are bringing ancient Rome business cycles as an argument against Mises’ point of view?
K.O. —
The subject of the post is MMT. Your repeated remarks that we all should be familiar with Mises and Rothbard are off topic.
MMT explains the way fiat money works. And that is the system used by all countries today. Austrians seem to believe that we should all back to gold standard which will not, and should not happen. Correct?
What will happen I do not know. But I believe MMT and other Keynesian and interventionist theories rely on the idea that fiat money will do just fine, as it provides great flexibility to policy makers, as long as government shows some degree of self-restraint. As I see it, such self-restraint is gone or nearly gone, so I view the future as very uncertain, and I think this lack of self-restraint has made return to gold standard a distinct possibility, out of necessity.
Rothbard and Mises are always relevant to any discussion of economics. As I wrote above:
Even assuming that they could pull off their various statist money-injecting/withdrawing gymnastics, the problems of the pricing process and Cantillon Effects would still be present and on steroids. MMTers are oblivious to this type of basic and simple Austrian School analysis.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-778558
It would be more accurate to say that it is *a* cause or “the dominant cause” of business cycles.
Business cycles (aka bubbles) occur when prices of commodities don’t match the prices of the final goods those commodities are used to produce. There are several ways this can come about: a change in the money supply, an unexpected change in a commodity supply/demand, and “common knowledge” that turns out to be false.
A good example of your question would be Spanish and Portuguese inflation after the importing of gold from the new world. Gold is a ‘hard money’ so it should resist inflation, but there was a huge change in volume which was sufficient to cause inflation without a central bank’s intervention.
Another example of a bubble would be today’s university system: many young people are spending 4+ years of their life accumulating more costs than their education will allow them to make up over the course of their life. Even if it’s subsidized by grants and scholarships, it is still a cost.
If saving money is “entirely unrelated” to saving real goods, then what exactly do we gain by doing GDP calculations?
Ralph,
Have you read the first part of this? What do you think of it?
http://mises.org/rothbard/mes/chap11b.asp
Head Stomp,
I’ve just read it. It’s a typical bit of not very clever von Mises stuff.
The first paragraph points to Keynes’s paradox of thrift, i.e. the fact that excessive saving of money causes unemployment. It then says that advocates of the paradox of thrift are accusing savers of a “vicious anti-social action”. That is total nonsense. Advocates of the paradox are simply pointing to a fact of life.
I’ve read Keynes’s General Theory. I have no recollection at all of him criticising savers for their actions (other than pointing to the unfortunate side effect of a rise in saving).
Then in the second para the author claims that “most writers” also think that savers are scum of the Earth. That is total nonsense. The only people bandying words like “antisocial” and “vicious” around are the von Mises lot.
In a later paragraph, the author makes another mistake which I’ve seen other von Mises authors make. And it stems from the fact that (hilariously) they don’t understand basic supply – demand schedules or graphs. The para starts “The first error in this concept…” The author claims that supply or demand cannot be aggregated up to total demand (or total willingness of suppliers to supply) because every “demander” (i.e. customer) has different preferences. And every supplier is different.
If the von Mises community could work their way through a basic economics text book, they’d find that this difference between each customer and each supplier is EXPLICITELY AND VERY CLEARLY taken into account! In fact it is PRECISELY the different characteristics and tastes of “demanders” and “suppliers” that give lines on supply – demand graphs their slopes.
Your Robinson Crusoe story is a good one. Your coconut tree is the central bank and coconuts are your currency. The central bank creates money by dropping coconuts. Your eating is equivalent to taxation and creates the need for the coconuts. What you don’t eat (tax) you can save. It fits well with the MMT story. Your currency is, however, financially constrained as deficit spending is not possible.
OK, so this is slightly different, instead of a 100% VAT tax, all productivity belongs to the central bank and through their benevolent spending on you, you are allowed to create savings.
The Austrian theory of money is easy to understand: money represents real stuff. In a primitive area without money, if a banker came along, they might bank coconuts and give little pieces of paper saying ‘redeemable for X coconuts.’
Inflation is caused by printing up a greater number of papers than are redeemable in the currently accepted value of everything of value in the economy. If people tried to redeem 100 papers but the bank only had 80 coconuts, you would see inflation as each paper could only buy .8 coconuts.
Deflation is caused by an increase in the goods available in the market relative to the paper, and is therefore a sign of an expanding economy, or a decrease in the paper supply.
Neither inflation nor deflation are necessarily signs of an expanding or contracting economy.
I never said they were, I said they are a sign of a changing paper supply *or* an expanding/contracting economy. (Although to be more accurate, I should have said *and/or*)
The tree is not a central bank as the tree can’t just decide to drop more coconuts on command. There’s a physical limit on how many can grow and at what frequency. The tree can’t “stimulate” the island’s economy by doubling output.
Guys, Don’t over think it. You invented this one person economy without a government to make a point that I is worth making about saving. In this case the paradox of thrift would not arise.
From an MMT point of view mother nature is the government, and the central tree bank spends coconuts to purchase goods and services from the private sector to provision itself. In so doing it creates money. In this case the service is cracking coconuts for the single federal employee to eat. In MMT taxes destroy currency; in this case it is eaten. That which is not eaten (taxed) is saved. As in another commodity based system (gold standard) spending is constrained. Spending by the government has enriched the private (Robinson) sector.
It’s a simple story that works for you and for MMT. It appears in this case that there is a money tree.
Dan,
There is an important difference between a money tree and a coconut tree; you can eat coconuts.
If the central bank were in fact giving out coconuts at least it would be doing something useful…
Sadly, man cannot live on coconuts alone and my local supermarket will not accept them as tender.
Noble effort by Mr. Murphy of the Mises Institute, but it’s hard to get a productive discussion going at this level. Good try though. I would suggest a follow up discussion of specific issues in more depth. There are many points of agreement and many points of disagreement.
K.O. seemed to hit on the major disagreement: ”
“Austrians believe money is a creation of the voluntary sector of the economy in its process of development and evolution, while MMT says that money is a creation of central government.”
I thinks that’s right. But today, all countries use fiat currency, which by definition is a creation of the central government. Correct?
No. It is an ersatz. This is my opinion, but I think this is an important insight on how socialism works: All economic creations of government are not creations, they are copies of existing voluntary arrangements, but “improved”. I cannot site a specific Austrian reference for this, but Lew Rockwell once said: “Liberty is the mother, not the daughter, of orderliness.”, which I believe states the same thing. So I do not consider fiat currency to be a creation of the central government, but rather pretend money, which is legal tender, by law, and forces everybody to game currencies, among them gold, silver, and various fiat currencies worldwide. I do not think I am a pure Austrian, I do not propose to stand for any movement, just my opinion on this one. But I think it has a lot to do with Austrian view, and I welcome corrections.
As I said before:
You have to be careful about definitions of “money”.
MMT says that (credit) money is endogenous, the private sector does not need the govt to create these, but if we are talking about net financial assets (S-I not equal to 0) then yes, the accounting says they need to come from the government. There is no way around the arithmetics. If the Austrian School claims otherwise, it is simply wrong by violating the accounting principles.
But the private sector CAN create as much (credit) money as it wants! It just always comes paired: asset-liability. You and the bank can create “money” out of nothing by you getting a loan: You get the million dollars of the deposit, but you need to issue a liability: sign a contract to repay the loan. The bank gets an asset (loan), but at the expense of a liability: it needs to credit your deposit account, this is bank’s liability. Such credit money can be created in infinite volumes by the private sector, but in such cases always “created assets”=”created liabilities”.
What liability is created when the mining operation extracts gold from the ground and coins it? New money just entered the system without help of any government, thus your “net financial assets” just went up without a single central bank printing a single unit of currency.
Under the gold standard private companies cannot introduce gold into circulation. What are you talking about?
It seem like the Austrian schools is about absurd hypotheticals.
Educating yourself that even before fiat money, money was debt based rather than commodity based, and always has been, would probably save you from at least this kind of ignorance. The rest, I’m sorry to say, probably cannot be cured by any means.
Okay, taking for granted that Govt Deficits = Net Private investment, what does that mean?
It applies to money as well as it does any other commodity: If the govt loses 10 apples to the private sector, the private sector, in aggregate, gains 10 apples from the govt. But where does the govt get the apples? It either creates them from real resources (apple trees), confiscates them from the private sector (taxes), or creates IOUs to future apples (govt fiat credit).
So in any of these 3 cases, is the private sector better off (a subjective measure) if govt policy is to run any size of deficit?
In the first case it is demonstrable that the private sector handles production of real resources better than a central planner. In the second case, taxes, there is the issue of morality to deal with, but there is also the fact that the apples were taken directly from the private sector to begin with; there is no net deficit in the government if it takes from the private sector all that it gives to the private sector. Thus taxation invalidates the assumptions of the initial equation by hiding a transaction under another name.
The third option, credit production, must then rely on govt production from real resources alone, as taxation to repay these debts would not affect a deficit anyway. So we’re back to case 1, where the govt must make production decisions about how much of their future real production can be promised to the private sector today. And again, this decision is best made by a private actor in a price system. Further, if the govt extends credit more leniently or more strictly than market actors would, the structure of production becomes distorted, and booms and busts follow.
So by the MMT’s proponent’s own terms, the govt should not be in the business of changing money, or even the production and sale of apples.
the private sector is the source of all real assets, and the govt is the source of net financial assets.
The difference is when the private sector issues some real assets to the govt, it has less of it. When the govt issues money to the private sector, it does not diminish in any way its ability to issue more. It can also call back (destroy) the financial assets it issued (taxation), which the private sector cannot do.
Since money is not neutral, the level of net financial assets held by the private sector (issued by the gov) can impact the level of production of REAL goods.
The question of whether the mode of financing a firm affects the value of the firm is the subject of the Modigliani-Miller Theorem. Financing does matter, and MM tells you how.
that’s a rather simplistic view of ‘taxing.’
Government doesn’t ‘destroy’ through taxing, it reallocates. Those bills it takes represent real items in the economy. Which items is subject to personal choice, but they are nonetheless real.
The govt doesn’t accept real items as tax payment (try paying your taxes in flour or wool), it only accepts dollars it had issued before. That is how it gives value to an otherwise worthless paper.
Peter,
1. The government taxes income for the most part so it can never “destroy” the financial assets it issued as it only taxes the growth of real assets. Taxation thus throws the balance between “real” and “financial” assets into a vicious cycle where the real assets are destroyed by the State. The only way to counteract this is to borrow, but borrowing is simply deferred taxes. As the amount of debt grows the cost of debt becomes higher and monetizing the debt simply increases interest rates as we have seen empirically with the Fed’s last “asset purchase”. Given this reality we face one of two outcomes: either it becomes impossible to increase the production of real goods as this capital has to be destroyed by the government in order to pay off its creditors or the country goes into technical default as no one will lend in order to roll over its debt.
2. What would MMT say if instead of using government money we were using corporate equity? The same rules apply in that companies can issue as much equity as they want and can buy the equity back.
1. Taxation does not destroy any real assets, again, try paying your taxes in cars or houses. It only destroys dollars, they evaporate never to be seen again. There are no “interest rates increases”, as the Fed controls the interest rates, it just happens to choose to control the short end of the curve only. But if it wanted it could control the whole curve. http://bilbo.economicoutlook.net/blog/?p=8986
You seem to think that the government needs our money to spend. The reality is just the opposite: first the government has to issue the money into the economy for the private sector to be able to pay taxes. Murphy’s Cruzoe cannot save before the coconut trees (the govt) issue their nuts (dollars). The trees don’t need Cruzoe’s nuts back (taxes) to grow more nuts (spend).
2. The companies cannot impose on us to use their equity as a means of payment, because they cannot impose a tax obligation to be paid with paper they had issued.
Taxation destroys wealth that would otherwise go to increasing capital via loans or some other useful endevour. It robs a significant part of the potential for growth and wealth creation over time.
Besides that it creates real harm for individuals that need the money for something actually useful. Like buying food, or going on vacation.
Money represents a ‘unit of wealth’. That is you take dollars and use it in exchange to aquire other items.
Without the wealth backing the dollar then the money is mearly paper. Government does not create wealth. We do. When government taxes us they are taking our property and using it for the government’s own purposes. Without our wealth, without our property, then government spending money would be meaningless.
The Fed ‘printing money’ and then buying government treasury bonds from the private market is a form of indirect taxation. The increase in money supply lowers the value of the dollar, reducing the overal ‘unit of wealth’ that the dollar represents. This effectively shifts wealth from individuals to people government and the people who initially receive the money from the bonds sales.
Peter,
1. The Fed does not control the interest rates at which the government borrows, the market does. Otherwise, the government would pay 0% interest. And, if the government paid 0% interest on its borrowings then why would it tax, or, maybe more importantly, why would people put up with taxation when the government could just print money. Even if one believe’s that there is a symbiotic relationship at work between government and the economy the post WWI episodes of hyperinflation show empirically that the massive amounts of new money created end up causing privation instead of prosperity. If governments do not issue debt then they have to print the money to spend more than they take in. If any part of the cure for recession is to increase spending then once you hit a recession the economy, the currency and the State itself are going to fail. When you are awash in financial assets the real assets become more and more expensive to the point where the country cannot produce enough goods to lower the price enough so that people can buy them because they just do not have enough money. At this point you can argue that the government will print more, however, the same thing happens as prices change again. It is not like trying to dictate interest rates to the market and attempting to avoid payments has not been tried before. The hyperinflation that ravaged post-WWI Germany, Austria and Hungary was due to exactly this idea of trying to free a country from the demands of creditors and the market. What evidence can you offer that following MMT will not lead directly to hyperinflation?
2. What does “imposing a tax obligation” have to do with issuing money? And why does the use of money have to be imposed? I might like using corporate equity as money. In fact, that’s how a large percentage of mergers and acquisitions get done.
Chris,
All good questions! They had been answered by MMT.
1. The bond market under a fiat regime is a remnant of the gold standard. The Fed could control theo whole yield curve the same way it controls the interbank rate. It just chooses not to. Please follow the link I gave, you will be intrigued.
Yes, the govt could pay 0% in interest, simply stop issuing bonds. If you think it is hyperinflationary, you listened to people who don’t know accounting, look here: http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html “Printing” money is basically equivalent to bond issuance to banks, somehow this doesn’t cause hyperinflation.
You are right that too much spending would cause hyperinflation: you simply need to stop when you reach full employment. What is the problem?
Hyperinflation usually happens if 50% of the economy evaporates: is shipped as reparations (Weimar) or disappears (Zimbabwe): then yes, there is too much money.
2. Tax has a LOT with issuing money, or better said, with having it accepted. Everyone can issue money (debt), I can pay you for your house with my IOU, but you wound’t accept it, because you could not pay with it – other agents may refuse it. But what if they had obligation to pay taxes in this very currency? They would happily accept you payment with my IOU. This is how worthless paper or electronic markers can become money.
I think we should try to leave ideology aside, you guys hate the govt, and you are right that it is inefficient and such, but MMT does describe meticulously the workings and accounting of the system that is in place. One can reject all their ideology and still accept the desription of system mechanics. Regards.
Is that Chartalism or is Charlatanism? I have a hard time distinquishing between them. They are soo much alike.
“Hyperinflation usually happens if 50% of the economy evaporates: is shipped as reparations (Weimar) or disappears (Zimbabwe): then yes, there is too much money.”
This is utter nonsense. Hyperinflation didn’t happen in Weimar until well after Germany was utterly destroyed. It was their attempt to print money to pay reparations, not the paying of reparations themselves. They only recently paid off the reparations for WW1 and yet there was no new hyperinflation after WW2 when their country was wrecked yet again.
“the private sector is the source of all real assets, and the govt is the source of net financial assets.”
That is not operational reality. That is a totalitarian currency regime under which everyone acts with perfect rationality according to the central bank.
What, pray tell, is a “net financial asset”?
I can see no other definition than “govt issued bills of credit” – which must be backed by taxation (a net drain from the private sector) or by real resource productivity (best handled by market actors, not govts).
Govts are not magic; they cannot create anything of value qua govt.
“When the govt issues money to the private sector, it does not diminish in any way its ability to issue more.”
I call shenanigans on this statement. First, we’re assuming that fiat money is nothing but a ticket system by which our great central planners can track our economic interactions, but more importantly: the govt is definitely limited in the amount of (token) money it can issue. Think of the regression theorem: that which has value today does so in part because it was salable in the past. If the govt were to even CLAIM that it could issue tokens ad infinitum, then consumer expectations would immediately begin to discount the future saleability of govt money, and would refrain from using it.
MMTs don’t have answers for anything, they just fall back to “the govt can print wealth” as their founding refrain.
If you could understand that a net financial asset is simply a means of storing excess value, it would probably be clearer to you. Because in human exchange, value is expressed as obligations, it becomes obvious that there is a need to denominate obligations — to keep score. The government does no more and no less than provide a universally accepted means of denominating those obligations.
No one can “refrain” from using government money because the government demands taxes in its own money. If you do not pay taxes, you will go to jail. You can complain all you like that the government empowers itself in this way, but it’s a fact that it does. It does so precisely so that it can pursue the public purpose. You may argue that the government should not pursue the good of the public but this is a political choice, not an economic one. I think that most of the commenters on this thread are confusing their political convictions for economic ones (those who are not simply confused altogether).
“means of storing excess value”
(1) there is never “excess value”, there are only real physical goods that are low on an individual’s demand scale, and thus they’d rather lend them out them use them themselves.
(2) How the OTHER MMTers have defined “net financial asset” has been “an output from the private sector to the government”. There is no reason to introduce an actor that is like a deus ex machina, in that it is somehow distinct and separate from the “private” economy.
(3) Yes, if the concept were understandable, it would probably be clear to me. You seem to admit that MMT makes no sense.
“Because in human exchange, value is expressed as obligations, it becomes obvious that there is a need to denominate obligations — to keep score.”
And there are any number of freely chosen “monies” that have developed prior to the development of centralized govt. Govt stole the role as “universal issuer” ONLY to be able to earn revenue in a clandestine and low-resistance manner.
(1) You can choose to not pay taxes, and you can avoid jail (possible, but not likely). Govt is not god, it does not demand total obedience, nor does it have the economic ability to actually enforce such notions.
(2) How does a govt “empower itself”? It points guns around, and relies on people to spread the fear. People and violence empower the govt.
(3) Whether the govt should seek the “public purpose” is indeed an economic question: an analysis of the institutions and human nature of the roles in the institution shows the ECONOMIC INEFFICIENCY of central planning. If you care about a “public welfare”, however defined, voluntary transactions ALWAYS present a better result than taxing and spending.
Robert Murphy wrote:
“My point is that the national-income accounting tautologies aren’t a good critique of the tea party after all. [...]
The MMT worldview is intriguing,”
I find the first statement without meaning and the second statement true. In my opinion, MMT theorists approach very well the scientific ideal of not mixing theories about facts with ethical choices of values. They are quite careful to say: this is our theory to DEScribe things. And this is what we PREScribe as political action given our theory and and our ethical choices.
MMT attempts to describe economic events. It cannot be used to make a good critique of anything, a political program in particular, without assuming also ethical choices.
Let one take the case of full employment, which is a relevant example as all the MMT theorists I know value it as good and advocate it. Yet, no MMT proponent claims that full employment is other than a choice. Rather, they argue that if there is a social choice of full employment, MMT shows possible to get it with simultaneously putting a floor in salaries and a ceiling in prices in the actual economic context.
Surely, other people can accept and use MMT (say, to predict financial markets evolution) and have other valuations of full employment. Person X can value it as good (say, because it would prop up demand) and person Y as bad (say, because it would prop up salaries). There is no scientific or logical way to determine if full employment is good or bad on an objective basis, as there is no scientific or logical way to determine on an objective basis if it is good or bad to save or end a life. Science or logic can only say HOW to save or end a life not if the choice to do such things IS good or bad.
The reason is that science or logic cannot determine a valuation in the absence of a criterion. Let one assume a criterion C1 to determine if a given choice H has the value of good G or bad B. Given C1, science can possibly tell us if the value of H is G or B and in this sense justify the choice. But C1 was assumed without a scientific or logical analysis, so one asks: can C1 itself be scientifically justified as good or bad? No, because to do so one would need to posit a criterion C2 to found the valuation of C1. This gives rise to an infinite regress, that can only be broken if one steps in and assumes some ethical choice of criterion C0 to begin with.
In other words, an ethical choice is one that cannot be scientifically or logically determined. It is the full responsibility of the one who chooses to assume the choice without refuge in considerations of truth or falsity.
Of course in using any tool, scientific, logic or other, one cannot escape to make ethical choices. But MMT proponents are in fact special in my knowledge of economic thinking. By clearly separating the scientific HOW of description from the ethical OUGHT of prescription they inherently require that people assume the responsibility of their valuations of good or bad and of their consequent choices in the social realm. Which is indeed quite intriguing, as it is a very libertarian attitude, after all.
Murphy Logic:
1. MMT uses accounting identities
2. These accounting identities are consistent with possibilities that are not part of MMT (e.g. Google running deficits with the non-Google sector, crowding out investment by government)
Therefore:
3. MMT is irrelevant.
The accounting identities are necessary, but not sufficient, for understanding the monetary system.
Thus, the fact that the government creates money and Google does not actually makes a difference according to MMT…
So if the government is unable to prevent anyone from creating money, MMT is irrelevant? How many people does it take to undermine the currency regime for MMT to be irrelevant? How is the state going to prevent this peaceful human action..er, I mean this dastardly economic terrorism?
You can always send your coconuts to the IRS and start the coconut revolution on facebook.
Please post some pictures!
Sarcasm aside, that is precisely the point. You can issue money all you want, you won’t get it accepted. State’s worthless paper is accepted (stolen! fought for!), why? Because we need to pay taxes with it. When a state has a problem levying taxes the value of money usually plummets (The Confederacy).
Yeah, it had nothing at all to do with the Confederacy printing too much, it had everything to do with it not being able to tax it enough…
Yes it was.
How do you explain that US dollar didn’t plummet after all the “money printing” by Bernanke? Lots of people are misinformed and they genuinely fear hyperinflation, yet no hyperinflation. Why, oh why?
and you explain why it plummeted in zimbabwe? not enough faith in the fiat of mugabe?
@ pravin
Here’s your explanation courtesy of Prof. Bill Mtchell at billy blog
Zimbabwe for hyperventilators 101
Printing money does not cause inflation
OK Peter. I looked at the link and I have some “quibbles”. First of all. As someone who has worked in a bank and in corporate finance I can tell you that reserves are not assets, they are liabilities because the bank has to hand them over or default as reserves are unlent deposits. Secondly, hyperinflation cannot be disregarded simply by looking at the point at which the treasury or the Fed increases deposits as the hyperinflation occurs after that as the money gets lent out again and again and again degrading from there each time the multiples of new money exceed the demand(i.e. “Cantillon effect”). The third problem I have is that I don’t see how you can reconcile the act of printing more money with the sale of bonds. If you are talking about open market operations then the market sets the price. If you are talking about simply printing money then this is like issuing stock and this means that people will be diluted unevenly. Not issuing any debt would also require that government sell assets in order to decrease the supply of money. Not only would this not be an effective means of lowering the supply of money, but what assets would the government buy to replenish its supply. If you believe that simply taxing financial assets to set the money supply by, say, a levy against bank deposits or loans that might work once. However, this would cause a massive flight of capital from the jurisdiction in which it was enacted and would become severely regressive in nature as those people and companies with the means to do so would simply deposit and borrow offshore and wire in the funds. My fourth issue is that taxes are not an effective means of implementing a currency. Most people would be happy to pay their taxes in some government currency and have normal transactions conducted in a private currency that held its value better. The problem is that no one would voluntarily accept the government currency as payment because its value would be highly volatile depending on whether it was tax time or not, and the government would have no way of recirculating it in the economy except to pay taxes. Given that taxes are around 20% or so of GDP and GDP is a value-added measure that seriously undercounts the total amount of money transacted in the economy I don’t see any possible link.
It’s easy enough to explain this by observing the huge non-lending of banks, and those sticky reserves.
But I know what you are thinking, you can always print a ton of money as long as you also tax just as much. The only thing you don’t know is whether you are taxing the right people or not. Of course MMT theorists imagine that the planners can know absolutely everything. So when all that money is added to the economy they know exactly when it’s enough because they know the precise rate of “natural unemployment” in any economy… as if they are all the same.
There is so much presumption on the part of MMT it’s insane to think anyone takes it seriously.
I don’t need to pay taxes with anything.
Did Massachusetts Bay Colony have a problem levying taxes before its currency collapsed? Wiemar Germany? Zimbabwe? Argentina? No. Their money-substitute currencies collapsed because of over-leveraging. Taxes are one (immoral) way to keep the revenue stream up, but Mass. Bay Co. was counting on the OTHER way to keep revenues up: pillaging. They failed to bring home any loot from the fur trade attacks, and couldn’t keep their bills of credit promises to their soldiers.
You’re really saying that “lunch money doesn’t have any value until bullies demand it from victims.”
Again, you are confusing politics with economics.
It is a fact that you must pay your taxes in dollars. If you do not, the bullies will put you in jail. They do not accept coconuts (or furs or anything but their own money). This is simply a fact about how money works. It is not a statement of how things MUST be or a prescription for the economy. It is a description of how things are in a fiat-money economy.
No one is suggesting that hyperinflation was an outcome of inability to tax. I’m not sure why you think they are. The point is pretty simple. You could issue your own notes tomorrow, but your local shopkeepers would not take them. The reason they would not is because they are only good for spending with you. Government money they would accept because, ultimately, they must pay their taxes in the government’s money.
Robert Murphy
Robert Murphy – Thanks for the good post.
A couple of points that MMT espousers seem not to be able to field.
There is a real problem with equating identities and using that to argue anything at all as they are accounting identities. It’s like arguing that A=L+E means something significant economically. Thus to increase my assets I “must” take on more liabilities or increase equity, when in fact the relationship is IF my assets increase, THEN I can conclude my liabilities or my equity has changed as a RESULT but not necessarily a cause of a change in equity or liabilities. I cannot say that one or the other “must” happen for assets to rise because I can’t even tell the direction of causation, or if indeed there is any direction at all. Assets may have risen by some other cause completely outside of the “equation” (which is why there is such a false sense of reality in equation-based economics. That equals sign doesn’t mean what the proponents think it means). In reality the equality A=L+E means nothing in terms of economic action: it is a tautology with no latent information the same as the sectoral balances.
In regards to “savings” (using the redefined MMT view), the private sector can save w/o the government running a deficit when the price of products adjust downward. Somehow the error of confusing nominal with real has been made again …
If everyone saves at the same time, prices fall until everyone is holding the real purchasing power they want. While this is considered “horrible” by modern finance, that’s only because the elite has been hell-bent on replacing every dollar with highly leveraged debt, and if there’s one thing that would knock out the elite, it is deflation (their assets decline faster than their liabilities, while in inflation, since they get the new money first, they can trade their trash assets at par, invest in gold, and push through while their liabilities vanish).
That’s one thing that annoys me. I’m an accountant and people constantly confuse what the A=L+E even means. All that means is of all my assets in my posession, here is who actually owns it. It just keeps track of who I owe (liabilities) and why (assets). The remainder (equity) belongs to the stakeholders, be it a single owner, partnership, or corporate entity with shareholders.
It’s not really a tautology, it has useful information, but the information is incredibly limited in use. I can get an idea of how many assets are on the books, what kind of broad categories of assets, and how those assets were accumulated. The changes in those assets from period to period have meaning as well, but the more imporant information is the statement of cash flows, and that isn’t a simple one stop shop formula. Trying to operate a business around A=L+E is insanity.
Trying to operate a business around A=L+E is insanity.
Actually trying to operate one without A=L+E is insanity.
Trying to operate one just with it is dumb, especially if you don’t even understand what it means.
Well, I agree with you about that.
This thread is a great example of people talking past each other… that being said it has definitely helped me understand the key difference between Austrian economics and more conventional schools of macro (including MMT).
Austrians are concerned with the effects of monetary policy on the actual material wellbeing of the people in a economy; the consumption/creation of capital goods, increase/decrease of available consumer goods, creation/destruction of real wealth.
By contrast it seems that most macro-focused economists have forgotten about the real world in favor of a more easily manipulated fantasy world of indexes and numbers that may or may not be related to the real world. Ralph above said (in defense of MMT) that the saving of financial assets that MMT addresses is “entirely unrelated” to the saving (or investing) of real goods… and I must say that I agree.
What MMT theorists seem to ignore is that government deficits and money printing, even where they don’t lead to hyperinflation, distort prices and make economic calculation mush more difficult for everyone. This leads to bubbles and this leads to recessions… but understanding the connection requires a step back from indexes and aggregates and a look at what is happening to real capital and real goods. Their prescription for recession is more of the intervention causes recessions.
We should rightly fear anyone who believes that they are knowledgeable and wise enough to make financial decisions on behalf of hundreds of millions of people without their consent… the fatal conceit of central planners everywhere.
Anthony,
Great comment, thanks!
THE ECONOMIC ADVANTAGE OF A MONEY THAT FLUCTUATES IN BOTH QUANTITY AND QUALITY.
Serious economists agree any quantity of money, q, is sufficient for all the transactions since the money is not used up. Like a catalyst in a chemical reaction, money functions to place the participants in the transaction “closer together” and allows the transaction to be completed. Any positive multiple of q can serve as well the catalytic function of money. See sci-note below.
Altering the quantity of money for the purpose of adjusting the economic activity of a society presupposes that knowledge about what level of activity is best for that society actually exists and that a rational goal can be set. The evidence presented by the plethora of differing opinions is sufficient to render that assumption invalid. Any goal actually implemented must therefore be imposed against the will of those holding variant opinions. For that reason alone purposeful manipulation of the money supply must not be done.
Any alteration will cause a disruptive effect in the valuation of money and although that may well serve a small segment of society, any universal benefit that it may create would be accidental.
The establishment of money, and by implication the control over its quantity, is claimed by the gov’nor. By homesteading his claim, creating all the necessary paperwork to prove that his ownership claim is valid, and having the power to defend it against all interlopers, he has successfully set up the paradigm of the state’s monopoly control over money and its right to prevent competition from others. No other form of money is permitted. It does not matter whether the gov’nor is “king” by self proclamation or by election, he is still the embodiment of the state and he has the power to create and destroy the money that he, by law, owns (even though you may be in possession of, and using, a bit of it).
The fact that he can do so with “his” money is the same as it is for Crusoe alone on his island. Crusoe can create as much money as he desires, just like the gov’. The only difference is that what Crusoe gains when he creates more money, he loses exactly the same because he is both parts — the winning part and the losing part. For Crusoe that activity is senseless. It is not so for the gov’nor. He keeps the value gained from money creation and passes the compensating losses to his lessers.
When money is expressed only as commodities or precious metals there is a limit to the amount the gov’nor may gain at his subjects expense, and if he goes beyond that limit he may lose his head.
Thankfully, the Modern Monetary Theory proponents have proven beyond any doubt the reality of the virtuality of money. For them money has morphed into ViRNs, Virtual Reserve Notes, that are completely disconnected to anything real. I say, “Thankfully” because that piece of information, the virtual nature of money, must be discovered and announced to achieve its public acceptance, and they are doing so at great cost to their collective reputation. I fear that there will be no one willing to admit membership in that group in the future so I will say, “thank you” to them now.
The Modern Money Theorists’ advocacy for the process whereby the gov’nor can create money and citizens lose their wealth marks them as friends of the state, not anarchists. Simply observing and announcing the truth, that money is virtual, would have been by far preferable, but alas, that is not to be. They rather obfuscate the matter by arguing that the gov’nor’s debts are the people’s savings when actually the gov’nor need never borrow money and not create any debt at all. And then they argue in favor of the goddamn taxes. They argue that taxes are needed to destroy some of the money supply to provide some balance for the newly created money. That’s just plain dastardly. The taxes only crudely redistribute the loss such that some people feel less bad about being victimized by the gov’nor while others are made to feel worse. Tax is completely unnecessary because the very act of money creation by the gov’nor simultaneously distributes the entire loss over the entire populace in direct proportion to the amount of money each person holds. It is automatic, instantaneous and perfect just as it is, and it needs no taxatious meddling.
In defense of the discredited MMTists failure to explain why taxes are never needed, I offer the excuse that their other choice is to explain to the public that the ViRNs will become sci-notes, and be printed in denominations, 1′s, 2′s, 3′s, 4′s, etc., and also 0′s, -1′s and -2′s, and that those numbers are actually the powers of ten that they represent. By using these sci-note numbers on the ViRNs they will never, in the life of the universe, exceed three digits in length and nobody will have to resort to an archaic wheelbarrow to carry them. Try explaining to your bartender that the five 0′s and the two -1′s and the five -2′s you offer him equate to 5 dollars and 25 cents and see what happens to your beer. When the smallest denomination of the ViRN is the 1, the project becomes easier.
What Austrian Economists are steamed about is not actually that there is a different amount of money because they understand that any amount is just fine. It is the method used to bring about the quantity change that impoverishes the populace while enriching the gov’nor and his pals to which they object. Rejecting all manipulation of the money supply is but a shorthand notation used to mean that while an anarchic method to control the supply of money might be acceptable, and since there is no anarchic method allowed by the state, all are to be rejected. Mining gold could be an anarchic method for the creation of money because it can be done by anyone, even if by proxy, but gold is not allowed to be money.
In the presence of a constant money supply the relative value of money will change to reflect reality when the quantity of products offered in the market changes as shown in the following.
When disaster strikes and production drops fewer products are available, and because the amount of money remains the same, the prices are likely to be bid higher. This signals to the buyer that he needs more money now than he did before to purchase any replacement products. The quality of money is now lower. This signal means that more work must be done, and no surprise, that is the natural effect of a disaster, not that we need to print more money.
Alternatively, when there are productivity increases and more product is available, the prices will be bid down simply because there has been no increase in the quantity of money with which to bid. The quality of money is now higher. This signal means that additional work effort is not required to maintain the current status. This “go slow” signal is every bit as important as the “speed up” signal and both are natural phenomena. Constantly signaling speed up without the occasional slow down signal leads to the burnout of society, decline of civilization, and perhaps to the premature destruction of our natural environment.
The gov’nor’s constant spending sends continuously the “speed up” signal, never a “go slow” signal. The bias toward inflation and the lowering of the quality of the dollar by increasing the quantity of money mangles the slow down signal into one that says speed up. In other words, we are being directed by distorted economic signaling to increase our efforts to produce more than is optimum, all the time.
The way for the economy to emit an actual slow down signal requires the gov’nor to refrain from creating more money. But he will create more money as long as he gets positive feedback himself and none of the negative effects his subjects enjoy. Positive feedback systems tend to be unstable and destructive.
Consider that these signals are automatically generated by natural fluctuations occurring in the quality of money over the entire economy or over large regions. These signals are more valuable than Keynes’ aggregate demand in that they propel one toward the appropriate action, either work more or work less, they are an aggregate of the whole economy while the real economic activity is, as always, in the micro scale.
~~~
And that segues from quality fluctuations to quantity fluctuations. Quantity fluctuations are possible, as we all know, by creating new money or by destroying existing money. The gov’nor never destroys any, does he? And when it comes to thinking about the process our thoughts stop at the waters edge. Thinking that there is any possible money creation by anyone other than the state delivers a painful shock to our brain that paralyzes any further thought about it. The idea that millions of individuals autonomously creating money would render it useless is the prime example of thought paralysis.
Missing is a mechanism to perform three functions:
(1) to signal an economic disruption at the micro scale
(2) to offer corrective advice (increase or decrease work)
(3) to provide immediate relief aid to regions and individuals that are hit with an adversity
A new paradigm for the creation of money that is consistent with the principles of anarchy is required. I propose this paradigm can lead to the development of such a mechanism.
This post is way too long to continue, so I will stop now.
Please read Warren Mosler’s The Seven Deadly Innocent Frauds of Money Policy. Also check out MMT Wiki for explanation and other references.
Oops that should be The Seven Deadly Innocent Frauds of Economic Policy.
The Mosler books explains that the neat and hip genesis of MMT was the vicious Hut Tax on poor subjugated Africans.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/#comment-778555
Don’t forget about their commie godfather, Abba Lerner:
http://blog.mises.org/16854/the-upside-down-world-of-mmt/#comment-778786
1. I don’t see any endorsement of the hut tax in the work of Mosler or other MMT theorists. I don’t see any recommendation that we should have fiat money or any discussion of its desirability. MMT simply describes what we have. You can’t really object to it by saying “we shouldn’t have fiat money” because the simple answer is “well okay but we do”.
2. It’s a sad truth that this is akin to suggesting that one should not think the sky is blue because Rabbi Lerner was a communist and he said the sky was blue. The fact is, the sky is blue. You may wear redtinted glasses if you choose, but the sky remains blue all the same.
Tom,
Since you asked nicely, I did read some of Warren Mosler’s own words to which you directed me. Or at least I started to but since it didn’t add anything to my understanding I figured watching a re-run of Gomer Pyle would be a better use of my time.
If you think my paraphrasing of MMT is indicative of my misunderstanding, by all means please supply your own paraphrase for me to consider. There are many perspectives from which to view the universe. I see virtual money through a very different prism than do the MMTists.
Don, MMT describes the present nonconvertible floating rate monetary system in general and specifically as modified by voluntary political restraints. If you think that MMT is in error in the description, please show how.
MMT also provides some policy options under the present system to achieve full employment along with price stability. MMT also recommends removing the political restraints from the system in order to allow it function at its full potential in achieving full employment with price stability.
MMT advocates a nonconvertible floating rate exchange because that is a necessary condition for monetary sovereignty. Monetary sovereignty gives a democratic society greater control over their destiny than giving up monetary sovereignty by adopting convertibility or a fixed rate, taking on debt denominated in a foreign currency, or using a foreign currency. The cost of transitioning to a fixed rate system is losing monetary sovereignty.
What is that cost? Understanding sectoral balances reveals that the government fiscal balance, the domestic private sector balance and the external balance sum to zero. Without monetary sovereignty, a government does not have the tools to ensure that this balance is maintained at the level of full employment and price stability.
Tom,
What color is the statist lens through which you view the world?
I truly would like to discuss the benefits of virtual money with you but I am afraid that we will not make that connection happen.
Perhaps a more productive venue would be to inquire to what ultimate purpose is MMT to be put, what progress points are to be expected and what metric is to be used to determine if the theory is correct or not?
If “full employment” and “price stability” are part of the plan, I think you can rightly conclude from my post that I do not believe those objectives are anything to shoot for.
Fluctuating prices are not stable prices yet they serve a useful purpose and they will do it for free with no planning whatsoever.
“Full employment” is what the master desires for his slaves. For myself, I prefer rather less than a full workload. But perhaps you yourself feel compelled to do work to your capacity. If so, I thank you for your contribution.
Could you even conceivably be more obtuse? Full employment means simply that everyone who wishes to be occupied is occupied. If you don’t want to be occupied, nothing in MMT suggests that you should be. A discussion of the desirability of price stability is, I’m afraid, beyond your scope.
As Zen pointed out, full employment is in the sense that anyone could work as much as they want, not less. That means avoiding involuntary unemployment. What’s so terrible about it?
As I’ve said before, all that these MMT guys have is the most primitive and dim-witted version of aggregate demand management which was eviscerated by Mises before Keynes gave birth to the “general theory”. They’ve just added on to it their miraculous discovery of the abolition of the law of scarcity. And they are oblivious to even basic Austrian School concepts.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-779092
Donald Rowe, you are basically an ideologue. Tom Hickey is talking operational reality and math of sectoral balances and you retort with “why don’t you love Jesus?”.
There is a much better debate on this on pragcap: http://pragcap.com/final-thoughts-on-the-austrian-school Lance Paddock as an Austrian who acknowledges that you cannot get much out of Mises.org.
On the ending note: here you have an Austrian (Vijay Boyapati) who understands the fiat moneatry system they way MMT does:
http://libertarianpapers.org/articles/2010/lp-2-43.pdf
This Austrian uses MMT to understand the banking system, he acknowledges that ideology divides Autrians and MMT-ers, but they can agree on operational stuff:
http://www.creditwritedowns.com/2011/05/on-ideology-economics-and-the-compatibility-of-chartalists-and-austrians.html#utm_source=feedblitz&utm_medium=FeedBlitzRss&utm_campaign=creditwritedowns
Dr Zen, ManMoTh and Peter,
My objective is not to explore yet another perspective on the monarchic creation of money that is MMT. It is the virtual nature of money and discovering an anarchic way that it can be produced and regulated that interests me.
MMT advocates are instrumental in exposing the virtuality of money, and that is my only purpose for mentioning them, and not to condemn them for holding a different opinion than do I.
I am, after all, an anarchist. You are as unlikely to convert me, as I am sure I am unlikely to convert you.
Philosophically, discovering how the world works is one thing, discovering how humans have structured their society is very different. One must be, while the other is but one variant of human endeavor. I prefer to explore how humans may, by choice, plan and structure their society for the benefit of all, and without the need for a central power structure.
Cordially,
Don
Don, I am an anarchist myself although I recognize that anarchy is only possible in an environment of enlightened individuals voluntarily cooperating for mutual benefit. Modern nations are nowhere near that stage and probably will never be in the from that they now exist. However, it is possible now to live in anarchist social groups that operate underground within the larger framework of the contemporary nation state with relative success.
Circuit overload in progress.
Shedding load.
Killing processes.
Unable to compute.
Unable to proceed.
Anarchy and MMT are completely incompatible.
Cannot reconcile.
Shutting down to preserve life functions.
Signing off.
DR. all one needs to do is to recognize what country one is living in, what its rules are, how to deal with them most effectively, while also living in the community of one’s choice, whose rules are more compatible with one’s preferences, or else create that community, or emigrate, of join with others in changing the politically system of the US.
I faced these choices in the ’60′s, thought of emigrating but decided to stay and participate in communities whose rules I found compatible, while also working toward making the wider society a better place. There are all sorts of options available in the global context. It’s all about what you want and are able to create for yourself. That’s the challenge of living creatively, or, “living dangerously,” in Nietzsche’s words.
Sorry Tom, that it has taken me so long to reply. Life intervenes sometimes.
You say that you are only “telling it like it is,” with MMT. In fact, you are doing that, but there is more to the story as there always is. Do you actually think that the Austrian economists are not understanding “how it actually is” in the current economy and how clearing works? I think not.
You are doing much more than explaining MMT, as this snippet shows. “MMT advocates a nonconvertible floating rate exchange . . .”
MMT does not describe gravity or electro-magnetics. It is a description of a human system that humans have created. And that system can fail and be replaced by another. Gravity cannot fail and be replaced.
You, and the other MMTists, are attempting to advocate for money production by the state, in as subtle a fashion as possible, while preserving deniability. In your case you have claimed to be an anarchist. I do not believe that you do not know what anarchy actually is. Advocating for the state is certainly not anarchy. Advocating for anarchy “someday” is not advocating for anarchy at all.
As an anarchist, I accept your right to hold an opinion that differs from mine.
Perhaps you do not understand the depth of your own deceptiveness. Understanding modern money theory as well as you do, you are called upon, as are we all, to take a decisive stand, either you are in favor that it is the best way or you are against it and in favor of a better alternative.
If Murray Rothbard agreed to paint my house for 5,000 dollars, and upon completion I present to him 50 crisp C notes from the pallet in my basement, he would denounce me as a thief and a charlatan on the spot. He could spend them just like any others and some would say that he was neither cheated nor harmed. But he would understand that he had to work for them but I did not and by that alone I am a scoundrel. If I were the gov’nor, this would just be MMT at work and I would not be a scoundrel at all, even when I tax some of that money away and destroy it.
I imagine a man working in a government office building who is intelligent enough to understand “how it is.” His paycheck comes from the spending of the gov’nor every two weeks. He depends on that money to feed and shelter his family and he thinks he cannot walk away from it. This man attempts to equalize the injustice by pretending to work. That way his money is more like that of the gov’nor. He adamantly denies that he is committing any crime, because it is not against the law, it’s just the “way it is.” In perilous times, when that system comes under relentless attack and may possibly fail and fall, he will advocate its wondrousness to the whole world in an heroic attempt to maintain his current status, without the need for any obvious outside motivation.
I am not describing you in particular, nor any other person, rather a “strawman.”
I have been unable to reconcile advocacy for both MMT and anarchy in any other way.
Cordially,
Don
Thanks for the rant, DR.
Resp,
tom
But we get our economic calculations right Bob.
We’ve been long on coconuts way before Murphy suggested it!
Edward Harrison of Credit Writedowns weighs in at his place:
More on the Upside-Down World of MMT
Another interesting thought I just came up with while wearing the physics hat that basically makes MMT completely unworkable:
If I purchased gold, for instance, instead of holding cash, I’m still saving and the person who sold me the gold can hold onto the cash. We’re both saving and neither one of us is in a deficit. Savings is not measured in how many pieces of currency scrip we’re holding onto, but how many resources we’re retaining for some expected future use. Only if you arbitrarily deign money as the means of saving is there any kind of “deficit”. One can never create “net savings” because the underlying resources that money is being traded against can neither be created nor destroyed, only changed in form. This is basically the Law of Conservation of Mass. Economics isn’t immune to the physical sciences, no matter how badly the economist wants his model to work. Reality doesn’t bend to our will, we bend to its will.
Government doesn’t provide savings nor does government debt create net savings even as defined by MMT. If giving up money to another person creates a net deficit and holding onto the money creates a net asset, then buying a Treasury creates a net deficit on the one who purchases it, not on the government. In other words, the only way to expect government to provide this mythical net asset is if we arbitrarily exclude a Treasury bond from the investment end of the equation G-T=S-I. Only via this arbitrary massaging of definitions can that equation even work. All government debt has the same features as any other debt sold by private companies or individuals. Government debt is selling a promise of par value plus interest on that par value. This is no different than a bond or a mortgage. Since government tends to immediately spend whatever it takes in, there is no saving going on at all. What happens is that the purchaser of the Treasury instrument is now either going into a net deficit or placing the full amount into investments, depending on how you want to arbitrarily designate a Treasury note, and transferring the net cash to some other actor in the economy, typically without any expectation that it is returned at all, making that person a “net saver”.
You can call this movement a net savings because one individual is engaging in investing and another is now considered saving via government entering into debt. However, government is completely unnecessary to do this because any other actor borrowing money will create this feature. There is an investor providing money (I) a borrower selling a bill (D-T), and the recipient as the net saver (S). Since the borrowing party isn’t going into a deficit at all because the amount of cash he has from before and after the transaction remains unchanged, unless deficits are conveniently redefined in this situation only, then we just “net saved” by converting assets into an investment via an intermediary and transferred them into savings.
Even if we take the formula at face value, shifting currency through a Treasury makes little sense in creating this mythical “net savings”. Mainly because it assumes government somehow exists outside the laws of the universe (Law of Conservation of Mass noted above) and is literally capable of creating something out of that which previously was a vacuum. However, since government doesn’t exist in its own dimensional paradigm, there is nothing being saved on net because government MUST obtain all resources from the private sector to operate. As such, the private individuals and organizations of the nation in whole “collectively” own all the assets and liabilities of the government. There is no such independent entity called government, it’s merely an imaginary device that is utilized to funnel money around based on political decision. It creates nothing of its own to be able to be classified as such, it merely confiscates (even if it confiscates land and labor to operate a factory). As such, any Treasury bill doesn’t create anything on net because the deficit is now obligated on the taxpaying population to repay at some point in the future. All that’s being done is the creation of a promise that money at some point in the future will be shifted around in the economic system to repay whoever is currently holding the Treasury note. No resources were created in this arrangement as the same amount of resources that existed prior to the deficit spending exist afterward. The only thing “created” was the expectation that those existing resources will be utilized to repay the debt, merely shifted and moved into different avenues than had that debt not existed. The recipient of the borrowed money owns a portion of it back to the lender, the lender of the borrowed money owes a portion of it to himself, and everyone else living in the country outside the transaction also takes up a portion of the deficit. Collectively bundling up the liability and giving it to a steward called government doesn’t wash the hands of everyone of the deficit nor does it create anything called savings.
MMT is nothing more than an exercise in using words with positive associations to justify government debt. If you sit back and understand what is going on, nothing is really being created or saved, apart from a sense of feel-good by certain parties who actually buy into MMT. The only thing that can be created by any transaction is the subjective and intangible “value” attribute. The materials and their objective uses always remain constant, it’s that the user is ever reaching a more and more optimal mix of those available uses under his control is where any real value is created.
There can be no “net savings” because there is a fixed volume of matter in the universe.
You realize, of course, that this is an imaginary universe you are describing, while MMT is describing the existing US and global monetary system. Should the US and global monetary system change, then MMT will describe that.
There isn’t a choice between living in this system or that while one is living in the US, or any other country should one choose to emigrate. One has to live according to the rules of the system and it behooves economist to understand the operational reality of that system.
All this talk about coconuts and gold has nothing to do with the present monetary system in which government is the monopoly provider of nonconvertible floating rate currency of issues and everyone who is a currency user in that system must obtain that currency to satisfy liabilities to the government, like taxes, fees, and fines, because government payment offices only accept government liabilities. There is the real world and there are fantasy worlds.
Answer the following questions:
- What exactly are these “savings” made up of?
- What makes these “savings” valuable?
- What are these “savings” used for?
- Who accepts whatever the savings are made up of for payment of services should the savings need to be dipped into “for a rainy day”?
- Who owns these “net savings”?
- Why is it important that these “savings” increase indefinitely?
- Why is it bad that the “savings” are used, and thus reduced “in net”?
- By what mechanism are these “savings” actually used?
- Is there a causal-relationship between the well being of a people and the volume of these “savings”, whether it is based in absolute terms, in terms of local currency, or in per-capita ratios? If so, show me the data ranking every nation on Earth in an unambiguous, no exceptions, list that shows that higher “net savings” equals greater quality of life with Haiti, Zimbabwe, The Sudan, and North Korea somewhere at the very bottom of the list of both national debt and quality of life since those nations are unquestionably the worst places to live in the world.
- Why is it necessary to create an involuntary national policy that everyone must live under to engage in this “net savings” growth?
- What makes it necessary to even engage in the current monetary system at all to go through these tortured explanations?
The reason what I explained seems imaginary to you is because it is imaginary. Mainstream economics is, unfortunately, wholly divorced from the basic laws of the universe. No matter how much money you print, no matter how much “net savings” you engage in, you’ll never turn 1 ton of iron atoms into 2 tons of iron atoms. You can smelt it, alloy it, expose it to oxygen to rust, turn it into buildings, or toys, or cars, or scrap, or chairs, or rub newly printed Dollars against it, or lecture it on the importance of “net savings” for days on end, but you’ll never get that 1 ton of iron atoms to turn into 2 tons of iron atoms. We all have to find a way to allocate that 1 ton of iron atoms to whatever the best use of it may be, and waving freshly minted cash at it and complex algorithms based on that freshly minted cash won’t help in the slightest.
There is nothing modern about modern monetary “theory” (it’s even charitable to call it a theory, theories usually require testing and data to back up what they’re saying). It’s modern day alchemy, but instead of using acid compounds to turn lead into gold, it believes that it can turn money into products and services. It is the most basic and childish explanation there is – a child sees Mommy give the teller money and then Mommy gives a toy to the child, thus the child assumes that money created the toy. Lord Keynes was a child. Whoever conjured up MMT is a child. Money doesn’t create anything.
Money and debt, sorry, “net savings”, are commodities like any other, and all that creating more of it will do is assure that it can be traded for less. That’s all there is to it.
Hey, where are those MMT guys with the answers to these basic questions? I’m turning purple holding by breath.
You guys are so far from the reality of how modern monetary economies actually work it is not worth the time arguing with you. You describe things as you would like them to be in an imaginary system that you hope will come to pass. MMT describes things are they are in the present system. As soon as someone tells you how things are, you launch to nonsense about bartering coconuts.
They just choose to be happy confusing real with nominal all the time. You say the private sector cannot increase its holding of money w/o the govt injecting exactly the needed amount, they respond that you hate freedom, or that the private sector produces all the real goods, which is true, but irrelevant, since we are talking about money. But hey, who cares.
No. We Austrians are reality-based. These are just basic questions that you guys cannot answer.
And you MMTers believe you have abolished the law of scarcity, which is a problem when you are trying to concoct reality-based explanations. So you don’t.
again you are confusing real with nominal. There is no scarcity of dollars (for the govt), there is scarcity of coconuts. You may not like it, but this is how it is.
But I agree that Austrians are reality based, in the sense that you can only describe a purely real economy, without money. There is no way you can describe credit-money economy on coconut examples.
It’s not describing anything, it’s taking an active policy stance that more of this “net savings”, which is nothing more than government debt redefined, is important. It’s saying that, without government debt, we wouldn’t have “net savings”. Play around with the numbers to “prove” that “net savings” is created via government debt, but that never tells me that “net savings” is desirable to have in the first place. You’ve failed to tell me exactly what we’re saving and for what purpose. Building savings today without depleting them in the future is a meaningless exercise. Since this “net savings” account is nothing more than public debt, it can’t be dipped into and used for anything. Outstanding public debt can’t be used to buy potatoes or used to construct a building, it’s a useless accounting trick. By that notion, whether we have “net savings” or not doesn’t make a difference in the function of an economic system, and the presence of it seems to be an overall detriment.
Savings implies withholding some valuable resource in reserve for a future use, either known or unknown. More savings isn’t necessarily a good thing and indefinitely increasing this savings account is counter-productive. Telling me to forever withhold a portion of my production into a savings pool that will only grow to the day of my death, handed off to my heirs for them to just indefinitely grow the pool until their death, ad infinitum, is ridiculous.
Taking on the responsibility of paying off a Treasury bond through taxation doesn’t generate any savings at all, it just creates a constant tax drain as my resources are confiscated to service that debt.
When we Austrians mention Cantillon Effects, economic calculation and the distortion of the price, investment and capital structure CAUSED by funny money dilution, you MMTers don’t even know the subject matter, much less how to respond.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-778558
Limiting the analysis from a monetary point view MMTers say nothing new.
Like Austrian, I completely disagree with MMTers, but just from an analytic point of view, setting aside the effective demand, the description of how a fiat-money system works can’t be object of criticism in its basic conclusions. I try to restate it in a more libertarian form because many Austrians here have a strong political bias and they can’t avoid thinking about gold and money as a medium of exchange chosen freely by society – when it is obvious that there are rulers and ruled.
Rougly speaking, in a closed economy where the State has the monopoly of both physical power and money production, if you consolidate Treasury and Central Bank balance sheet money and debt match. There is nothing wrong in this description. So, if you’re the Ruler, you can diluite the purchasing power of money running on defict. Obviously you can withdraw and reallocate real resources directly (infringing private property rights through tax and spend schemes) and indirectly (with a soft debasement issuing bonds – if you debase too much you’ll have hyperinflation). Banks and private sector can expand balance sheets creating credit and debit via fractional reserve banking. Who can employ the strenght to enact its decrees can also allocate real resources in an arbitrary way printing money.
Does it sound more familiar now ? I think so.
Austrian friends, if you attack this side of the description you miss the point. There are also a lot of powerful allies against MMTers proposals, why do you ignore them ?
– Is MMT microfounded ? No. What can MMTers say about microeconomic effects of their proposal ? Nothing more than post Keynesian.
– What about Pubic Choice Literature and Government Failures ?
– What about Constitutional Economics ?
– What about economic freedom and innovation ?
– What are the driver of real economic growth for MMTers, where the world “real” means more products, better products, new products, more possibilities to satisfy people’s wants (not only nice statistic datas) ? Can development for MMTers be planned and fixed like an engine ?
– Who is the sovreign for MMTers ? Consumers or producers ? Does “capital beget capital” for MMTers ?
Let’s start using Mises and Hayek in a more clever way and not as if they were goldbuggers ! Find allies in Schumpeter, Coase, Buchanan, Tullock, etc. and debunk the socialist side of many MMTers !
The reason the Austrian School and MMT talk past each other is because the former is a school of economics and the latter is a school of journalism.It’s all well and good that MMT can describe money flows in the economy. So can Matt Tabibi if you give him enough access. The name for that is journalism.But they do not understand economics or economic laws, which is why they respond “operation reality” over and over again when being asked hypotheticals. They are not interested in discovering economic law, only the flow of money.MMT is a very good school of journalism, but it is not a school of economics.
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