The Modern Monetary Realists have put up a new website to help disseminate a correct understanding of monetary operations to a wider audience. Regardless of any differences they may have with Modern Monetary Theorists, their main goal of educating the public is a worthy one. I do think, though, that their handling of a few points in an introductory post need some tweaking. I offer this in the spirit of helping to move the discussion forward. For brevity, my focus will be on points of difference, but this should not obscure the fact that there is much more in both Modern Monetary Realism and Modern Monetary Theory with which I agree than disagree. I will simply refer to the two groups as Realists and Theorists. I am not strictly in either group, but consider myself closest to the perspective of the Theorists.
Value of the Currency
The Realists state their key differences with the Theorists in their introductory post. Four points are highlighted. Their disagreement with the chartalist explanation of state money is touched on in point 2.
Viewed in terms of the Theorists’ definition of currency value, the Realists appear to mix up productivity or living standards on the one hand with value and viability of the currency on the other. It is true, as the Realists correctly stress, that real resources, including labor, are prior to taxation, and there would be no point taxing if the non-government did not already possess some resources. Even so, members of the non-government always possess at least some resources, even if only their own capacity to perform labor. The value of the currency, as defined by the Theorists, is the amount of labor time it takes to acquire a unit of the currency. Or, looked at from the reverse angle, it is the amount of labor time that can be commanded with a unit of the currency. Clearly, the level of productivity has no bearing on the amount of labor time that is commanded by a unit of the currency.
Certainly, productivity affects how much real stuff is produced with that commanded labor time – and is a key economic issue – but it is a concern that is separate from how much of the currency it takes for the government to transfer some labor services to the public domain, or, for that matter, how much of the currency it takes for private-sector employers to employ a certain amount of labor.
Pointing out, as the Realists correctly do, that there is a prior issue of government legitimacy backed by the people does not alter this point. If productivity languishes and real living standards decline, there is a likelihood that one set of politicians will be replaced by another set without there being a change in the currency in use. If the rot continues, despite changes in government administration, the legitimacy of the system itself might come into question. Even then any systemic change could conceivably occur (though not necessarily) without a change in the currency.
But the legitimacy of the state and viability of the currency are not necessarily affected by productivity. In principle, it would be possible for the value of the currency – which is a monetary measure – to remain, say, a dollar per minute of average labor time while productivity plummeted year after year. The government and private-sector employers would still be able to command one minute of average labor with every dollar outlaid, but the output made possible by this would be in decline. This would be a bad situation, but the problem would be the declining productivity, not the value of the currency.
Equally, productivity could increase strongly year after year while the legitimacy of the government, currency or system itself came into question. Mass unemployment, extreme inequality, civil unrest, incessant war or any number of other political factors could undermine the legitimacy of a government or system itself. Yet, in principle, a dollar might continue to command one minute of average labor time. As long as this were the case, the currency would remain operative as a means of commanding labor time.
In other words, it is not that productivity is unimportant. It is just that it is a separate consideration from value of the currency. Productivity relates to alterations in potential real living standards. Value of the currency is a monetary concept that relates to the difficulty in obtaining it. (For more on the above considerations, see the last two sections of this post.)
Now, it may be that the Realists would prefer to define the value of the currency differently than the Theorists. They may have a definition in mind other than the amount of labor time required to obtain it. This possibility may be implicit in past remarks they have made concerning their notion, yet to be elaborated, of Full Productivity. If this is the case, I think it would be beneficial, in moving the discussion forward, for the Realists to spell out their alternative definition of currency value and their reasons for it. Or, if this is not yet possible, it would be helpful at least to make explicit the alternative definition of currency value that they have in mind. This would help to clarify the points of disagreement.
The Supply Side
The Realists are concerned that the Theorists ignore supply-side issues relating to productive potential (point 4 of the introductory post). This may partially misconstrue the nature of the Theorists’ macroeconomic theory, which emphasizes output, employment and price stability while at the same time remaining compatible with other heterodox (e.g. Post Keynesian) explanations of technical progress, productivity and microeconomic issues.
There is widespread agreement across all schools of thought that there is ultimately a supply-side constraint on the economy. A key debate in macroeconomics is over whether there can be a long-run demand constraint that usually comes into play prior to the supply-side constraint being hit.
The neoclassical macroeconomic orthodoxy supposes that in the long run only the supply-side constraint is binding. This view depends implicitly on the supposed existence of an automatic tendency to full employment induced through the price mechanism. This (usually only implicit) assumption cannot be justified by appeal to neoclassical theory, since well known results in general equilibrium theory make clear that no such automatic tendency can be shown to exist other than in a single commodity world or similarly extreme simple case. If orthodox macroeconomists recognize this issue at all, they usually appeal to a supposed empirical relevance of the supposed full-employment tendency. But this claim is exceedingly weak, resting on the redefinition of full employment to correspond either to “natural rate” unemployment or the NAIRU. Even then, it cannot be claimed that the economy automatically tends to an invariant (supply determined) natural rate or NAIRU, since the rate of unemployment supposedly corresponding to these measures are redefined in response to persistent alterations in actual unemployment that themselves reflect past levels of demand.
The Theorists, of course, along with Post Keynesians, reject the supposed automatic tendency to full employment, or indeed a supposed automatic tendency to any particular level of output and employment. Output, for them, is demand determined, including in the long run. Normally, other than by fluke, the economy will hit demand constraints well inside the supply constraint.
The Theorists certainly do not deny the importance of productivity and technical innovation, although these aspects are the focus of other complementary areas of heterodox economics. But even here, demand factors are important, and not independent of the supply-side factors. Strong demand, high employment and rising wages create a strong impetus for technical innovation as a means for firms to slash costs and economize on labor. Fiscal demand management that maintains levels of output near capacity are complementary and conducive to technical progress.
The orthodox preference for a sole reliance on so-called microeconomic reform or labor-market deregulation loses any appeal it might have if output is demand determined and persistently far below potential. Any efficiency gains that might or might not obtain in particular cases are minor compared to the forgone output caused by the economy operating well below capacity. I say “might or might not obtain” because there is no convincing theoretical basis for supposing such policies have systematic effects on the overall performance of the aggregate economy.
Even if in particular cases a microeconomic policy can be shown to be beneficial, the benefits will not be compromised either by appropriate generalized deficit expenditure or the introduction of a Job Guarantee. Such policies do not prevent relative price movements or save unviable private firms from bankruptcy. The policies simply help to ensure that potentially viable production does in fact take place while at the same time creating a strong impetus for technical innovation.
Any disagreement I might have with the Realists on this point should not be overstated. I feel certain that they are well aware of likely interdependencies between demand and technical innovation and that their influences are broadly Post Keynesian rather than neoclassical. My main purpose in this section has been to point out that the Theorists do not discount the importance of technical progress. It is just that their emphasis, in macroeconomic theory, on demand determined output and employment does not contradict these insights but to the contrary is highly compatible with them.
There still appears to be a feeling among the Realists that the Theorists view coercion as in some way justifying government intervention in the economy. This is not the Theorists’ argument. There is coercion in the tax obligation, but there is no suggestion that this is what justifies government intervention. Rather, the argument is that the coercion explains how the government is able to transfer some resources from the private to public domain. It explains, rather than justifies, the way in which the tax obligation enables the government to command some resources.
There is certainly no suggestion that the coercion in the tax obligation implies authoritarianism rather than democracy backed by the people. For example, Wray wrote in 2003 (hat tip to Scott Fullwiler):
For our purposes, sovereignty can be defined as the ability to impose tax liabilities, although in the past the ability to impose fees, fines, tithes, and interest was more important than imposition of tax liabilities. Clearly, these payments are not voluntary at the individual level, although in democratic nations tax liabilities are at least in theory imposed by consensus. It should be emphasized that this ability to impose liabilities on the population does not presuppose an autocratic or fascistic State. Even the most democratic of states impose taxes, indeed, it is somewhat paradoxical that the social democratic states (Scandinavian nations, for example) tend to impose relatively larger tax liabilities than do more oligarchically controlled states (the US or Japan).
My own view is that taxation is coercive, but less so than the likely alternatives (e.g. sole reliance on brute force), short of society progressing to a level in which all cooperation can be purely voluntary.
The TC Rule
Michael Sankowski has put up an early post on what he calls the TC Rule. I think it is premature to subject the TC Rule to close criticism until its rationale and underpinnings have been elaborated in more depth. It is a proposed fiscal rule, partly informed by empirical regularities that in principle could be modified over time to reflect the latest evidence. The theoretical underpinnings seem unclear at this stage. The suggestion is to target a particular deficit to GDP ratio based on the degree to which actual rates of unemployment and inflation exceed their targets, accounting for population growth. The unemployment and inflation rates are political choices. Sankowski suggests a rate of 4 percent as appropriate for both targets.
It seems to be the view that policies informed by a correct understanding of monetary operations would enable a target rate of unemployment that is below the current orthodox estimates of the NAIRU.
From my perspective, if 4 percent unemployment is to be deemed acceptable, an unconditional basic income would be morally required. If not, I don’t see how this approach is much of an improvement on the preferred stance of the current orthodoxy. It gives up a little price stability for some reduction in unemployment, which in itself I have little problem with, but in doing so is likely to be inferior on both counts (unemployment and inflation) to the Job Guarantee proposal of the Theorists. The Realists touch on their objection to the Job Guarantee in point 3 of the introductory post.
Debate Over the Balance of Payments Constraint
In my view, the Realists (and others such as Ramanan) are providing a positive service in raising the external sector as an area for discussion (point 1 in the introductory post). Although at this stage I am not convinced that the criticisms are anything more than a framing issue, in which different economists are electing to compartmentalize various political challenges and realities in different ways, neither have I managed to convince myself that the critics do not have valid disagreements that go beyond mere framing. A long discussion has been taking place in a recent thread, which I am still in the process of reading through closely. I would be interested in seeing a response from the Theorists to the critique of Ramanan and the Realists, or be pointed to any responses that might already exist.
For quite some time now, Ramanan in particular has been criticizing the Theorists’ perspective on the external sector. From an outsider’s perspective – and, when it comes to Modern Monetary Theory, an autodidact’s perspective – it does not seem to me that his arguments, now supported in some sense also by the Realists, have been clearly and properly addressed. It appears, instead, that critics have been, in effect, banished from the larger MMT blogs not by force of argument but simply an appeal to authority. I am open to the possibility that the Theorists have a convincing answer to the criticism, or even that it already exists somewhere (if so, I’d appreciate the relevant links), but I am not left with that impression at the moment. Judging by the comments of other non-academic commentators on the various blogs, I get the impression my uncertainty on this point is not unusual.
I hope the Realists will take this post in the spirit in which it is intended. I am reticent to criticize either the Theorists or the Realists when we all have so much in common. But I think debate is the most effective way to push the conversation forward. Realists should certainly push back with whatever counter-criticism they deem is warranted.
Lastly, I wish the Realists all the best in disseminating the understanding of monetary operations shared by both Theorists and Realists. The more this understanding takes hold, the better life can be for all of us.