Crank at the Financial Times

There is an article in the Financial Times by John Kay who in attempting to disprove the chartalist explanation of state money by example gives an illustration fully consistent with it. The article is entitled “Money, like hat-wearing, depends on convention, not laws”. You will need a subscription to view the article, which would not be the wisest expenditure of money you’ll ever make!

The Chartalist argument adopted by Modern Monetary Theorists is that the government is able to create a demand for its own money by imposing a lump-sum tax obligation – e.g. a property tax – on the non-government. The imposition of such a tax ensures that people in the non-government need to get hold of the government’s money to the extent necessary to meet their tax obligations. They could do so by selling goods or services, including their own labor services, to the government in exchange for the government’s money, or by transacting with others in the non-government who had previously transacted with the government.

This, according to Modern Monetary Theory, is sufficient to ensure the non-government, in aggregate, will transact with the government enough to enable the government to transfer some goods and services from the private to public domain.

It ultimately would not matter if in its other activities the non-government transacted in a different money in preference to the government’s money, although for many reasons (e.g. convenience) it usually will use the government’s money when the tax basis is operative. As long as the non-government abides by the tax laws, it will demand the government’s money to the extent required to facilitate the government’s transfer of some goods and services to the public domain.

John Kay writes:

A theory called chartalism, which sounds cranky, or modern monetary theory, which sounds better, argues that money derives its value from the willingness of governments to make payments and accept taxes in it. But this is easily refuted. Suppose the Scottish government would only accept payment in highland cows. Then there would be an active trade in highland cows, to meet tax payments, but people would continue to take their banknotes – English pounds, euros, or US dollars, as Tesco preferred – not their cattle to the superstores. The ingenious folk at RBS would quickly create tradeable highland cattle certificates. The only cows you would see would be those grazing outside the Scottish parliament in the fields rented by RBS. (Emphasis added.)

Kay concedes the point in the bold part of the passage. The non-government will transact in the government’s money to the extent necessary to meet its tax obligation. This is all that is required for the government to transfer the desired level of resources from the private to public domain.

So Kay thinks chartalism sounds cranky, yet inadvertently agrees with it. I suspected there might be cranks at the Financial Times.

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11 thoughts on “Crank at the Financial Times

  1. More straw men at Pragcap in response to the same FT article:

    http://pragcap.com/the-ft-does-mmr-on-currency-demand

    Modern fiat currencies are more complex than these authoritarian examples show. Modern fiat currencies are not merely a “creature of the state”. Rather, in a free society such as the USA, the state is a creature of the people. That is, money is a always a social construct meant to serve the needs of the people. The state cannot establish or maintain currency viability merely by holding a gun to our heads, by starving us or by threatening us with a lower living standard.

    The mind boggles…

  2. PeterC,

    Are you actually expecting him not to contradict himself?

    A few weeks ago Kay wrote something like this (it’s not verbatim, but I am too tired to look for the precise quote): “sloppy language makes for sloppy thinking”.

    Somehow it seems to me he shows the inverse is also true: “sloppy thinking makes for sloppy (written) language”.

  3. Actually, Magpie, I pay very little attention to him, and only became aware of the article because of a link provided at Mike Norman Economics. But I felt a response was in order considering he touches on a point that is topical at the moment in the discussions over MMT and MMR.

  4. Tom Hickey in a recent post quotes a tweet by Scott Fullwiler that makes the same point as my post, only more succinctly:

    #MMT in the FT. Gets it wrong, though, as the “proof” against MMT is actually perfectly consistent with it, in fact.

    Wray is very clear that the earliest state monies were rarely used in private transactions. #MMT

    In other words, wide use in private transactions is not necessary for state money’s viability. At a minimum, it is sufficient that the non-government transacts with the government in the government’s money enough to extinguish the tax liability. In doing so, real resources are transferred to the public sector.

  5. Scott, if you go into your browser cache and delete the ft. items you can get in again. At least, it has worked for me in the past.

  6. Typically you can Google the headline and then get immediate access rather than access via subscription. Sometimes Pete I think you really need to get on twitter to follow the action.

  7. Thanks, Senexx. This twitter business seems inescapable. It’s going to get me in the end, isn’t it? Maybe I’ll just go back to less topical stuff so there’s no need to keep up. The world’s so tedious and boring. 🙂

  8. Twitter is a fantastic resource for engaging and interacting with single topics of interest.

    Politics & Economics go hand in hand and its all I really use twitter for.
    There are other topics of course.

    I dabble a little in it for NFPs but its a real challenge to be able to use twitter just on a personal level

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