Resistance to the Chartalist View of State Money

There is quite a lot of resistance in the MMT blogosphere to the Chartalist theory that the tax obligation underpins demand for the currency. A notable recent example is an interesting discussion at Pragmatic Capitalism. But a similar reaction seems to pop up in many places. The consternation on this point has surprised me in the past. It is not the disagreement over the theory that surprises me, but the strength of the reaction the theory seems to incite in some people otherwise sympathetic to MMT. Lately, a couple of possible explanations have occurred to me.

The Chartalist Explanation in a Nutshell

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 tax obligation on the non-government. A simple case would be a head tax. The imposition of such a tax would ensure that people in the non-government needed to get hold of the government’s money in order to meet their 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.

Personally, I find this explanation convincing, but that’s not my focus here. Rather, I am interested in speculating on why some people not only disagree but seem to react so strongly against the idea, and perhaps addressing those concerns.

Coercion Underpinning State Money

The most common objection seems to be that the Chartalist explanation implies there is coercion underpinning state money. For the viability of state money to be assured, the tax obligation must be enforced, in the last instance through a resort to the state’s monopoly on violence. There is no suggestion that this compulsion is a good thing, although it is probably necessary unless and until we reach a point where people are willing to cooperate voluntarily in the common use of some resources.

What surprised me at first about this objection is that I would have thought many of the people making it – typically in the right-libertarian quadrant of the political compass – would have been in agreement with the view that the state is coercive and prone at times to brute force. But then it occurred to me that two separate issues might be getting conflated, one that is anathema to right-libertarians (the state) but the other which is prized (a monetary market economy). Perhaps what is partly causing the disquiet is a perception that Chartalism implicates money itself in coercion.

If so, I think the concerns can be allayed. First, the theory pertains to state money, not other monies. Second, the effective enforcement of a tax obligation is a sufficient but not necessary condition for the viability of a currency.

Other monies are possible. Even for a private money, state coercion is sufficient. If the private currency issuer (e.g. a private bank) imposes a debt obligation on customers, and these obligations are enforceable, backed by the state’s legal apparatus, that would be sufficient for the viability of the private money.

However, it is also the case that under the right conditions private monies can be issued and accepted without compulsion or a resort to the state’s monopoly on violence. These monies will circulate among active participants in their particular circuits, provided there is sufficient trust among the participants. It is unlikely that one money will become dominant over another in the absence of state compulsion, but provided trust is present, this will be enough to ensure viability of a private money.

What matters for state money, in the MMT view, is not that all other monies are eliminated or that people only use state money. The critical factor is simply that people use state money to the extent necessary to enable the government to transfer the desired goods and services to the public domain, as indicated through the democratic process. The way the government ensures this is by making sure the tax obligation is large enough relative to its own currency issuance and the non-government’s net saving desire in the government’s money.

Of course, in many nations, state money or bank money denominated in the government’s unit of account will be widely used out of convenience. But this is not strictly necessary for the viability of the government’s money. For example, there are some countries in which people largely transact in a foreign currency (e.g. the US Dollar) except to the extent necessary to meet the tax obligation in the domestic government’s money.

Resources Precede Taxation

Another objection seems to concern how productivity fits in to all this. For example, in the thread linked to above at Pragmatic Capitalism, there is a comment along the lines that “productivity precedes taxation” and an objection that MMT does not recognize this. The reason MMT does not recognize it is that it is not actually correct.

It would be truer to say that “resources precede taxation”. If the non-government had no resources to offer the government in exchange for the state money, there would be no point imposing a tax obligation. But the non-government always has at the very least its own capacity to work (labor power). The non-government is always in a position to provide labor services to the government.

The level of productivity does not matter in this sense. What the government can command, through its coercive tax obligation, are resources, including labor services. If the non-government possessed nothing other than its capacity to work, the government would be able to command some of this labor time.

This is not to imply that productivity is unimportant. Far from it. But the value of the currency is a monetary concept, and money is a social relation. The social relation, in the case of state money, is in the first instance the government’s capacity to impose a tax obligation on the non-government denominated in its own tokens and specify what must be done to obtain the tokens. Some people give up goods or services, or their own time, in exchange for the government’s money. The value of the currency can be regarded as the amount of simple labor time that must be given up in exchange for a unit of the currency.

Productivity improvements mean that more goods and services can be commanded with a unit of the currency. But no matter how low the level of productivity, state money will remain viable provided the tax obligation is enforceable.

Note on Productivity

There is no suggestion that productivity is less important than the value of the currency. Quite the reverse. After all, in principle we could have a highly prosperous non-monetary economy thanks to a high level of productivity, technical knowledge and organization. Productivity is not necessarily contingent on a viable money, and conversely a viable money is not contingent on productivity. They are two different considerations.

It is true that in a monetary economy we try to obtain measures of what really matters – e.g. productivity – in terms of money. But when we do this, what we are really interested in is getting a sense of how productive we are in real, not monetary, terms. We resort to monetary measures for want of a better alternative, because heterogenous material and non-material outputs cannot be added together to produce a true single measure.


97 thoughts on “Resistance to the Chartalist View of State Money

  1. Nice post.

    Here’s a question for you. Is Buckaroo a currency?

    My short answer is that it’s not. Because if it is, Reuters should be able to show quotes.

  2. Good post Peter. I actually think Cullen Roche has some good reasons to be skeptical of the chartalist theory of taxation. But I believe he is barking up the wrong tree in his discussions of productivity. Production and productivity don’t themselves contribute to an understanding of why people accept a specific form of currency.

    You raise some interesting issues about what might be motivating the intensity of the opposition to the chartalist component of MMT. People are attracted to MMT for various reasons, and it is never simply because of the purely descriptive component. People are always evaluating and acting upon their social scene, not just passively observing it.

    One camp that has been drawn to MMT are those who respond to Warren Mosler’s claim that we are overtaxed. For them, the most attractive aspect of MMT is the part that says, “the government doesn’t need to tax in order to spend.” It is not uncommon to read comments from newcomers who, when first encountering MMT, have their heads swimming with dreams of a world without taxes, where the government spends what it needs to simply by crediting bank accounts, and nobody ever has to pay the taxman.

    Maybe some of these folks are the people who come to Cullen’s site or Warren’s site seeking investment advice. They love the suggestion that the government could, in principle, go about its business without imposing those nasty capital gains taxes on their investment earnings. They thus see MMT as a ticket to personal freedom from government.

    Then they learn later that there are at least two reasons for taxation according to MMT: to regulate aggregate demand, and to create the demand for the currency in the first place. (There are other public purposes served by taxation, but these are the two MMT explicitly recognizes and emphasizes.) They are obviously disappointed. The second reason in particular seems to say that not only are taxes useful for various purposes, they are essential for the most fundamental of purposes.

    I have to say that I don’t find the tax-driven money version of chartalism entirely compelling as a description of the causal ground for the acceptance of the public currency in modern economies and modern money systems. I would like to see more empirical evidence in its favor before I would be willing to accept it.

    The taxes most people are familiar with in the modern world are not head taxes, but income taxes and transaction taxes. These are taxes on monetary income and monetary transactions. So they can’t explain why a person is willing to accept the currency in the first place. Having to pay taxes is an effect of the decision to accept money, not the motive for the decision. When someone agrees to work for an employer, and agrees on a salary in money, they never think, “Oh good, because I need that money to pay my taxes.” In fact, it might be the case that if they decline the job, and the income that goes with it, they won’t have to pay any taxes at all. The same is true of sales taxes and VAT taxes. You can avoid the tax by not carrying out the transaction, so it can’t be that the motive for the transaction was to acquire money to pay the tax.

    Also, consider the perspective of a company that sells something to the government, like computers, paper clips or jet fighters. Surely they are not motivated to make these sales by an antecedent need to obtain more money to pay their taxes.

    At this point, I’m inclined to think that tax levies of the kinds with which we are most familiar, while adding one additional tool to stabilize and regulate the public monetary system, are neither necessary nor sufficient to underpin the demand for the currency. There are a variety of other factors, some grounded only in social convention and some grounded in governmental regulatory powers other than the power to levy taxes, play an equal or more important role.

    I think we have to start with the fact that a monetary system is an extraordinary public convenience. People therefore want there to be such a monetary system, and want it to be stable and reliable. So once a public monopoly monetary system exists, its continued existence will be somewhat self-sustaining so long as government takes reasonable steps to fend off competitor currencies and to stabilize prices in the currency by regulating the processes by which new units are created and destroyed.

    And no modern currency system is created from scratch with a single point of inception. They always evolve from previously existing systems from some combination of private decisions and government policies.

  3. I think states jealously guard their monopolies. The existence of independent private money is a challenge to the authority of the state just as surely as an independent private army.

    Private banks create money with the explicit charter of the state as an extension, not a rival of state money. Other forms of private money are sometimes tolerated, usually with firm limits and regulations. Should they attempt to rival state money they are extinguished with the full weight of the state apparatus.

    What of foreign currency? I think this is a completely different animal. State money vs. private is about power within the state. State money vs. foreign currency is about relations between states.

    In both money and violence, states which enforce monopolies within the territory still exist as rivals among themselves and may tolerate, depend upon or have no choice but to submit to the power of other states depending on their needs and relationships.

  4. Dan, you said:

    “The taxes most people are familiar with in the modern world are not head taxes, but income taxes and transaction taxes. These are taxes on monetary income and monetary transactions. So they can’t explain why a person is willing to accept the currency in the first place. Having to pay taxes is an effect of the decision to accept money, not the motive for the decision.”

    I think that’s a good point. I can definitely accept the view that at some time in the past it has been a fact that demand for currency has been driven by the need to pay tax (and Wray gives examples in his book), but has this changed over time?

    The discussion at Pragcap seems to have focused on the coercive element, suggesting that coercion is not the main thing driving tax, but I don’t think that is a strong argument. It seems to me that while there is a feeling that people will receive something in return for the taxes they pay, if the Government were to announce that the payment of taxes was optional, I don’t see how the government could maintain its monopoly over the currency. So coercion remains vital.

  5. Dan,

    Income and transaction taxes easily become just everyday background noise as long as the exchanges are dollar-denominated. Sort of like not being conscious of the need for oxygen as long as there’s plenty of air.

    When they aren’t dollar exchanges though, the need for dollar currency can quickly leave you gasping.

    A few examples I can think of:

    Winning a car on a game show.

    Receiving a home as a gift.

    Non-cash portions of a job compensation package.

    Barter transactions.

    Foreign trade.

    As a general rule, if you realize a non-dollar gain and the government finds out about it, the government is going to levy a dollar tax on you… driving you to go and get some dollars.

  6. Dan,

    Look up the history of King Henry’s tally sticks. Tally sticks were used by money lenders prior to this, but this was purely for accounting control reasons. Since in the bank’s case, the bank held the stock, while the lender had the short end of the stick. In King Henry’s case, the treasury kept the short end of the stick, while the stock circulated as money. When the stock came back to the treasury as a tax payment, both parts of the tally stick were destroyed. The term “stockholder” refers back to tally sticks.

    This tally stick money lasted from 1100 to 1826 – well after the Bank of England was established.

    See – The Tally Stick: The First Internal Control?

    But King Henry expanded the role of tally sticks beyond simple record keeping. Since tally sticks could be used to pay the taxes imposed by the king, he created a demand for tally sticks. This demand for tally sticks expanded their role, and they began to circulate as a form of money (Carmack, 2003).

    Some might ask the question: Why would sticks of wood ever be accepted as money? History shows us that anything of value or perceived value was accepted as money. Salt, silver, copper, gold, cowry shells, whales’ teeth, and paper have all been accepted as currency. In other words, anything can be money as long as people accept it as having value.

    In England, tally sticks continued to be used until 1826 when they were officially abolished. The tally sticks were then taken out of circulation
    and stored in the Houses of Parliament. In 1834, the burning of the huge number of accumulated tally sticks in an overburdened stove
    resulted in a fire that started with the paneling, and eventually destroyed the old Houses of Parliament (Holzmann, 2000).

  7. Those are good example geerussell. But those are taxes that not everyone pays. Can we say that the existence of such taxes are one motive that contributes to the overall demand for the currency, but not a foundational motive underpinning the entirety of that demand?

  8. Clonal,

    A lot of discussions of the nature of modern monetary systems get entangled in competing stories about the origins of monetary systems. And the state theorists have given convincing criticisms of the theory that monetary systems originated in barter, with gradual adoption of a privileged commodity as a medium of exchange. But I’m not sure how much weight to assign these historical origin accounts in the explanation of contemporary social practices.

    For example, perhaps the habit of shaking hands originated as a way of showing that one was holding no weapon (or perhaps not). But whether or not that is how handshaking originated doesn’t tell us much about the functional social role of handshaking today, or the psychological dispositions that perpetuate the practice.

  9. Ben, as Peter mentions a lot of libertarians have strong objections to taxes, which they often regard as thievery by a state by which they have not personally consented to be governed. I think you are definitely right that if the coercive element in taxation went away, a lot less tax revenues would be collected. Even people who have no principled objection to their tax rates would find a hundred reasons to skimp on the payments, gradually readjusting their budgets to diminish substantially the proportion going to the tax contribution.

    But surely the role of law enforcement and coercion in the functioning of government is not some new insight. Is there anybody under the illusion that tax systems function in the manner of voluntary contributions?

  10. Dan,

    Tally sticks, and why they were used as money is not a theory, but a historical fact. The state issued tally sticks were created as a debt owed by the state for goods and services received by the state. The only way the debt could be repaid was by the power of taxation inherent with the sovereign.

    What the state spent on was a different issue. It was incumbent on the sovereign to spend to improve the well being of “his” subjects. Without that, the sovereign would have little authority to impose the taxation. Money creation was, is and will always remain a “quid pro quo” – Probably that is where the slang “quid” for the British pound came from.

  11. The problem that many don’t realise is what happens if the state stops collecting taxes. It can, of course, still TRY to command goods and services, but this would mean that the state portion of GDP would have to be equal to the deficit. As in many nations government services (including health care and pensions) easily make up 30 % of GDP, that gives you a minimum deficit of 30 %. But at that rate, the private sector will very soon find his desire to save net financial assets saturated, and will increase spending. So the governement and the private sector will outbid each other for the real ressources. The government, of course, can always create new financial assets in it’s own currency, and thus “win” the battle to command at least 30 % of GDP. But this fast – and accelerating – spending race will result in more and more accelerating inflation, with hyperinflation just around the next corner.

    And once we have hyperinflation, the government money will become worthless, people might introduce private monies, or use foreign currency. If the government than still want’s to command good’s and services, it has to do so – literally at gun point.

    So, there can’t really be any reasonable doubt that government money will loose it’s value (acceptance) if taxation is to low – but OTOH, there can’t be no growth with a balanced budget…

    My fear is, that if politicans would ever get a minimal grasp of MMT, they would campaign for less (or no taxes) (“Taxes don’t pay for goverment spending!”) and for more spending (“There are no financial constraints to a monetary sovereign government”). Result – almoust certainly – hyperinflation.
    [o.k – this might sound pessimistic – but IMO there is no such thing as an honest / competent politican – or at least not one that is able to win an election..]

    OT3H – if there are only private monies (or a use of foreign currency), the government would always need to tax to command goods and services at all…
    OT4H – competing private monies would create a huge mess – you always have to now the actual exchangerate….

  12. Clonal Antibody,

    I’m not denying the historical fact of tally sticks. I’m just saying that the manner in which a current social practice originated in historical time is not necessarily closely related to the behavioral motives and forces which sustain that social practice today. To understand what drives the contemporary monetary system, you have to study that system as it currently exists, not its historical forbears.

  13. The Justice/Legal system is a government/public good/service Right/Authoritarian law/n/order types are happy with so I don’t get why public money provided by people mandated government should be a problem either, unless it’s the “people” mandated bit?

  14. Dan,

    If the question is “why money?” or the question is “which money?” then taxation is just one consideration on a list of many. As you pointed out, people have a desire for the convenience and benefits a system of money brings. Especially in today’s world where everyone is accustomed to having it, private solutions would emerge to fill money needs even in the absence of state money.

    On the other hand, if the question is why State money, with the emphasis on State, the answer is it is the lever of choice for the exercise of state power to command real resources to public purpose.

    The power of command has its foundation in the demand for the State currency to the exclusion of other options. The only tool both necessary and sufficient to crowd out the competition and achieve that exclusivity is taxation. Most States can achieve the desired effect at a threshold far below a literal head tax on every citizen, but at some level it is the anchor for state power.

    The more established and credible both a State and its currency are, the lower that threshold of unavoidable taxation can be but were it to go away entirely, the power of the State would also diminish over time to no better than parity with private entities.

    At that level is debatable whether you still have an effective government at all.

  15. This is a recent tax prosecution in my area that hits close to home. This fellow has maintained a law office across the street from me for over 10 years and I have said “good morning” to him many times. He is a former business partner of a friend of mine in the tavern mentioned in the prosecutors statement. He also holds a low level elected office. I believe he has been sentenced to 5 months in jail + probation.

    This is how the US IRS Special Agent put it: “Paying taxes is a solemn obligation of citizenship,” said Acting IRS Special Agent in Charge Jeannine A. Hammett. “The privilege of living well in the United States carries certain responsibilities, one of which is the voluntary payment of taxes.”

    This is interesting that she says it is “voluntary” but yet here she is having this fellow thrown in jail I guess for “not volunteering”. So it looks like the people in charge of enforcement don’t even really know what is going on or at least how to accurately describe the process of taxation. If you get thrown in jail for not doing something it hardly seems “voluntary”.


  16. Taxation isn’t necessary, I don’t think geerussell. If a state has the power to enforce taxation, then it has all sorts of other powers as well. It can use the courts to require people to settle their disputed debt claims with the currency. It can issue cease and desist orders to people attempting to establish other currency systems, and shut those systems down. It can require banks licensed to engage in lending to trade in dollars alone, to participate in a central banking system requiring them to hold the currency in reserve, and to issue its loans in the form of liabilities for that currency. It can simply give people money, and then offer some government goods and services in return for it, thus adding to the demand for the money.

    For a government to enforce a system of taxation, it needs some power. And if it has that power, that means it already has a number of resources at its disposal.

  17. This is interesting that she says it is “voluntary” but yet here she is having this fellow thrown in jail I guess for “not volunteering”. So it looks like the people in charge of enforcement don’t even really know what is going on or at least how to accurately describe the process of taxation. If you get thrown in jail for not doing something it hardly seems “voluntary”.

  18. Dan,

    Granted the state has a broad array of powers to compel at the transaction level. All of which might fairly be grouped together as some variation on the theme of “legal tender” laws.

    All these powers are useful supplements but in the absence of taxation they are a leaky boat of grey and black market avoidance. The enforcement burden is tremendous–monitoring every deal, every transaction. I can’t think of non-taxation powers that meet the twin tests of necessary and sufficient.

    In contrast…

    Give me a monopoly on violence and I will have a functioning economy based on coin with my face on it inside of a year.

    1) Stamp my face on coin and pass it out

    2) Announce a quarterly head tax payable only in my coin or your head.

    That’s it, modern money in two moves. The first couple quarters might be messy as some will no doubt force me to prove my credibility. By the end of the year, coin will be delivered with a handshake and a smile.

    This situation is easily self-sustaining until regime change and bears a great deal of resemblance to how actual real world currencies have come into being and been maintained even in the pre-fiat world.

    I’m open to hearing a tax-free narrative that accomplishes this feat.

  19. Give me a monopoly on violence and I will have a functioning economy based on coin with my face on it inside of a year.

    How do you get that monopoly on violence? Don’t you have to possess a lot of guns and administrative tools, and a loyal army of police and soldiers and cars and jails and whatnot? How do you get all that? You must have already successfully provisioned yourself.

    And I’m not sure how the head tax works if you just pass out the coins. Then all that is necessary is for people to hold the coins and then pay them back. You need to offer the coins in exchange for goods and services.

    Its seems to me that in the real world almost every currency system in existence came into being through subtle or occasionally dramatic modifications of currency systems that were already in use. There is no “inception”. I think it is a mistake to try to base an account of the forces that preserve a currency monopoly in some kind of origin story.

    I think this is a more plausible picture of how the government preserves a currency monopoly, and continues to assure the currency is universally accepted, with taxes only playing part of the story:

    A: “Your honor, I provided veterinary to B last fall, and he promised to give me three spring calves in return. I haven’t received them.

    Judge: The court concludes this is true. B must pay A $3000.

    A: But your honor, I don’t want $3000. I want calves.

    Judge: Tough luck. This court won’t compel the delivery of calves. It’s $3000 or you go home empty-handed.

    B: But your honor, I don’t have any dollars or calves. All I have is land, farm buildings, farm equipment and the like.

    Judge: You had better get some money then. The banker will lend it to you and take some of your land, your buildings and your equipment as collateral. When you bring in your crop, you can sell it for some money.

    Banker: I would prefer not to take farm assets as collateral.

    Judge: Well, if you prefer to be allowed to remain in business, you will take the farm assets as collateral.

    Bob: Hey A and B, I have a new monetary system called “Bobcoins”. If you agree to settle your affairs in Bobcoins, I’ll give you each a free starter amount – and a toaster.

    Judge: Bob, you are running a currency system without a charter. Cease and desist or I will through you in jail.

  20. If the non-government possessed nothing other than its capacity to work, the government would be able to command some of this labor time.

    This is the basis of conscription, which I suspect is more primitive that taxation, but here we are peering into the mysts of prehistory.

    Some credible use of force, and the use of force is only credible if it is used at least occasionally, is necessary to address free rider problems in societies. This is exhibited in biology way early on the chain of life. “There ain’t no such thing as a free lunch” is a law of nature in the biological world to which humans also belong. Nature works though boundaries and there are consequences to crossing boundary lines.

    Even with private banking and money creation there must be some control mechanism that involves enforcement. Go that — enFORCEment. Free markets cannot exist without enforcement either, making “free market” an oxymoron.

    In a society based entirely on virtue, where there was no vice, there could be a system without the need for enforcement. Otherwise, not. The question then becomes how to create a virtuous society. Unbridled pursuit of self-interest ain’t it.

  21. Could instances of regime change or newly independent states where a new currency is introduced qualify as such an origin story? I’m thinking of South Sudan, for instance.

  22. Good post, and consistent with my interpretation.

    FYI, Wray 2003 states the following:

    “For our purposes, sovereignty can be interpreted as the ability to impose 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 oppose liabilities does not presuppose an autocratic or a fascistic state.” p. 5

    Note Randy says “It should be EMPHASIZED . . . .” This whole debate just baffles me. I’m sorry I took the time to even check it out today. Many more important things to do than correct the bazillionth misinterpretation of MMT in the blogosphere that is easily refuted by actually reading the academic literature.

  23. Ramanan: I am not very familiar with the Buckaroo, but I think it would have the basic features of a state money. If I am understanding the idea correctly, the students are compelled to transact in the Buckaroos at least to the extent that this is necessary to meet their obligations at the university. Beyond that, they could transact in the Buckaroos among themselves if they wanted, but also are free to transact in “foreign currencies” such as the US Dollar or simply barter. I am guessing it is also permissible to exchange Buckaroos for a foreign currency such as the US Dollar at an exchange rate that is acceptable to both parties.

  24. Dan and others, thanks for a lot of terrific discussion. Good arguments have been put forward on both sides.

    My own view is that it is lump-sum taxes that drive demand for the currency. A lump-sum tax creates an imperative to get hold of the currency, whereas income and consumption taxes do not directly do this.

    As Dan points out, once a currency is up and running, many other factors come into play to help keep the system humming along. Income and consumption taxes, among other factors, do contribute to the viability of the currency, but indirectly.

    For example, once the currency is up and running, somebody who is willing to work to make an income will find that many of the best employment opportunities involve payment in the government’s currency. Taking a job, in most cases, will result in a tax obligation (income taxes).

    To take another example, in the case of welfare payments or a Basic Income Guarantee, the recipients need to purchase goods and services with the money they receive. If there are taxes on the consumption items that they find necessary or most desirable, their need to transact in the government’s currency will bring with it a tax obligation (consumption taxes).

    So the way I see it, lump-sum taxes drive demand for the currency. Other taxes play an indirect role once the system is up and running.

    My reasons for finding the Chartalist explanation convincing are not confined to the historical analysis. I agree with Dan that it is impossible to be certain about the history, even though I do find the Chartalist historical interpretation persuasive. What most attracts me though is the logical point, which can be considered not only at the point of inception of the currency but also at a point of potential breaking down of the currency. If the currency is being undermined by tax avoidance, etc., it seems that the surest way to secure its viability is through the imposition of a lump-sum tax. An obvious option is a property tax.

    In my opinion, the introduction of lump-sum taxes is the decisive step either in introducing a new currency or securing an existing one that is getting shaky. It is in that sense that I do think the tax obligation (specifically, lump-sum tax obligations) can be said to drive demand for the currency, and personally I do see this as foundational.

  25. Well,here’s one recent example of a currency with an inception point: the Euro. But I believe that the way it was introduced is by fixing exchange rates among the existing European currencies, and then making the Euro legal tender as of a certain date for any obligation that had been denominated in the earlier currency. That included tax obligations but also any other obligations.

  26. Dan, I think you touch on an interesting point here:

    Taxation isn’t necessary, I don’t think geerussell. If a state has the power to enforce taxation, then it has all sorts of other powers as well. … It can simply give people money, and then offer some government goods and services in return for it, thus adding to the demand for the money.

    I agree that enforceable taxation is sufficient but not necessary. However, for a state money, I think taxation is likely to be needed whenever private ownership of some (or all) means of production is permitted.

    Consider your example in which the government simply gives people money and offers some goods and services for sale. In a system with no private ownership of means of production, there would be no need for taxation, because people would have no option but to work for the government. The tax obligation would not be needed to induce people to sell their labor services to the government.

    When private ownership of the means of production is allowed, people do not need to work for the government, and it is extremely likely that taxation will be necessary (not just sufficient) to transfer some resources to the public domain. Strictly speaking, there might be an attempt to rely on voluntary transfers, but if trust broke down the system would become shaky. If and when it became shaky, lump-sum taxes could be used to assure the viability of the currency.

    Maybe this is another aspect of the Chartalist argument that aggravates some right-libertarians. It suggests that private market economies are likely to require taxation whereas socialist economies do not. Or to put it another way, private ownership of the means of production is the reason we are likely to need taxation.

    Regarding the Euro, I think the emphasis on austerity and keeping the currency scarce is very much in the minds (too much in the minds) of the authorities. I also think it is no coincidence that in Greece attention turned to the use of property taxes when lack of tax observance was considered to be undermining the system.

  27. “State money is necessarily coercive – get over it” is Warren’s standard response.

    Bootstrapping is always fun, however the usual mistake is to fail to realise that you are where you are as a result of whatever previous system existed.

    Therefore if you have power to enforce liabilities on others (however this has been obtained) then you can impose a currency system on those others.

    So as a parent I can enforce liabilities on my children in my own currency, and they will have to work for it if they don’t want to suffer the consequences.

  28. peterc @ 15 January 2012 at 4:24 AM,

    Thanks for the response.

    It may be a currency to the few people in UMKC and they may quote each other an exchange rate. However, Citibank would not.

    I can buy an iPhone in my currency – assuming Apple has a store in my country. (my/I as in a general citizen of the planet). Else, at least I can walk into an Apple Store in London with a credit card which charges me in a different currency than in GBP but still buy the iPhone. I am doubtful if one can walk into an Apple store and use Buckaroo credit card to buy an iPhone because for banks, the exchange rate is zero.

    My point is the Buckaroo is not even comparable to any other currency. The reason I brought this up is that MMTers try to “prove” whatever they say by giving the example of the Buckaroo but it seems the Buckaroo doesn’t even come close to looking like money as we know it.

  29. When private ownership of the means of production is allowed, people do not need to work for the government, and it is extremely likely that taxation will be necessary (not just sufficient) to transfer some resources to the public domain.

    I agree Peter. If the government wants to get something from people via exchange, it first has to possess something to exchange. In democratic societies, acquiring these goods and resources might not be terribly coercive, because there is a sense of a social contract, in which many are willing to commit what they regard as a fair share of what they produce, in order to sustain the common project of government.

    But notice that in this broader sense of taxation we are including direct levies of any kinds of goods and services, with no consideration yet of a monetary system. So why does this imagined government not just use its power to directly collect the goods and services from individuals its selects, rather than use the more involved technique of creating tokens of money, offering the money for goods and services according to a price list it says, and then requiring the payment back of the money. I believe the chartalist answer is that it is more efficient and convenient to go the second route, because then the government is letting the private sector figure out on its own how to create and distribute the goods to meet the combined obligation, which it can facilitate by allowing a trade in the tokens.

    Of course, this can become a bit of a cruel mess if the system is not implemented with some foresight, and if the levies are not proportional to the degree of wealth people have.

    But ultimately, what all this evokes is just that the government has the power to create or regulate systems of obligations, and to declare what kinds of things will be permitted in discharging those obligations. Tax obligations are only one kind of obligation. I think it does the same thing when it regulates the system of private exchange through the legal system, assigns monetary values to goods and services when disputes about the exchange of these goods and services arise, and requires that creditors accept the established monetary unit as payment.

  30. Neil, comparing citizens to children is ridiculous. The government is not our mom and dad even though it’s clear that some people here wish it would act more like that. Besides, tax systems aren’t established the way the Buckaroo or a parent establishes chores. In a free society taxes are imposed by choice, by majority. They are not imposed by a school board or two parents as every ridiculous MMT argument shows. Not even close.

  31. FDO . . did you not see my post above? Your interpretation of MMT is nothing but a caricature of it. Read the literature, please, before assuming you know what we “believe.”

  32. Ramanan,

    I dont think the MMTers suffer under the delusion that their Buckaroo is a “real” currency, please.

    After all they are at core Educators. Educators sometimes use academic demonstrations to help students understand abstract concepts.

    Prof. Kelton some time back used an analogy of a “see-saw” to help explain the concept of the sectoral balances; I do not believe she really thinks our open is economy is actually a see-saw, no?

    Same with a Buckaroo, it to me helps people understand some core abstract concepts about how currency systems function, that is all. Nobody thinks they can buy an iPhone with it (?????).

    Not everybody picks up on these concepts as easily as you do; sometimes educators have to use different techniques to get through to different people. You can’t be elitist and be the best educator.


  33. Scott, I’ve read the literature, thanks. There’s a blatant contradiction in the literature. You all claim that the government has a monopoly on the currency, but then you claim that the government is not authoritarian. But all your standard examples (buckaroo, parents and chores, pointing guns at people) are all authoritarian. That’s not how the real world works. The government does not have a coercive monopoly. At best, it has only a very weak monopoly built on the public’s willingness to let it even exist. But you MMTers take the coercion argument to its extreme in justifying price fixing due to the coercive monopoly. Like your ridiculous examples, its wrong.

  34. Ramanan, the Buckaroo is established by authoritarian controls. Not by democratic vote by the student body. Its in fact the antithesis of our currency in the USA and if the students had any sense of this they’d revolt against it.

  35. FDO . . there’s no contradiction.

    Coercion is at the individual level. Consensus is at the macro level if we are assuming democracy. Warren’s quote is about the individual level; Randy shows both levels.

    A state theory of money requires a state, and a state requires legitimacy. Democratic regimes require the people’s consent in the aggregate for legitimacy. Authoritarian regimes do not, at least to initially impose a tax liability–misuse of authority including in the economic sphere can result in lack of legitimacy, as Mubharak found out. This applies to Buckaroos, too–students obviously believe they’re learning something, because UMKC grads are doing it at several other colleges. No revolts yet; still legitimate. I imagine they would appreciate your suggestion that they are stupid, though.

    And there’s no price fixing. There is merely the setting of a base wage that anyone who wants to work at can. That’s it. If they don’t want to, they don’t have to. I’d be happy as can be if we set up a JG and nobody showed up, since that would mean nobody was involuntarily unemployed. And we’d abolish the minimum wage in that case. This all seems far less coercive than what we have now.

    You and other seem to want to move from operational “facts” to political economy. Fine, but don’t pretend you’ve got the high factual ground anymore while we’re being “politically motivated.” Note how this whole debate is falling along traditional political lines.

    Finally, as an MMT’er who contributes to the literature and who has known all the founders personally for several years as friends/colleagues/collaborators, I can say with 100% confidence that my interpretation of MMT is correct and yours is wrong. Indeed, your interpretation is simply ridiculous–mindbogglingly ridiculous. Believe what you want to believe, though, since what is fact doesn’t have anything to do with this discussion anymore obviously.

  36. Scott,I can see you’re getting rather upset. Obfuscation and condescension will get you nowhere though. I am not claiming that MMT is authoritarian. I am pointing out that MMTers justify a MORE authoritarian government through the monopoly argument. Its all relative of course. I’m not calling you a Statist, but lets be honest. MMT leans far more towards statism. So don’t get all upset like you always do and don’t try to change the topic. MMT is a policy proposal towards a MORE Statist approach. Embrace it. Your name will be attached to it forever.

  37. Matt,

    If it is not a real currency then what? Its supposed to prove something right? What is it showing? (As in … a genuine question)

    Yes the real world economy is not a see-saw but in the analogy is made clear from the beginning. Nowhere in the explanation is it claimed that the economy IS a see-saw.

    On the other hand, it is indeed claimed that Buckaroo is a currency.

    “It’s been more than 10 years since the economics department at UMKC (University of Missouri at Kansas City) introduced its own currency.”

  38. Here is an example which can be discussed

    “I then sit back in my chair and suggest that:

    Any child who wants to eat and live in the house must pay me, say, 600 business cards each month for the privilege.

    The kids respond in unison, almost immediately:

    When do we start work?”

    The striking thing in the example is that it starts off assuming the State imposes an *amount*. On the other hand, States in the real world set a tax rate. In the modification of the example where the father sets a rate, I fail to see how the kids start working. The father just says he will tax a percent of income. The kids figure they don’t have to do paid work because in that case, they won’t be taxed because they don’t have an income.

  39. R,

    “It’s been more than 10 years since the economics department at UMKC (University of Missouri at Kansas City) introduced its own currency [Ed: Internal currency: no Citigroup involved]. It’s called the buckaroo, named in sync with the school mascot, the kangaroo.

    It all began when the department indicated a desire to have students contribute their time to community service. I suggested they do it by introducing a new currency, which would both, for the most part, accomplish the intended purpose and give the students and up close and personal knowledge of currency dynamics.”

    It’s an academic exercise/demonstration.

    Ramanan, You’re knowledge of these systems is at a much higher level than the intended audiences for this intro to “Buckaroos” at the HuffPo.

    Here in the US we have people who are getting their education degrees and as part of this they take assignments as “student teachers” in the classrooms. They are assigned to classrooms of experienced teachers so they can see experienced teachers in action, in the classrooms. They are there to learn “how to teach” the topics, not to engage in the actual student-teacher dynamics on the topic itself. The student-teachers are not there to engage academically, that would be beneath their level of expertise.

    All of this is beneath your knowledge of these systems, it is like you are trying to engage at a lower level than where you are.

    Most people who read the HuffPo dont even know what is going on at the most basic levels of currency systems, Warren is just trying to get these people to at least start thinking about what is really happening wrt currency systems as this may help them to engage and participate in pubic policy debates with some grounding in the basic operational concepts…

    You are not part of the target audience I’m sure. Resp,

  40. The topic of this post is what is meant by the state theory of money. I offered a quote by Randy demonstrating that the interpretation made by others including FDO is incorrect. I did not change the topic. I have seen no rebuttal or response or different interpretation of Randy’s quote offered, only condescension.

  41. Randy’s quote demonstrates NOTHING. The point is that MMT uses the monopoly argument to justify increasing government intervention through various channels. Its built on a myth of coercive monopoly.

  42. Oh, so democratic socialism makes it all better. Whew. I was worried you might be advocating huge government programs.

  43. Staying on point and avoiding ad hominems, it is clear that MMT’ers understand that coercion requires legitimacy be granted by the people. In fact, it’s so obvious that it is ridiculous to even suggest otherwise–a state theory of money requires a state, and a state requires legitimacy. It doesn’t matter if the state “democratic socialist” or “neoconservative,” a state requires legitimacy. End of story.

  44. And the reason why your theory has gained zero legitimacy in American politics or even mainstream economics is because the politics that the theory are based on are not remotely compatible with the ideals this country was founded on. But MMTers dont understand the state in the USA (or have delusions of changing it massively). Now that’s the end of the story.

  45. FDO15, I’ll restate for you, since you seemed to have missed Fullwiler’s comment:

    “Staying on point and avoiding ad hominems, it is clear that MMT’ers understand that coercion requires legitimacy be granted by the people. In fact, it’s so obvious that it is ridiculous to even suggest otherwise–a state theory of money requires a state, and a state requires legitimacy. It doesn’t matter if the state “democratic socialist” or “neoconservative,” a state requires legitimacy. End of story.”

  46. Oh please. I’ve seen you all over these MMT blogs. You write the most pompous and arrogant comments of any MMT advocate. Even though you’ve been writing about MMT for 20 years it has gone exactly nowhere. The only people who take MMT seriously are bloggers and it looks like you guys are shooting yourselves in the foot there.

    The politics that MMT are founded on are not compatible with the small government ideas that founded theUSA. You seem oblivious to this fact. Instead, you justify your theory by claiming that the politics should evolve towards the theory. Knapp, Lerner and Minsky all had strong socialist influences. But you’ve developed a theory on their beliefs that are totally incompatible with the foundation of the USA. So yeah, “whatever” is right.

  47. FD,

    “The origin of the United States lies in the adoption of a Constitution whose advocates favored a strong central government. For example Alexander Hamilton wrote, in The Federalist Papers, “Not to confer in each case a degree of power commensurate to the end would be to violate the most obvious rules of prudence and propriety, and improvidently to trust the great interests of the nation to hands which are disabled from managing them with vigor and success.”[9]
    However, starting in 2009, the Tea Party movement has advocated small government, and has claimed, without evidence, that the “Founding Fathers” also advocated small government, and that the United States had a small government at some unspecified time in the past. In general, the Republican Party is associated with the idea of small government, though no Republican president has ever implemented any of the ideals of small government.[10] One minor party, the Libertarian party, has an ideology of small government. The most successful Libertarian politician in the United States is Ron Paul. Another advocate for small government is Carla Howell”

  48. FDO15,

    MMT isn’t politics. Didn’t you know that MMT can be used by all political parties – from far right to far left?

    Obviously in a democratic state the voters decide how MMT will be applied.

    The problem now is that voters don’t know anything about MMT.
    MMT only shows that TINA is a big, fat BS.

  49. Matt, nice try at revisionist history:

    ” The powers delegated by the proposed Consitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former [federal powers] will be excercised principally on external objects, as war, peace, negotiation, and foreign commerce…The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement and prosperity of the State. (James Madison, Federalist Papers)”

    That’s from the father of the constitution. Nuff said.

  50. Ryan, MMT is all politics. If you haven’t figured this out yet then you’ve been duped.

  51. FD,

    Easy to advocate for “small government” when you are a landed slave owner (must have been nice!) …. what other authority (other than a righteous civil government) could ever forcibly remove your slaves from your custody? (which is what eventually happened) fyi I view Hamilton as the father of the US Constitution….


  52. FD

    MMT is all politics while YOU on the other hand are above politics, preferring to stay above all that and just stick to facts…………….. yeah riiiiiiiiiight.

    Supply side is pure politics, Austrians are pure politics….. economics is pure politics.

    Instead of trying to dismiss something as politics, just address the things it says.

    MMT says;

    The US dollar is issued by the US govt. It does not arise in the private sector and is later lent to the govt………….. any debate here?

    Taxes are not necessary for the feds to have money to spend, they are purely a means to regulate aggregate demand. MMT even says we should lower taxes…….. on EVERYBODY!!……… any debate here?

    MMT says interest rates (for the US anyway) are set by the fed and not market determined……any debate here?

    Lastly MMT says the govt CAN directly hire people and that this likely will be more stabilizing than having a large stable of unemployed people. This is obviously the most controversial tenet of MMT but it is a true statement as far as it goes. Many have aversion to direct hiring ….. ON PURE POLITICAL grounds… but that doesnt mean that MMTs claims are false… or political.

  53. I didn’t say I was above politics. But MMT tries to give this apolitical impression when the reality is that its very politically motivated. Moslers your big defense on the political spectrum and even he’s a democrat. So let’s stop sugarcoating the fact that you’re beating your liberal drums on MMT.

  54. I’m tired of repeating the same point over and over just so you guys can blur reality. [Personal attack deleted.]

  55. Looks like I chose a bad time to take a break from the computer.

    This is a small blog. One upside of this is that the standard of discussion is typically high. A few of the posts in the latter part of this thread look like they belong on a popular blog.

    I will delete personal attacks if and when I come across them in the future. I have done so belatedly with one of the comments up to this point.

    FDO15, I am happy to have you here, but so far you have elected not to add much of substance in your contributions. I’d prefer you either stuck to the topic of the thread or not bother commenting. Thanks.

    Apologies to all that I didn’t intervene sooner.

  56. “On the other hand, States in the real world set a tax rate. ”

    You’ve obviously never paid council tax then. Or the Television Licence fee. Or a fine. Or ordered a passport. Or paid rent on a council house.

    Or done jail for failing to pay a tax. Or paid VAT on your barter transactions.

    All those are bootstraps that force you to obtain state money – and once you do that then the percentage taxes kick in as well.

    It’s like a boiler with a pilot light. The little taxes and the regulations ensure that you can’t avoid the big taxes no matter how hard you try.

  57. Peter,

    Interesting post!

    I have a related question about the Chartalist approach to money:

    What goes in the Chartalist money demand function? (Maybe this function is implicit–I’m sure you know what I mean, though).

  58. Some time ago I used a little story to explain my understanding of how MMT works. As it shows coercion, I’ll put it here, hoping it can be useful.

    Tabitha, Tanya and Toby are siblings.

    Tabitha is a cook and she cooks for Toby. She sells each meal for $X (this is how she gets the money to pay for her dresses).

    Toby is a weaver and he sells his fabrics to Tanya. He sells M square meters of fabric for $X (this is how he gets the money he needs to pay Tabitha).

    Tanya is a dressmaker. Tanya sells dresses to Tabitha. Each dress costs $X (this is how Tanya gets the money to pay Toby).

    One day, Toby lost the only existing coin: a gold coin with a face value of $X.

    As a result, they could not trade: they could not barter directly; they could exchange goods indirectly, but after Toby’s gaffe, nobody trusts him anymore.

    They are unemployed and miserable, although they keep all the stuff they always had: Tabitha still has her pans and food; Toby lost the coin, not the weaving frame; Tanya’s sewing machine is still there.

    So, along comes Uncle Sam. Seeing his nephew’s and nieces’s predicament he devises an idea: he takes an old piece of paper from his pocket, writes “face value: $X” on it, signs it and hands it over to Toby with the following warning:

    “In a year’s time I’ll return and I’ll demand my paper back. I don’t care who holds it, as long as I have my paper back. If nobody has it…” and he shows them an Uzi submachine gun, while staring at them in a cold, manic way that shills their bones. After that, Uncle Sam turned and left.

    Toby clutches the accursed piece of paper with both hands, as he starves.

    Tabitha, who doesn’t have much faith in Toby, offers him a meal in exchange for that useless piece of paper with “face value: $X” written on it.

    Initially Toby is reluctant, but eventually, forced by hunger, he decides and gives her sister the paper and eats as he always had.

    Tanya offers Tabitha a new dress (don’t get me wrong, she trusts Tabitha, but still feels safer with the paper in her own hands). Tabitha was craving for a new dress, after all this commotion. Now she has one and feels happy again.

    Eventually, Tanya needed more fabric and bought it from Toby, paying him with the piece of paper.

    Uncle Sam never had to come back; the siblings still trade to this day, but they make sure the piece of paper is kept safe, just in case.

    It’s a simple story; it may or may not be convincing (I can’t see any logical reason why it should not, but that could be just me), but you can see the role coercion plays.

    (It also shows that the material the mean of exchange is made of has no relevance. And, finally, it shows why effective demand is an issue).

  59. 1. The fact that a government demands that taxes be paid in its currency does not make that currency the most widely used form of money in the country concerned if that government administers the currency incompetently. E.g. In Zimbabwe, the official currency was despised a few years ago (even though I assume taxes had to be paid in that currency). People tended to trade in U.S. dollars, etc.

    2. There is no sharp distinction between the money we all have to pay for food (which is coercive, in that if we don’t eat we starve) and the money we pay for what government does (provide education, health services, etc). Government education and medical services are effectively in competition with private providers of those services. If governments don’t provide value for money in these areas, they get the boot, and customers/voters opt for the private equivalents. The fact that money paid to government for those services is called “tax”, and payment for your groceries is not called “tax” is irrelevant. So governments are much like supermarket chains: large conglomerates.

    Put another way, if we had no money, and a supermarket chain started issuing tokens with which to buy their stuff, those tokens could easily become the basic form of money.

  60. Ralph,

    “and the money we pay for what government does (provide education, health services, etc). ”

    Isn’t this “taxpayer on the hook” though? ie the way this is phrased, it may lead one to believe that the govt needs our “money” to be able to provide services… like the govt “needs the money”.

    Would not the Chartalist view be such that the govt sector wishes to procure health services from the non-govt for a certain portion of the population so it provides balances to the non-govt health providers then collects some taxes…


  61. Ralph,

    I completely agree, as the quote I posted above from Randy suggests. Further, back in 2004, I wrote the following:

    “What matters is not whether there are other, private methods of settling payments, or whether private payments are settled at all on the Fed’s books, but whether there is a non-trivial demand for reserve balances; that tax liabilities are settled with the Treasury via debits to reserve accounts is sufficient for such a non-trivial demand to exist.”

    There are always been and always will be methods of payment in circulation besides the “state’s” money. In the US, there is a deliberate legal requirement that the Fed promote competition among private sector institutions with its own liabilities in retail and wholesale payment settlement.

    Many are currently misinterpreting our words to suggest we would disagree with the two points you make. That is not true whatsoever, and never has been.


  62. The notion of government as supermarket of services, driving acceptance of currency by producing and selling things to the private sector is one addressed in the paper linked to by Scott in an earlier comment:

    “…one accepts government fiat money because one knows one can buy goods and services from government by delivering the same government fiat money in payment. While this is not theoretically implausible, it does require that government, like Microsoft, is a producer and not a consumer of the nongovernment-sector’s output. There may well be governments like that in the real world, but Merhling’s theory is not obviously applicable to the case of most governments around the world… which do provide some goods and services, but which are consistently very large net consumers of private sector output.”

  63. Agree, geerussell,

    I didn’t look carefully enough. I was agreeing with Ralph’s point here:

    “Put another way, if we had no money, and a supermarket chain started issuing tokens with which to buy their stuff, those tokens could easily become the basic form of money.”

  64. Addendum to previous comment: The reason I ask is that initially it when you hear people discuss the “taxes drive money” view (or whatever you want to call it), it seems like a theory that should relate changes in the price level to changes in some given tax rate. In addition, many people (perhaps not academic MMTers, though) do talk about raising taxes to control inflation, which also suggests that the demand to hold a certain stock of liquid wealth is related to the tax rate in some stable manner.

  65. vimothy, I’m not sure I’m interpreting your question correctly and have been hoping somebody else would jump in. 🙂

    My understanding is that what matters for inflation is the size of the budget deficit relative to the non-government net saving desire. Since the latter can be unstable and unpredictable, there will not be a mechanical relationship between the deficit and prices. Also, since tax revenues are endogenous, the deficit will vary for given fiscal settings. For these reasons, I don’t think there can be a simple relationship between fiscal settings and the price level.

    The benefit of automatic stabilizers, including perhaps a JG in the future, is that they counter unpredictable changes in non-government net saving behavior in a timely manner. The academic MMTers argue that a JG would anchor the price level, but prices would still be susceptible to alterations in non-government net saving behavior and, at times, call for tighter or looser generalized fiscal or monetary measures.

  66. Peter,

    Came across these excerpts from a book by JK Galbraith in 1975 “Money: Whence it came, where it went”.

    Don’t see the Chartalist view represented in name anyway. But there are some interesting historic observations by JKG in any case.

    I never heard this book mentioned before so some may find it interesting if they also did not know about it….


  67. Scott, Ralph said

    “Put another way, if we had no money, and a supermarket chain started issuing tokens with which to buy their stuff, those tokens could easily become the basic form of money.”

    See Canadian Tire Money

    Some privately owned businesses (in Canada) accept CTM as payment

    Also from Canada’s Favourite Currency: Canadian Tire Money

    In Canada, various pubs, drycleaners and other businesses have accepted the currency. A bakery in Toronto’s Kensington Market used to trade Canadian Tire money for bread. A restaurant in Guelph even advertised ‘Canadian Tire Tuesdays’, where you could trade Canadian Tire Money at par.

  68. Peter,


    So it seems like from a practical point of view, taxes are not expected to be a very effective tool of demand management. Presumably, the same can be said for govt expenditure, for the same reasons (i.e. what’s important is the level of net expenditure but its effects are unpredictable so not exploitable). Is that fair?

    If so, why would you expect the automatic stabilisers to be more effective? Don’t they work through the same channel (NFA)?

    I’m still interested in finding out more about why in the Chartalist view people want to hold money though, as opposed to other assets. I did read some of Goodhart’s Money Information and Uncertainty last year, and from what I remember he used fairly standard demand functions (a la Tobin), but perhaps Goodhart is not a Chartalist or at least non-typical.

  69. vimothy: The significance of automatic stabilizers is that they are endogenous and respond passively and countercyclically to non-government spending decisions. In contrast, other government expenditures and also tax rates are exogenous. Once they are set, changes in non-government behavior that are not anticipated by policymakers can render the exogenous decisions inappropriate.

    To take a JG as an example, when non-government spending increases and employment picks up in the regular economy, government spending associated with the JG automatically decreases and tax revenues (due to higher incomes) increase. And vice versa in a downturn. The response is passive – decided, really, by the non-government’s behavior – and does not require perfect anticipation of non-government behavior. There would still be an attempt to have exogenous fiscal settings at a level conducive to strong but not inflationary demand in the broader economy, but the automatic stabilizers provide a larger margin for error.

    Regarding demand for holding money (i.e. what proportion of NFA to hold in liquid form), I am not certain whether MMTers are all in agreement on that question, but I imagine they think some form of Keynes’ liquidity preference theory is relevant.

    Having said that, it seems to me that the approach would be open to other explanations of money demand.

  70. Peter,

    Why should the automatic stabilisers be more effective, simply because they’re automatic? If the relationship between NFA and prices is unstable and unpredictable, then the effect of the automatic stabilisers should be unpredictable and unstable too, no?

    Re the liquidity preference theory, I find that hard to reconcile with the idea that bonds and cash are equivalent, which I’ve heard many MMTers claim. Am I mistaken in this? If I’m not, how can liquidity preference explain the demand for money?

  71. Vimothy,

    Automatic stabilizers are more effective, because politically, they require a one time approval by the legislature. After that the parameters of the stabilizer can be tweaked administratively, within the limits set by the legislature.

  72. vimothy: In MMT, inflation will occur if NFA exceeds the non-government net saving desire. What matters for inflation is that the budget deficit does not exceed this net saving desire. For example, NFA might be less than the non-government’s net saving desire, which would be deflationary. The non-government attempt to increase net saving would be countered by the automatic government spending and taxing measures. For instance, the JG spending would increase automatically while taxes fell, enabling an increase in NFA that was consistent with the non-government attempt to net save, and alleviating deflationary pressure.

    Regarding liquidity preference, people can move between assets with different liquidity reflecting changes in their liquidity preference. But this is not a decision to spend or not spend. It is a decision to be more or less liquid. In the theory, greater liquidity will be desired if prices on bonds are expected to fall. The decision to go liquid is not necessarily in order to spend in the real economy but to capitalize on asset price movements, and so does not necessarily have inflationary implications. Relating back to MMT, what matters in that approach for inflation is the net saving desire relative to NFA, irrespective of the composition of saving.

  73. FYI, we do not say bonds and “money” are equivalent. We say that holding Treasuries does not constrain spending. Those are entirely different things.

  74. Scott,

    Can you expand a bit on why/how treasuries don’t constrain spending (or maybe a pointer to further reading)?

  75. geerussell,

    treasury security is one of the most liquid asset, you can sell that easily. And if you buy treasuries, probably you haven’t another way to invest that money, no?

  76. Sort of, and forgive me if I’m being dense here. My takeaway had been similar to vimothy’s above. That one could loosely say cash and treasuries were equivalent, since treasuries are also gov’t IOUs and so liquid.

    What I’m trying to understand is where that thinking goes wrong.

  77. Scott,

    Thanks for clarifying. It seems to me that it might still make sense to talk about equivalence there–an equivalence between bonds and cash in terms of their effects on nominal aggregate expenditure, which implies some kind of equivalence to the holders of those assets. So I’m interested in understanding the nature of (what I’m interpreting/characterising as) this equivalence.

    Where I’m coming from can perhaps be related to your statement that bonds do not constrain spending. Of course I agree that govt bonds are highly liquid. But my question is why an individual agent should choose to hold cash over bonds. Assuming the yield on bonds exceeds that on cash, any investor ought to choose to hold bonds–unless there is some other compensatory benefit accruing to cash. Given that, what compensatory benefit could make the investor indifferent between holding bonds and holding cash?

  78. Peter,

    Sorry it’s taken me a while to respond. Damned exams, interfering with the really important stuff 😉

    Couldn’t the effect of the automatic stabilizers be characterised as a fiscal policy feedback rule–one with (effectively) no discretion and absolute time consistency?

    And if the effect of the policy rule is not predictable, why should the effect of the automatic stabilizers be predictable? I mean, it seems like the same thing in principle. Or perhaps there’s no practical way for the govt to implement such a feedback rule effectively given the political constraints on fiscal policy (e.g., the time it takes to get spending programmes through the legislature, etc).

    It does seem like the obvious conclusion of an MMT-type analysis that everyone should be guaranteed an income by the government in a direct transfer. But I’m interested in how and why all the parts fit together. Another thing related thing that I’ve been wondering about, and perhaps Scott could shed some light on, is how MMT sees the dynamics of NFA playing out in the event of the institutionalisation of its views. E.g., at the point of full employment, how does NFA behave? dNFA = 0, dNFA = dY, etc?

    Incidentally, from what I remember of Godley & Lavoie’s “Monetary Economics”, it mostly focuses on analysing the steady state solutions of the dynamic models, but I don’t remember reading any applications of the model to business cycles–in particular, it would be very interesting to see the model subjected to stochastic shocks to see what sort of business cycle dynamics it could generate. Do you know of any papers in this vein?


  79. “E.g., at the point of full employment, how does NFA behave? ”

    That’s less of a point and more of a line. Full employment is like light speed – it’s impossible to get to the optimal point (everybody engaged at the maximum output they could produce). So the best you can do is try to get close to it. Friction stops anything more, and the friction varies throughout the economy and is different in each economy.

    All hiring systems suffer from the same problem. Once you get to the point where there is insufficient choice you start getting perverse outcomes. The labour hiring market is even more exciting because you start getting perverse outcomes if the hiree doesn’t have a choice too. That generally doesn’t happen with cars or hotel rooms 🙂

    Incidentally the general rule of thumb is to avoid running hiring systems greater than about 80% utilisation. That’s considered ‘full’. Push beyond that and weird things start to happen that make your system unstable.

    And it depends what you mean by full employment – which is another of those Humpty Dumpty terms like inflation that makes analysis so damn difficult.

    The best that any of these macro economic system designs expect is that everybody has a minimum income, something to do and that AD is prevented, systemically, from dropping below some minimum level.

    That leaves a lot of capacity spare in terms of potential output that entrepreneurs can tap. If they can persuade people that they can enjoy themselves just as much doing something else and tap the surplus generated then you get a ‘fuller’ employment.

    “it would be very interesting to see the model subjected to stochastic shocks to see what sort of business cycle dynamics it could generate.”

    Yep. That’s what we need – a weather forecast model that we can perturb dynamically. Inevitably there will be non-linear non-deterministic feedbacks in these systems and we need to understand what they are and what they do.

    Lot’s of work to do in that area.

  80. Regarding the moneyness of the Buckaroo I subscribe to Ingham’s test:

    Money is uniquely specified as a measure of abstract value (money of account) (Keynes 1930;270 Economy and Society Grierson 1977; Hicks 1989; Hoover 1996); and as a means of storing and transporting this abstract value (for means of final payment or settlement of debt (Ingham 2004: 70).

    The buckaroo passes those conditions. I am uncertain why it is important to have citi quote the exchange rate or the ability to buy an iPod are critical features.

  81. It’s awesome to see some of these guys bashing Chartalism based on nothing outside ideology and a total lack of understanding of history. They like to believe in the fairy-tale of the “good old times” – when a bunch of white, smart, slave owners decided they wanted to be free. When they stated that all men are created equal, except for women, neggars, and indians. The same “small” governments which advocated the slave-plantation, the stealing of indian lands, the robbing of land from the mexicans. The imperialist policies in central and south America, then later on those imperialist policies abroad.
    Oh, yeah, great pseudoarguments against the idea of tax-driven money. People should dump all the useless dogmas they’ve been force-fed all their lives, and start studying actual human history and take a simple course in double-entry bookkeeping. For the latter, I recommend Debt, The first 5000 years, by David Graeber.

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