Straw Men (And Women)

This post is for all the MMT foot soldiers out there in cyberspace, including myself and most readers (prominent MMT economists who are kind enough to drop in from time to time excepted, of course).

Come on, we know who we are. Battling it out in diverse message forums, matching wits with fellow participants who, judging from their arguments, mostly appear to read our posts with their eyes shut and their fingers in their ears to block out the sounds of our linked video presentations. This navel-gazing exercise may seem self-indulgent to the crustier MMT old-timers among us, but, hey, rationalize it, we deserve it!

The post is also for readers who have not yet made up their minds about MMT. Think of this as a small taste of the kind of self-congratulatory back slapping you too will be able to enjoy at heteconomist if you decide to join the ranks of the foot soldiers. Enjoy! You also deserve it!

Straw Men in Cyberspace

On a private message forum I often visit, a regular participant – who is very bright, and a good contributor on many topics – recently posted a criticism of the MMT position on budget deficits that went something like this:

Budget deficits increase demand in some areas and decrease it in others. To illustrate the point I will show an extreme example. Say Honest Annie has $10,000 in savings. Mr Lucky is given $100,000,000 to stimulate the economy. Oh look, now Annie can produce more goods because Mr Lucky can afford to buy them. Of course, look at poor Annie’s real disposition. This new demand comes with the devaluation of her hard-earned savings. What is changing is that now she has to produce more to be able to afford more goods. The government has tricked her into having to work more because her savings have been devalued due to inflation. Sure, Mr Lucky is happy because Annie is producing more goods for him, but there are two sides to the coin.

Clearly the government should not adopt such a ridiculous policy in which it randomly gives one person $100 million in an economy where a typical person has savings of $10,000. But even in terms of the ludicrous example, the poster’s logic is lacking.

If Mr Lucky spent some of the money to buy stuff from Honest Annie, and she had the available time and resources to respond to the additional demand at current prices, she would receive some of Mr Lucky’s money in payment and also have increased spending power to purchase output from Mr Lucky or somebody else. The deficit expenditure can increase demand in some areas without reducing it in others provided the economy is operating below full capacity.

The question is whether there are idle resources that people would willingly put to use if there was demand for the resulting output, and whether this additional output could be supplied in a non-inflationary manner.

No one in the MMT camp is suggesting the government should net spend more than is necessary to enable the purchase of potential output at current prices.

The author of the example is influenced by the Austrian school, so some of his reasoning is defensible within that framework. In particular, as I discussed here and here, the Austrian definition of inflation is different from the one used by other economists. For everyone but the Austrians, inflation means a persistent rise in the general price level (the weighted average of all prices of final goods and services), not an expansion of broader money per se.

This can lead to differences between Austrians and non-Austrians in their assessments of whether inflation is occurring. If there is a rise in general prices, there will typically be an expansion of broader money to accommodate it unless real potential output shrinks due to a supply shock. In this case, both Austrians and non-Austrians alike will observe inflation. But it is possible for the broader money supply to expand (inflation for Austrians) without general prices rising (no inflation for other economists) whenever the economy is operating below full capacity. This means that from the Austrian perspective, it makes sense to suggest deficit expenditure will reduce the value of money even if, for other economists, there is no inflation.

Differences such as this can be discussed as part of a healthy debate. What is more annoying is the practice of creating straw-man arguments, such as the suggestion that MMT economists are advocating mindless spending out of all proportion to the actual demand deficiency or without any thought to the allocation of that net spending. The tactic often appears to be deliberate, in that there is a wilful misinterpretation of the argument to make it easier to ridicule or criticize. No matter how many times the point is clarified, the wilful (and convenient) misinterpretation will be repeated as if nothing has changed. The result is a discussion that fails to advance beyond irrelevant mischaracterizations and attempts to set (reset) the record straight.

As a practical matter for foot soldiers, we need to balance the need to deal with such mischaracterizations with the desire to develop the argument further for those not thrown by the mischaracterizations or to present the same argument elsewhere. At some point, it is probably best to assume that intelligent readers have been provided with enough clarification to make up their own minds about the merits of the straw-man argument, and just get on with advancing the discussion, or if the point has been made, move on to other forums. There is no need to convince every person in every forum.

MMT – and heterodox approaches, in general – seem more susceptible to this kind of straw-man treatment because its proponents have to make the running. In debates with critics or skeptics, the aim of the MMT proponent is usually to explain why the current dominant understanding of the economy is lacking, and why an alternative may offer an improvement in understanding.

A skeptic who is only interested in a better understanding of the economy has no motive to mischaracterize MMT arguments. The motive for engaging in discussion for such a person would be to understand the approach to enable an informed assessment of it. But when a skeptic or critic is more interested in defending a preconceived view of the world – possibly for psychological, political, or careerist reasons – their motive may not be to understand but to obfuscate, sidetrack, or otherwise hold up the discussion in ways that at least muddies the waters enough to make it difficult for others, who may be trying to understand without prejudging positions, to separate nonsense from valid argument, especially if they do not have a training in economics.

Consider journalists who write on economic matters, for example. In a way, it is hard to blame them for erring on the side of the orthodoxy when in doubt if they don’t have sufficient confidence in their own understanding of the subject. When in doubt, it is surely safer to go with the view of a Nobel Prize recipient or Professor from an Ivy League university over the views of a heterodox economist, even if the heterodox position seems to make more sense.

Opponents of the heterodox position can take advantage of this, knowing that they do not have to win arguments, or even engage in them in many cases, provided there is sufficient doubt over the heterodox position, whether because of perception, status, obfuscation or deliberately disruptive tactics, which on the internet can of course be done anonymously.

Straw Men in Academia

Straw-man argumentation is not limited to the orthodoxy or the internet. Heterodox schools use this tactic in disputes among themselves. For example, Marx’s theory of value was widely claimed to be “internally inconsistent” for eighty years on the basis of a straw man (the dominant dual-system, simultaneist interpretation of his theory) before a group of economists were finally able to demonstrate that Marx’s work could be interpreted in a way that not only gave it internal coherence but reproduced all of his results on value, including the long-run tendency of the rate of profit to fall, which had supposedly been “disproved” by Okishio’s theorem.

It wasn’t until the 1980s that papers began to be published by economists adhering to the so-called “temporal single-system interpretation” of Marx, demonstrating the theoretical coherence – validity, not necessarily correctness – of his theory of value when interpreted in a temporal and “single-system” way. It took another twenty-five years of persistence by these economists before the critics grudgingly stopped dismissing Marx’s theory in pat phrases repeated over and over again without any authority other than the insinuation of authority.

One of the leading protagonists in this debate, Andrew Kliman, has written an accessible book, Reclaiming Marx’s Capital (no free link available), for the generalist reader documenting the history of the debate and summarizing the major findings. For anyone interested in the debate over Marx’s theory of value, it is well worth reading, and eye-opening in bringing to light the extent of intellectual dishonesty in academia, including within the heterodoxy.

The straw-man tactic of the critics served to discredit Marx and help to create a justification for alternative heterodox theories to replace or “correct” Marx’s theory. The tactic was also employed by developers of an array of alternative, though short-lived, value theories, such as the New Interpretation, Simultaneous Single-System Interpretation, Value Form theory, etc. A certain career benefit and “respectability” no doubt also comes from distancing oneself from Marx’s theory of value in a capitalist society.

The straw-man attack on Marx’s theory was effective partly because Marxism is outside the orthodoxy and Marxists have little to no presence in academic economics, let alone clout. Another reason for its effectiveness may be that Marxist thought is critical of the capitalist system itself. It is not merely reformist. This is not exactly the most career-savvy research program for an up-and-coming academic.

None of this is to suggest that the alternative positive theories of the critics are not valid approaches in their own right. It is simply to insist that the developers of these theories were not entitled to assert the invalidity of Marx’s theory almost like a religious mantra when the argument relied on a straw man.

The unjustified but highly successful eighty-year banishment of Marx’s theory can be contrasted with the lack of impact the Cambridge Capital Controversy has had on the dominance of neoclassical economics. This time the position of the critics in theoretical terms was very strong, and their central points were conceded by Paul Samuelson and other leading neoclassical participants in the debate, yet the victory has so far had little impact on the status quo in academic economics.

The strategically effective response of the neoclassical orthodoxy to heterodox critiques drawing on the results of the Cambridge Capital Controversy has been simply not to respond through debate but rather ignore the implications, stop publishing heterodox work in the top journals, and cease hiring heterodox economists in the most prestigious universities or leading policy-making institutions (see Nobel-nomics for a polemical take on the aftermath of the Capital Debates).

When aimed at the orthodoxy, even legitimate criticism struggles to make a dent. For the heterodoxy, the very strongest arguments take a long time to break through.

Eventually, though, as MMT commentator rvm often reminds me, truth will out. Advances in understanding in many areas of human endeavor have faced the same kind of opposition throughout history. Even now, some heterodox advances in economics eventually slip in through the back door of neoclassical economics.

For example, there appears to be an increasing recognition among monetary researchers that some traditional concepts are untenable. Recent notable examples apply to the money-multiplier theory and money endogeneity. Understanding of these points has been well established in Post Keynesian economics for a long time. Now, slowly, some of the ideas are creeping in to mainstream analysis (usually without appropriate credit being given to earlier heterodox work).

All this is a longwinded way of saying that the road is uphill, but the only option is to keep plugging away. Some of the leading proponents of MMT have been grinding away for thirty years now. As internet foot soldiers, we can follow their lead. Sooner or later, perhaps long after we’re all dead, society will wake up to reality, strengthen conceptual understanding, and implement sensible policies.

Ancient historians of twentieth and twenty-first century economic thought will look back and realize that much of the truth was worked out by Kalecki, Keynes, Lerner, CofFEE, UMKC, The Center of the Universe, etc. From their vantage point of 5000 AED (five thousand years After Environmental Destruction), orthodox historians will wonder how the clear and cogent answers of MMT could possibly have been ignored by so many experts of the era, who seemed inexplicably fond of straw men. These orthodox thinkers of the future will know with utter certainty that they could never be so close-minded!

A Comment on MMT Internet Discussions

There is one particular straw man that is repeatedly erected by critics of MMT. I’m sure most foot soldiers reading this will have noticed it. It is one that I find especially grating. The best (i.e. most irritating) phrase I’ve seen to encapsulate the nuances of this particular straw man is the refrain:

MMT claims we can print prosperity.

The phrase “print prosperity” is shorthand for the common message board accusation that MMT ignores real resources and gets bamboozled by money as if it is magic. The accusation is very common. The term “print prosperity” was coined, to the best of my knowledge, by a Math Professor, no less, who happens to be keen on the kind of “fiscal conservatism” advocated by the Concord Coalition.

I consider it a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

MMT shows clearly that if we have the resources, money is no obstacle to a government that issues its own flexible exchange-rate fiat currency. It is not saying that creating money magically creates goods and services. It is saying that it is nonsense – superstitious nonsense – to think affordability for such a government could be about money rather than resources.

Obviously, anyone is entitled to disagree with the MMT position. But they are not entitled purposefully to misrepresent MMT as suggesting that it is oblivious to real resource constraints when it is alternative theories that attempt to obfuscate matters by conjuring up fictitious “financial constraints” (e.g. the neoclassical “government budget constraint” framework).

Take the debate over how to address the aging population for example. It should be obvious – and is obvious in MMT – that the only way to address this issue is to increase future productive capacity. This involves the application of real resources now to research, infrastructure development, education (including in areas relevant to servicing an aging population), etc.

Clearly, MMT is not, as many internet critics claim, saying that creating money solves the problem. It is really the MMT critics who are falling into the trap of thinking money rather than the application of real resources is the solution, despite their frequent protestations to the contrary. They are the ones who think that if the government “saves” money now, this will somehow help to address the needs of the aging population in, let’s say, twenty years time.

Yet, these same people also stress that you can’t “print prosperity”. Well, if you can’t “print prosperity” – and we all agree on that – what good is that money the government supposedly should stash away going to be twenty years from now? It won’t help to provide the infrastructure and technological knowledge that was not developed in the preceding twenty years because governments preferred to “save” money for the future rather than apply resources to the real task of raising productive capacity.

Oh well. We shrug and move on. Such are the trials and tribulations of an internet foot soldier.


45 thoughts on “Straw Men (And Women)

  1. Great video. Thanks, FSS. Hats off to Mike Norman. He knows how to handle the blathering bullying Fox tactics.

    I liked when Varney said “we could talk about fancy economic theories, Keynesian or otherwise, all day long.” Mike grins at that point. I would, too. Varney has demonstrated no capacity to understand even the most basic economics up to that point. I’d love to see him get “fancy”. 🙂

  2. Excellent! Hope you don’t mind if I post it on my website?

    Also, let me add, that yes, we can’t ‘print prosperity,’

    but certainly can ‘unprint prosperty’ which is exactly the problem!

    so we have federal spending that can be not wrongly called printing dollars (which increases dollar net financial assets of the non gov sectors)

    federal taxing that can be called unprinting dollars (which decreases dollar net financial assets of the non govt sectors)

    and borrowing which is the act of shifting dollars from fed reserve accounts to fed securities accounts (and doesn’t alter total dollar financial assets)

  3. Hi, Warren. Thanks for your informative comments.

    Certainly feel free to post on your website. Anything that helps to get the MMT word out. Plus, I’d be flattered. 🙂

  4. It is good to read that one of the MMT-proponents recognizes several of the major stumbling blocks which appear to impede communication of MMT ideas to others who profess interest in, or familiarity with, finance/economics. I had seen the Mike Norman/S Varney shouting match shortly after it appeared and found it puzzling that Mike was not better prepared to deal with Varney’s predictable behaviors. I also have followed comments on most of the blog sites dealing with MMT and have frequently noticed arguments similar to those mentioned by Peter C. Unfortunately, only a few commenters appear to have both the understanding, familiarity with a wide range of economics sources, and the ability to communicate in an effective manner.

    Although I am neither a financial or economics expert, I have an interest in the ideas promoted by the various teachers/practitioners of MMT who think/claim that they actually understand what is going on in the world today. If one wishes to influence popular opinion today and has lots of wealth to expend in such an effort, one can always try to use the MSM, however, that does not strike me as a prudent path for obvious reasons. On the other hand, if you were to pitch your arguments in a way/using a technique that has the possibility of facilitating conveyance of information to a broader audience, such an effort might prove a winner. In this context, I have left comments at several (5-6) blog sites to indicate that visual techniques (especially, animation, cartoons or comic strips) will be noticed and, if done well, will convince; example comments at W Mosler’s site:

    There have been only a few indications of agreement; however, these types of effort would require background information, time and talent which neither I nor you may possess. On the other hand, should this be read by someone who knows of a suitable candidate, this could be a useful challenge.

  5. Agree with William Wilson.

    I had similar thoughts when the erroneous QE animation clip went viral. For this to happen though we need formal organization to put money and resources together. I am pretty sure Peter has the talents to do such projects – MMT video clips.

  6. Hey Senexx,

    Love the video with Mike Norman. I posted it on America’s Debate and hope to get some additional converstaion going. Thanks.

  7. Forwarding MMT articles to friends can make you nervous; specially if those friends are already shooting up the self righteous indignation of the ‘back to the gold standard’ bunch. Might a change of emphasis make the process of opening minds a little easier? Shouldn’t the true nature of a deficit and how a nation can starve for lack of one be the center piece? Also, if MMT made it clearer that lowering taxes was the preferred method for achieving an adequate deficit and emphasized that public sector spending should be prudent and productive it might not so often receive the spendthrift label.

  8. Agree with the suggestions of animations etc to help make MMT pithy and comprehensible. But even before this, my view is that we need:

    (1) a clear, single intro page on MMT which most practitioners agree on (right now Bill Mitchell’s intro section consists of a dozen pages, and Warren’s intros under “Mandatory Readings” are quite long and heavy)

    (2) the wikipedia page updated – at the moment it’s v weak.

    I am keen to start lobbying journalists, politicians etc, but until we can refer to a single place which captures all the tenets, no one will bother to engage properly. The analogy is with Flat Earthers before Galileo: you wouldn’t have persuaded them that the Earth was round by asking them to spend a month wading through blogs.

  9. An Internet MMT portal/wiki is badly, badly needed. Something much more concise than Bill Mitchell’s posts (man, are those long…) and more uniform and to the point than Mosler’s Mandatory Reading. The level should be more “for dummies” (with links to more “expert” parts).
    As a substitute so far, when I post on MMT to novices, I usually start with the Levy Institute brief
    and then the Mosler book:
    as good introductory materials.

  10. “I consider it a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature.”

    It’s not really perverse, is it? It’s a pretty obvious consequence making claims like “the govt doesn’t need to fund its own spending”, etc, etc. “Print prosperity” is not an inaccurate summary of Neo Chartalism, IMO.

    And look, you’ve constructed your own straw man here: no one thinks that the true constraints are financial or monetary, we all agree that they are real resource based (remember money as a veil?).

  11. There you go again, Vimothy. You’re smart enough to not make such silly mistakes.

    First, yes, it’s inaccurate summary without the real resource constraint if the constraint is core MMT. Just taking one of the core axioms to a logical conclusion that is inconsistent with another core axiom is by definition inaccurate.

    Second, EVERYONE understands? Did you read the discussion of SS above? Have you heard Obama say “we are out of money”? Yes, theoretically it should be obvious even from mainstream texts, but that’s easily glossed over by most. Guess I shouldn’t be surprised that they can’t get MMT right, either.

  12. “Just taking one of the core axioms to a logical conclusion that is inconsistent with another core axiom is by definition inaccurate.”

    I said that rather strangely. Meant to say something like this: Considering one of the core axioms (or principles, perhaps) in an extreme hypothetical situation that is inconsistent with another of the core axioms/principles is by definition an inaccurate depiction of the overall approach given that it is the axioms/principles together that are the foundation. Without both operational realities and resource constraints, you simply aren’t talking about MMT.

  13. Hi Scott—I was sorry that our discussion at Interfluidity got cut short. Anyway.

    Yes, I’m afraid that EVERYONE really does understand. No one doubts that the govt can cut as much scrip as it wants. Taken together, your two axioms are true but trivially so. The issue remains whether the government can fund its spending in real terms. The Neo Chartalist solution is merely to note that the government does not need to fund its spending in real terms—it can always issue more currency and let the chips fall where they may. But this is a non sequitur.

    There is a further problem with the idea of Neo-Chartalism as resting on these twin axioms. The problem is, in practice, when does the second axiom actually bind? I’ve been reading you guys for over a year now and I have yet to read anything, in any medium, which suggests that we don’t have the real resources to do X,Y or Z. I mean, talk to some of the commenters on your blogs—it’s pretty clear that they don’t think about the real economy at all. Why is that? Because they don’t see the issue, because they read your blogs!

  14. I respectfully disagree with (almost) all of that.

    First, I’m glad it’s a non-sequitir for you. You’re not the problem, then. Obama thinks we’re out of money, though, and most agree and think China is our banker. They also think the govt won’t be able to afford SS. I don’t know how you could have possibly missed that.

    Second, of course, those axioms on their own are trivial in the sense that properly understood they aren’t unique to MMT. I would agree that sometimes my colleagues focus a bit too much on those alone, at least in the blogs (the research is a good deal more detailed in most cases). I’ve always thought that one of the core links is understanding that the loanable funds market doesn’t actually exist, and MMT’ers have provided the most detailed explanation of why. Yes, need more work on inflation, but (a) we’re a handful of economists (maybe 2 or 3 handfuls now), so please don’t hold us to the standard of research output of the tens of thousands in any competing school (that is, a complete, and completely emprically verified theory of how the macroeconomy works is a LOT of work), (b) take your preferred understanding of resource constraints and combine it with MMT’s operational understanding (the complete understanding here, not a simple “govt can create money” tag line–that’s the significant contribution of MMT to all of this) and in most cases (not all, for sure) the total picture has been changed (in some more than others, but changed nonetheless).

  15. Scott,

    Do you and your other colleagues – MMT economists – teach students?
    If yes, I want to believe you teach them MMT-economics?
    I know this year Prof. Mitchell and Prof. Wray are supposed to publish the first MMT textbook. Do you think it will reach some universities?
    How do economics departments decide what textbooks to be used in their courses?

  16. Scott,

    But when Obama says that the US is out of money, what does he actually mean? When the chattering classes depict China as the US’s banker, what do they mean? And when mainstream economists describe the loanable funds market, what do they mean? It strikes me that, in general, what you guys critique is something quite different.

    For instance, if Obama means that the US is literally going to run out of currency, then I agree that he’s talking rubbish, would greatly benefit from MMT101, and should be enrolled forthwith. But I don’t think he means that. I don’t think anyone means that—because it’s patently absurd. Obama means that USG cannot fund increased spending in real terms. Is he correct? Maybe he is and maybe he’s not, but it’s obviously not an issue that can be decided with reference to “operational realities”. And if you ask a typical commenter this question over at Billy Blog, say, and they will tell you that supply is infinitely elastic and output prices fixed as long as there is unemployment (though maybe not in so many words), which is 1, clearly in conflict with reality, and 2, not serious on its own terms (i.e. as a theoretical model without reference to the outside world).

    On loanable funds, for a further example, I think that Neo Chartalists are on even weaker ground. With respect, I haven’t yet seen an accurate description of the model, let alone a good explanation of its flaws.

    One of the chief problems with your approach (IMO) is that it over-values the analysis of the monetary circuit and undervalues the dynamics of real production and exchange, to the extent that it not only puts the cart before the horse, but mostly forgets about the horse altogether. But with no horse, the cart won’t move. Careful accounting is reduced to solipsism. Remember Bill Mitchell explaining that there is no such thing as the long-run (in a post about “conservatives” and the non-neutrality of money)? So what about that second axiom, those real constraints—where are they, not in the economy, but in your analyses?



  17. What does this sentence mean?

    “MMT – and heterodox approaches, in general – seem more susceptible to this kind of straw-man treatment because its proponents have to make the running.”

    Is “running” a typo?

  18. Vimothy,

    Again, I think it’s obvious they think we’re going to run out of money. Good for you that you know it’s absurd, and anyone studying macro models, even mainstream ones, should actually know this. But I can speak from experience presenting to lay people in my community and elsewhere that NONE of them actually know this–they are absolutely shocked to find out that money is an accounting entry. Similarly, the vast majority of even economists believe that SS can only operationally finance full benefits if payroll taxes and trust fund balances allow. I was just asked to speak to the locally Rotary club next week to explain this very point to them since 1 member has seen my work and knows that it will blow everyone’s mind to hear how it actually works. Another example is that most every mainstream economist, liberal or conservative, thinks there is some fixed quantity of “national savings” or fixed flow of “national saving” available for financing economic activity, and that deficit spending crowds the private sector out from accessing this (financial crowding out, that is, not real resource crowding out, which obviously can happen).

    On loanable funds, lots of critiques there. More formally, Tymoigne and Kregel have dealt with the concept of a real rate. I’ve gone through the “national saving” perspective point by point and built a more realistic approach, again point by point, in “interest rates and fiscal sustainability.” Many others. If you don’t find them persuasive, I’d be interested in your critique.

    On cart before the horse, the shortcoming in modern macro is in understanding the monetary and financial system, in our view. On the eve of the crisis, Mishkin gave a speech admitting that “financial market imperfections” had not been integrated at all into the basic mainstream model usually employed by policymakers. Willem Buiter wrote a blog post arguing that the mainstream model had been completely useless for understanding and responding to the crisis. Whether you agree or not, there’s a lot of support in both the mainstream and heterodoxy for the view that this is an enormous gap to be filling.


  19. RVM,

    Yes, a number of us teach. I only teach a few economics courses anymore, but when I teach MMT-related aspects of the economy (monetary system, financial system, in particular), I definitely teach the MMT view there, though I also explain the textbook view usually.

  20. rfr: Welcome! To “make the running” is an informal expression that means to take the lead in doing something. In this context, if MMT people want a debate with the mainstream, they will usually have to instigate it, because they are a small group and so unlikely to attract the attention or criticism of the mainstream unless they initiate the discussion. Alternatively, if they enter a discussion already being conducted by the mainstream, their argument will not be understandable to the mainstream unless the foundations of the position are explained first. This creates many opportunities to nitpick over side points to stall the argument and keep it from moving forward. Or, at least, that’s the suggestion I was trying to make. It’s contestable, of course.

    Idioms: Make the running

    William Wilson, Peter D, LED, Anders: Welcome! I think you all raise an important issue which I think deserves a separate post. I don’t have the answers, but it might be beneficial to have a post designated to the issues you’ve raised. That way, people can drop by and add resources or suggested teaching innovations.

    vimothy: It’s nice to see you here. I’ve read your contributions with interest at billy blog.

  21. Hi Scott,

    I will happily concede that many normal people probably do have beliefs about money and our financial architecture that don’t correspond to reality very closely. I’m also quite sure that hearing you explain how the monetary system actually works really will blow some of their minds. Personally, I admire your work. I disagree with many aspects of Neo Chartalism, but I always try to keep up to date with your papers (and Marc Lavoie’s output—who I know is not in the camp, but is related, at least in my head). But I also find that the naive view has some value. In fact, I think that a fusion of the two—your sophisticated understanding of the monetary system with the layman’s simple obliviousness to it—produces something that makes a lot of sense.

    The naive view is necessary because it gets you axiom two. Without it, circuitist approaches reduce to this Xeno’s paradox of infinitely recurring short-run ur-moments—where, we discover, in the foxhole, that the government makes the rules, and as such it can largely do whatever it damn well likes. But it can only do what it likes with with respect to those rules, the ones it makes. The naive simple stuff is correct in that there really is a constraint, which they’ve misidentified, and after we remove the false constraint, a real one remains.

    Even if all your claims are true, the economy’s productive capacity has not increased. The basic mainstream intertemporal optimisation macro model describes a situation which holds in both worlds—MMT world and neoclassical world. The optimal level of capital is a function of the real interest rate. Investment requires saving. Real income defines the budget constraint. National savings really is an actual quantity (adjusted periodically). Yadda, yadda, yadda. A bit boring, perhaps, but no less true for all that. Take any arbitrarily selected spending programme—it can be SS if you like. Can the government afford it? Maybe and maybe not, but the answer is certainly not an unconditional yes (or no, for that matter), which is the impression many might get from reading your literature.

  22. Of course if you concentrate too much on real constraints that may or may not be accurate you miss the simple but powerful change to the construction of policy that makes all the difference.

    Instead of

    ‘what are you going to cut to fund programme X’

    MMT show that you can have:

    ‘fund programme X, which will either pay for itself by expansion in the real economy (in which case inflation will stay steady and there will be no tax/interest rate rises), or it won’t (in which case this tax will go up or this interest rate will change).

    In other words your policy options switch from ‘pre-fund’ to ‘post-fund as required to maintain stable prices’. Taxation is no longer linked rigidly to the amount of government spending, but to the combination of government spending, net private sector nominal saving and the real expansion of the economy.

    It is powerful to be able to say “We intend to introduce a Job guarantee scheme funded by the state and we expect that the economy will be able to expand its output to absorb this extra spending. However we reserve the right to increase Corporation Tax by up to 3% to compensate should it feed through. Obviously we want to avoid that so over to you Mr Entrepreneurs to create the necessary expansion.”.

  23. Just wanted to add that I really liked both the post and the discussion. Vimothy, I think here you expressed much better your problems with MMT (I know you don’t like the term, but hey, that’s less typing than Neo-Chartalism) than on Winterspeak. Thanks!
    Scott Fullwiler also makes many things much clearer.
    And Neil Wilson’s last comment is a keeper as well.
    Thanks, all.

  24. Vincent: Thanks for posting your critical summaries.

    I haven’t had a chance to study them closely yet, but a couple of things jumped out at me on a first reading.

    You criticize MMT for ignoring the likelihood that inflationary pressures will begin to mount before reaching full capacity. Part of the reasoning behind the job-guarantee proposal is as a means of dampening inflationary pressures in the regular economy with targeted fiscal policy while maintaining full employment through the job-guarantee program. The latter would pay a fixed minimum wage and benefits package and not be allowed to compete on wages with employers in the regular economy. One effect of this would be to stabilize prices. In downturns, the job-guarantee program would put a floor under prices. In upturns, workers would be drawn out of the program into the regular economy since it only pays the fixed minimum. There is a set of billy blog posts on the topic. In terms of inflation, this post is relevant.

    Regarding the MMT take on hyperinflation, you might like to check out this set of billy blog posts if you haven’t already.

    I agree with your philosophy of trying to understand the approaches of competing schools of thought. In particular, I think understanding the points of difference between competing theories enables a stronger understanding of each theory.

  25. Neil Wilson: “In other words your policy options switch from ‘pre-fund’ to ‘post-fund as required to maintain stable prices’.”

    That’s a great summary, Neil.
    This is like the difference between driving your car based on what you think the road will look like vs. adjusting your driving to the road condition as their occur.
    Suppose you think that in the near future the road will go downhill – you’ll try to adjust by breaking now so that you don’t go too fast. Then you actually discover that instead of downhill the road goes uphill! Uh-oh! Now you are already driving super-slow and need to step on the gas to to somehow scale the hill. And to add insult to injury, you still think that there is somewhere in the future a steep downhill, so, you don’t allow yourself to step on the gas too much because of that and are stalling on your way up!
    This is exactly what we’re doing with our fear of deficits (combined with bad thinking that makes estimation of road condition even more unreliable.)

  26. Vimothy,

    Perhaps you were just joking, but all of this is 100% wrong:

    “The basic mainstream intertemporal optimisation macro model describes a situation which holds in both worlds—MMT world and neoclassical world. The optimal level of capital is a function of the real interest rate. Investment requires saving. Real income defines the budget constraint. National savings really is an actual quantity (adjusted periodically). Yadda, yadda, yadda. A bit boring, perhaps, but no less true for all that. “

  27. Scott,

    A bit tongue in cheek, yes, and I’m glad that it comes across on the internet (irony and blog comments rarely mix). I mean, I brought that stuff up because I know that you disagree with it all. I meant what I said about reading your stuff you know!

    But I don’t think that it is 100% wrong. We can discuss this if you have the time or the inclincation…?

  28. Vimothy, would you disagree with Neil Wilson’s interpretation of MMT (and my analogy) above? If so, why. If not, do you agree that MMT is not without merit?

  29. PeterC,
    thanks. One part I would particularly like feedback on is my explanation of bonds. In the same way we can imagine that the government burns all money collected as taxes and spends money out of thin air, we can also imagine that they burn all money collected from bond sales. The selling of a bond is like collecting a tax and then later creating money out of thin air and giving it to the people you taxed as a stimulus. While the bond is out it reduces demand like taxes do.

    Do you agree that my explanation of bonds is in the MMT spirit? Are there other MMT people who have explained it this way?

  30. Scott,

    By real income, I just mean the amount of income you’d get if you got paid in units of output instead of “money”. Money can be created ex nihilo at will, whereas real income obviously cannot. So it’s useful to think in terms of real income, and one way to approach the GBC is via the household BC. Imagine a two-period lived household. If we assume no credit constraints (and no fraud) then the maximum the household can consume in period one is the present discounted value of their lifetime income, i.e. Y_1+Y_2/(1+r). Clearly the government faces a similar (not necessarily identical) constraint.

    National saving is the flow of output that is unconsumed by either the public or private sectors. Bill Mitchell seems to think that it’s just an amount of money, and what difference does it make if the currency issuer acquires or doesn’t acquire currency. But the govt acquiring currency is neither here nor there.

    Investment requires saving because there are only two uses for output: consumption and investment. Saving is not consuming. Therefore investment requires saving (i.e. requires some unconsumed output). Nothing to do with money or banking. Just the raw physical facts of the universe. This explains how and why the govt can save. If I want to build a capital good, what is it going to be made out of—accounting entries?

    The optimal level of capital must be a function of the real interest rate, because the real interest rate is what equilibrates present and future production and consumption. Note that the real interest rate need not exist, and the optimal level of capital need never be reached.

  31. Vincent: I think it is fine when you say the bond sales, like taxes, don’t alter the government’s financial capacity to spend. It is not actually considered necessary to issue debt if instead the government simply let reserves build up. Since MMT rejects the money-multiplier theory, the inflationary consequences of the deficit expenditure will be similar whether bonds are issued or reserves are left to mount.

    Have you run your summaries past people at billy blog or Center of the Universe? If not, I think it could be worthwhile in terms of getting more feedback.

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