Who Will Accept It? Currency-Issuing Governments are Constrained by Resources, Not Money

“Lerner’s argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.” (Keynes to Meade, April 1943)

“The need to balance the budget is superstition … a myth. It’s like a religious doctrine that is used to get people to believe a certain thing.” (Paul Samuelson)

Election time serves as a reminder of how difficult it is to break through the popular illusions clouding public debate. Try as we might – and this goes for anyone seeking to dispel prevailing neoliberal dogmas – the public perception, if it budges at all, appears to do so painfully slowly.

In attempting to break through, one challenge is to convey our core ideas as simply and succinctly as possible to people who have never encountered them before. When it comes to Modern Monetary Theory (MMT), I think a simple but central point to get across is that for currency-issuing governments the hard policy constraints relate to real resources, not money. We need to convey that money is not the constraint but in almost the same breath call for the focus to be on real resources when pondering questions of economic policy.

Thinking in this way helps to clear away the mental fog that can otherwise form when pondering economics.

For instance, at a time of substantial unemployment and underemployment, what sense could it make to restrict library opening hours if we have the librarians and the libraries? How would closing library doors earlier than usual achieve anything useful? We could only think it was a sensible choice if we falsely believed that money was the obstacle to the operation of public libraries. The currency-issuing national government can always ensure necessary funds are available to currency-using state and local governments in cases where libraries are provided at the state or local level.

If we have the trains, tracks and drivers, what good would be achieved by a cut in rail services? None, unless we thought that money was the obstacle to providing adequate public transport.

If we have teachers and schools; medical practitioners and hospitals; engineers, construction workers and raw materials, what would cutting back on education, health care or physical infrastructure achieve? Again, the answer is nothing, unless we thought money was the obstacle.

And ditto for a great many other activities.

In “economics circles” – whether in university departments or in the blogosphere, facebook or twitter – the opinion is sometimes expressed that the typical person would deem this change in focus from money to resources as being of no practical significance. I strongly disagree with that viewpoint. It is perhaps easy to forget what it was like trying to think about economics and the economy before becoming a specialist in the field.

When people think money is the constraint on the government’s economic policy, they can be very easily deceived into thinking that austerity makes sense.

For such people – and, at the moment, they are surely legion – a basic understanding of MMT is not just eye-opening but would give cause for a fundamental re-think on the economy and economic policy. It can alter a person’s economic perspective at the most basic level.

In terms of economic understanding, I would venture that most people would actually be better off if they had never encountered a single idea of mainstream economics. That is not to say that mainstream economics lacks insight, especially that part of it that has emerged out of a broadly Keynesian tradition. But in modern mainstream economics, as taught formally to undergraduates and informally to consumers of mass media, these insights are largely disguised amid a jumble of mystifying neoliberal notions. Chief among these are the flawed analogy of government as household and the supposed desirability of government being run “as a business”. The economy is held up erroneously as the determiner of the social rather than embedded in society. In short, there is acceptance of the myth that “there is no alternative”.

For those presently captive to neoliberal dogma, it would probably be more effective, when contemplating economic issues, simply to think (or ask) about the real processes and real resources involved in pursuing a particular policy and consider its feasibility in those concrete terms.

Once this simple but important distinction between money and real resources is understood, the way is clear to develop a more accurate understanding of money, its role and how it “works”.

The change in perspective is simple but at the same time requires something of an about-face. Much of what we thought we understood is “turned on its head”. It is an epiphany of sorts.

Once we “get” it, it seems simple and obvious, and we would never wish to go back.

There is nothing frightening on the other side. The change in perspective does not necessarily call into question any of our personal views on politics or policy questions, except when these views are predicated solely on a false notion that money, rather than resources, is what constrains a currency-issuing government.

Once a person has made this basic switch in perspective, I think an understanding of the basics of MMT and related macroeconomic perspectives will follow quite easily. These basics will seem intuitive rather than counterintuitive.