Originally published March 15, 2012 on the New Economic Perspectives blog.
Sorry for the delay. I will respond to comments on my blog and also to comments on Dan Kervick’s excellent piece on MMT (part one—if I have any comments for part two I will post them after I get time to read the post and comments).
Since many comments then led to discussion that I think sorted things out, I will be choosey, commenting only where I have something (useful, I hope) to add. I’ll reword comments to suit my purpose—no disrespect intended, I just want to focus on what I think is important.
Q: Philip: Austrians use a bait and switch operation—denying that what we have is capitalism and comparing it to some sort of ideal utopian capitalism.
A: Agreed. That makes it easy to blame all of real world capitalism’s problems on its deviation from utopia. It is fundamentally an anti-scientific approach. Let’s analyze what we have and try to make it better. We cannot have utopia. We’re dealing with human society, after all.
Q: PH: 2+2=4. Science but no ideology.
A: Mitch did a great job answering this, and Joe supplemented. Let’s try this. 2+2=4 is a definition, not science. 2 cows + 2 cows = 4 cows moves us a bit closer. But what is a cow? We need some sort of view as to what qualifies. We need classification: do we count baby cows? Dead cows? We need a theory of species: ability to mate and produce a viable offspring. Ok then—as I told the MMR people—we are beyond cow plus cow and into bulls. So we need a view of gender. And then we’ve got nominal bulls who self-identify as females. And we’ve got donkeys and horses that happily mate and produce mules but their offspring cannot reproduce—although modern science will no doubt resolve that problem.
And then as Mitch said we want some sort of universal representation of value so that we can go beyond 2 cows + 2 bulls = 4 calves (maybe 5) and on to 2 cows + 2 bulls = 1 donkey cart. That is a tremendous ideological leap that literally took a million years for humans to make. But even then we’ve probably not advanced beyond accounting—which has some science behind it but what we really want do with science is to solve problems.
For that reason, we need to separate science from mere accounting and mere categorization and mere technique. For example, one objection often raised to my formulation is that Nazis used “science” to turn human skin into lampshades. In my view that is clearly false. Science must be purposeful and progressive, to serve human kind. Science does not refer to techniques used to perfect mass murder.
Q: Abram: Reality has a liberal bias.
A: Exactly. I love it.
Q: PG: Marx-Engels odes to first 100 years of capitalism is a myth.
A: Well if you don’t like that, what about the past 100? Or do you believe those stories about interplanetary travel by our ancient ancestors. You do not have to love capitalism to recognize its progress and advance—as Marx demonstrates. If I wanted to quibble with the odes to capitalism, I’d instead point to the remarkable progress of the Soviet Union in its first 2 decades, or to China in the past 2 decades—both of which deviated substantially from the capitalist model and still succeeded—rather than poo-pooing capitalism’s success at increasing the material means of expanded reproduction.
Q: PH: MMTers have different political positions.
A: Yes. My point exactly. There is substantial room for disagreement over what government should do. Any self-respecting Austrian ought to adopt MMT—just as she ought to accept evolution as well as global warming. It is science. What should we do about global warming is a different question entirely. What should we do with our sovereign currency issuing government is different from understanding what it can do. Now, I realize that much of the dissension in recent months has been over the question of JG/ELR—is that a “core” part of MMT. I won’t answer that today except to say that in my view MMT points the way to policy-making but does not seal the deal.
Q: Paul: Accepts that taxes are one important driver of money but the derivative uses of money (ie to buy junk) are as important in creating demand for government’s currency.
A: From inception you need obligatory payments in the currency to drive it. Once you’ve got a heavily monetized economy, the “derivative” uses can easily swamp the taxes in sheer number of transactions. But you cannot create a demand for money from inception by voluntary transactions—the reason is that there are no “virgin” Robinson Crusoe societies. All of them have an alternative method of production and distribution that does not require use of money. So you need to insert money into an already functioning society—and that requires disrupting existing relations and creating a demand for an institution that is entirely foreign. Taxes. Money.
Q: Peter: MMT is progressive; does that require a BIG government.
A: Progressive, yes. Big enough is enough. How big is big enough? Depends. What do you want government to do? That big.
I cannot see any simple way to answer this. It depends. Lots of young? Probably need a big government to provide all the stuff a society with a baby boom needs. Lots of old? Need a big government to take care of the elderly. Mostly agricultural economy living in the Sacramento valley? Small will probably do. Under continual attack by armed and hostile neighbors? Bigger is better.
Q: Dan/Joe: If G>T then government fills the hole by borrowing. Deficits are a good thing, and are not entirely endogenous.
A: Sovereign government never “borrows” as that term is normally used. It spends by crediting bank accounts. Keystrokes. Taxes by debiting. When G>T there are net credits. End of story. Is that “good”? Is it discretionary? It takes two to tango. The nongovernment sector can choose to reduce its spending, which will likely increase the government’s deficit. The government can choose to spend more (or cut taxes) and that might increase the deficit but it depends on the private sector’s reaction. I actually think that worrying about this is not very helpful. We ought to look at something that is important: for example, are there people willing to work but unable to find a full time job? If so, government ought to create a job for them. Take a devil-may-care view of deficits. Or, an owl view.
Both on my MMP blog and on the front page in response to Dan’s blog Phil posed 4 questions. Let me briefly tackle them:
Phil: 1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).
A: OK so let us say we have ELR in place, do we need big government? No. ELR by itself will probably run 1% maybe 2% of GDP. That is exceedingly small. ELR workers will do a lot of the things we want government to do. Is it enough? I doubt it. But, again, this is mostly a political matter. Now there is a question about instability. As a rule of thumb, Keynes and Minsky lead us to conclude swings of the budget ought to be big enough to offset swings of investment (adjusted by swings of the trade balance). That gets us up to a minimum government budget of 10% to 20% or more, depending on the amount of countercyclical swings you build into the budget. Still quite small. Add more and season to taste. I want good wine flowing from all fountains. So add another few tenths of a percent or two. What do you want? I think we will end up with a government that is 20%-50% of GDP depending on taste.
2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?
A: We need a sovereign currency. We could have a government-provided payments system as well as government community banks and development banks. Probably a good idea. But that does not follow from MMT. You could get by successfully with more public-private partnerships (which is what banks in all the developed countries really are) but you’ve got to regulate and supervise all the damned vampire squids. It isn’t easy. I don’t think the arguments for a big financial sector have ever been convincing. We could downsize it by 99% or more and greatly improve the operation of the capitalist economy. I would say that even if you adopt MMT + Minsky you’ve still got plenty of room for experimentation. Recall he argued there are 57 varieties of capitalism. At least. Maybe one of those would work. Or maybe we need to come up with a 58th.
3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?
A: I mostly answered above. Boy I sure hope we’re all not the same! What a boring world that would be. But I do think we share the view that science—and MMT—are progressive in the sense I have discussed. And I hope my Austrian friends will also join the progressive camp.
4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?
A: Depends on what “main” means. If you mean all of us old geezers who have been there from the beginning I think the answer is yes. To be sure we do have different visions regarding how much government ought to do. But if you mean all the main themes, up to and including JG/ELR then certainly the answer is yes. I’ll begin to explain why next week. I realize this last response might seem inconsistent with what I argued above.
But let me just preview the argument: as most of you by now recognize the greatest fear about MMT and “fiat money” is that it will cause inflation. No other fear comes close. To deal with that fear we must have an anchor. Our gold bug friends have got their anchor. Our deficit hawks have theirs. MMT needs one. And we’ve got it.
Let me close with a comment on Dan’s excellent blog on the front page. I agree with almost everything. But readers of the MMP will have noticed one deviation.
I argue that government currency as well as treasuries (bonds) are indeed debts, IOUs denominated in the state money of account. Dan wants to argue they are not debts. I understand the “framing” issue. People are scared to death of debts. It sounds much more user friendly if we can deny our government is in debt. Of course, by identity, if it is in debt we nongovernment types are in credit. The clock at Times Square is a credit or wealth clock, not a debt clock. Don’t think of the elephant and all that. Agreed.
But I’m afraid it is a big misleading and confuses our understanding of what debt is all about.
As I argued in the MMP all IOUs share one common requirement—Innes’s universal law of debt—that the issuer must accept it back in payment. Banks must accept back their own IOUs (demand deposits) in payment of bank loans. Likewise, government must accept back its IOUs (currency) in tax payments. I call this “redemption”.
Many conflate this with the promise to convert. Banks promise to convert demand deposits to cash on demand. Governments might promise conversion, too—but MMTers distinguish convertible currency from nonconvertible currency. That is the difference between Greece and the US.
And many conflate the fundamental law of debt with the usual prohibition against retiring one’s own debt with one’s own debt: you must use a second or third party debt to retire your own IOU. You use a bank IOU to repay your own. This is normally agreed upon on advance: your creditor agrees to accept a bank IOU or some other IOU or even a real asset to redeem yourself—cancelling your debt.
But sovereign government that signs a contract to “pay later” can deliver its own IOU to “redeem”. It remains in debt but it owes nothing more. It is done. You can present its IOU to pay taxes, or to exchange it for another IOU of the government. Nothing more. Unless government promises more. But sovereign government never needs to promise more than that: it will accept its own IOU in payment to itself.
So there is a difference in the nature of the IOUs of sovereign government and nonsovereign “users” of the currency. But in my view they are debts just the same. And in both cases, the issuers of IOUs must take them back. Refusal is a default.
