Home > Uncategorized > Schumpeter — an early champion of MMT

Schumpeter — an early champion of MMT

from Lars Syll

Evidently this phenomenon is peculiar to money and has no analogue in the world of commodities. No claim to sheep increases the number of sheep. But a deposit, though legally only a claim to legal-tender money, serves within very wide limits the same purposes that this money itself would serve. Banks do not, of course, ‘create’ legal- tender money and still less do they ‘create’ machines. They do, however, something—it is perhaps easier to see this in the case of the issue of banknotes—which, in its economic effects, comes pretty near to creating legal-tender money and which may lead to the creation of ‘real capital’ that could not have been created without this practice.sch But this alters the analytic situation profoundly and makes it highly inadvisable to construe bank credit on the model of existing funds’ being withdrawn from previous uses by an entirely imaginary act of saving and then lent out by their owners. It is much more realistic to say that the banks ‘create credit,’ that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them. And the reason for insisting on this is that depositors should not be invested with the insignia of a role which they do not play. The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fullfledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.

  1. Dr. Helen Sakho
    May 20, 2018 at 5:41 pm

    Yes, the relatively well off are” high on credit” and drowning in debt.
    The banks – clearly and legally soulless institutions – are always saved, often to the tune of billions, and secretly.
    So, the very poor continue to subsidise all other classes until “death do them part”.

  2. May 20, 2018 at 5:46 pm

    Please send this to Krugman. And everyone else while you’re at it. This is a great post.

  3. May 20, 2018 at 7:19 pm

    This is a much more accurate description of bank operations and what it serves. Missing is the simple but very important fact that the created credit is rented for a limited time and is not a “forever” thing.

  4. Craig
    May 20, 2018 at 9:33 pm

    All theorizing and argumentation within the current paradigm amounts to nothing more than “epicycle” “tempests in a teapot”. The recent debate between Steve Keen and Warren Mosler about MMT, replies to it by Bill Mitchell and Keen’s counter reply are excellent examples of this.

    The real insight of MMT which virtually all MMTers miss is simply that fiat money systems can be directly distributive. The problem is neither of them presently or in the future will be able to ethically or systemically control them…unless they recognize the digital nature of the costing/pricing, debt based money and accounting systems, and the significances of the point of sale/retail sale in the economic system…..and then craft policies to benefit all agents and completely align with the concept behind those policies, namely the natural philosophical concept of grace, and as it applies to economics and the money system, grace as in free gifting.

    I’ve observed the excellent research and debate of heterodox economists like Keen, Hudson, Mitchell, Mosler et al for going on ten years now, and I’m in agreement with probably better than 99% of it, but their nit picking with each other and address primarily to opposing academics are sure signs of being stuck in an old paradigm and an ignorance of what really counts in all political movements and what happens with all new paradigms….and that is an awakening in the minds of the individual.

    What these men together need to do is diligently search for and open their minds to the new paradigm and its policies and thus become a part of the solution instead of an erudite but niggling part of the problem.

    • May 22, 2018 at 3:16 pm

      “… address primarily to opposing academics are sure signs of … what really counts in all political movements “.

      Craig, you should try ploughing through the Knapp book Jan Milch has linked to below, for it contains very interesting observations about this, e.g. at pp.48-9.

      Schumpeter’s talk above about bankers creating deposits [out of nothing?] is very much “old paradigm”. What they actually do is authorise credit limits.

  5. Craig
    May 20, 2018 at 11:26 pm

    In His Critique of MMT’s Assertion That Every Nation Should and Can Run A Trade Deficit.

    Of course if every nation (within its current productive capacity) implemented the policies and structural changes of the new paradigm of Direct and Reciprocal Monetary Gifting…the urge and need to be either an export platform or run a trade deficit….would largely be eliminated. Why? Because they could then create sufficient individual incomes to keep the domestic economy in a free flowing state without having to worry about unemployment or practicing the economic, historic and geo-political vice of mercantilism that modern economies find “necessary” as a means of staving off the inevitable instability, rigidity, dominance and collapse that the old paradigm makes inevitable.

    National self sufficiency is an economic virtue which is inhibited by the current international coalescence of Finance’s paradigm of Debt Only, and the new paradigm ends that inhibition and enables a new international confederacy of nations that all benefit from it.

    If Keen would examine the transformative policies and structural changes of the new paradigm he would see this and could then get on its bandwagon so as to do more to advance economics, rejuvenate profit making systems and prevent eventual chaos and war….than arguing with terminally orthodox academics or even progressive ones.

  6. Craig
    May 21, 2018 at 12:07 am

    Should start as…”Steve Keen is correct…

  7. Dave Raithel
    May 21, 2018 at 1:36 am

    http://www.thomaspalley.com/?p=1145 … I believe something like this of his appeared a while back here, but I could not find it in the archives, my fault I do ‘spose…. I did spend some time reading everything Randall Wray posted over at the UMKC website some years ago, and though I am confident we are on the same side of what should be done, somehow, I could never get past that political actors can run deficits/print money for the most stupid and unproductive of reasons…warfare Keynesianism, and all that. Look at what we got in American these days…

  8. Jan Milch
    May 21, 2018 at 2:24 am

    Here is an even older MMT forerunner ,Georg Friedrich Knapp that developed The State Theory of Money, an approach that is directly
    opposed to the Metalist view, according to which the value of money derives from the value of
    the metal standard (for example, gold or silver) adopted. https://socialsciences.mcmaster.ca/~econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf

  9. Vince
    May 21, 2018 at 11:17 am

    This point is something now coming into wider understanding. Banks have found of late that it is far easier to just create credit to lend than the other two options, earning it or borrowing it(via depositors or elsewhere). Earning the money via profits is very difficult, as is finding depositors, on the whole, it is far easier and cheaper for banks to just create the credit out of nowhere. This is why our banking/money system is doomed to repeat boom and bust.

  10. May 22, 2018 at 2:58 pm

    Jan, thanks for your link. Knapp’s book is very interesting indeed, particularly (re my “credit card” argument re repayment by earning) this bit from [book] page 48, which unfortunately is the one bit of his argument that Knapp dosn’t explore at length. The point of it anyway is the legal aspect of repayment, and (elsewhere) the law having been created not by theorists but by mistaken lay politicians. Vince, point taken, but my credit card argument shows it doesn’t have to be like this. “Real” credit is what one gets in exchange for notional thin-air credit.

    48 THE STATE THEORY OF MONEY

    “The concept ” debt ” is amphibolic; i. e., if indebtedness is the relation between two people, it is not laid down which of the two is to be creditor and which debtor.

    “For the one, the debt is positive; he is called the debtor. For the other, it is negative; he is the
    creditor. Negative debts are claims. — Therefore the converse is also true, that the concept
    of a claim is amphibolic. If a claim exists between two persons, it is not in the first place laid down which of the two is creditor and which debtor. For the one the claim is positive – he is the creditor ; for the other, it is negative – he is the debtor.

    “Negative claims are debts –. The principle we have so often mentioned, that the State maintains existing debts, is better stated in the following way: “The State maintains in each
    individual case both negative and positive debts,” or, if you like, ” The State maintains in each case both negative and positive claims.” When the State introduces new means of payment, this takes effect in reference to the negative and positive debts of each person, or – what comes to the same thing – his negative and his positive claims.

    “Each individual has an amphitropic position in trade, i. e. he is in some quarters a debtor and at the same time in other quarters a creditor. This amphitropic position of the individual in
    economic transactions was so obvious that it was completely overlooked.

    “The objection of the layman to means of payment like the much-decried inconvertible paper money is always based on his mistake of looking at the position in economic transactions monotropically ; he thinks of himself as always creditor. He makes two mistakes : he regards such Chartal means of payment under their natural, not their legal aspect, and secondly, he considers his own position in trade monotropically, not amphitropically.”

    • May 22, 2018 at 5:52 pm

      Ok. But remember banks enjoy a special legal status. Banks are uniquely and explicitly granted the legal right to commingle customer funds. Brokerages for example may not use customer funds to purchase securities. You or I cannot lend money we don’t have. Only bank charters explicitly give banks freedom to do these things. I think this fact holds great explanatory power when asking what money is and how the economy works. Richard Werner teaches at length about this.

      • Craig
        May 22, 2018 at 7:54 pm

        Correct. For a single business model to have a monopolistic grip on the money creating right, and the even more deeply negative reality of the sole paradigm for the form and vehicle for money’s distribution, namely Debt Only,….is unworkability, dominance and felonious action waiting to happen.

        The only reason why the individual, economists and economic pundits tolerate such nonsense is habituation and hence de-sensitization to that paradigm’s negative effects.

        We need to wake up, stand up on our hind legs and demand that such obvious stupidity end yesterday.

      • May 22, 2018 at 8:57 pm

        Understood, Peter, but Knapp follows up his bit on amphitropic trade with:

        “Such tickets as paper money pure and simple are, it is said, acknowledgments of the State’s indebtedness. Payment in such tickets is therefore only a claim on the State, a provisional satisfaction still leaving something to be done on the part of the State. …The question is, how these pieces stand in the eye of the law. … The decisive factor is not what the State would do if it could, but what the State does. It is therefore a mistake to see no actual payment in payment by inconvertible paper money. It is a true payment, though it is not material”.

        I disagree with the conclusion here: such payment is just a token. What Knapp himself is missing is his amphitropy and what was taken for granted prior to Charles I, the “divine right of kings” being in context the king’s right to be paid for doing his job: either before (as credit) or after doing it (giving him credit for having done it). The decisive factor in the case of the State paying its servants with credit notes (whether or not these are acquired via taxes) is its credit being earned by crediting (instead of denigrating!) the work of public servants, and repaid by them through “what the State does”.

    • Craig
      May 22, 2018 at 7:56 pm

      Dave,  monetary gifting doesn’t alter the relationship between debtor and creditor. It simply makes the economic system workable and free flowing.

      • May 22, 2018 at 9:07 pm

        Agreed, Craig; we diisagree primarily on how to achieve the gifting. The point here, though, is that the relationship between debtor and creditor is “amphitropic”: i.e. ambiguous as to who the linguistic terms apply to. At some times each of us is in debt to our community; at others, giving back..

    • Jan Milch
      May 22, 2018 at 9:41 pm

      davetaylor, indeed Knapp was in many way ahead of his time.Onfortunatly the idéas of him and the German Historical school and American Instiutionalist school ,(Thorstein Veblen, Wesley Mitchell, and John R. Commons) became overrunned by the Anglo-Austrian Neoclassical school early on,and is still dominant at almost every economics and other social science departements.I think this have bring about much of the sorrow and confused state of mind and in todays economics thinking.

      The eminent German Macro-economist and economic sociologist Wolfgang Streeck emeritus director of the Max Planck Institute for the Study of Societies in Cologne pointed this out in a article for some time ago.He writes:
      “To understand the conflicts that have erupted in and around the Eurozone over the past five years, it may be helpful to begin by revisiting the concept of money. It is one that figures prominently in Chapter Two of Max Weber’s monumental Economy and Society, ‘Sociological Categories of Economic Action’. Money becomes money by virtue of a ‘regulated organization’, a ‘monetary system’, Weber thought. And following G. F. Knapp’s The State Theory of Money ,1905, he insisted that under modern conditions, this system would necessarily be monopolized by the state. Money is a politico-economic institution inserted into, and made effective by, a ‘ruling organization’—another crucial Weberian concept; like all institutions, it privileges certain interests and disadvantages others. This makes it an object of social ‘conflict’—or, better, a resource in what Weber refers to as a ‘market struggle’:

      -“Money is not a ‘mere voucher for unspecified utilities’, which could be altered at will without any fundamental effect on the character of the price system as a struggle of man against man. ‘Money’ is, rather, primarily a weapon in this struggle, and prices are expressions of the struggle; they are instruments of calculation only as estimated quantifications of relative chances in this struggle of interests.” [Max Weber- Economy and Society, p. 108.]

      Weber’s socio-political concept of money differs fundamentally from that of liberal economics. The founding documents of that tradition are Chapters IV and V of Adam Smith’s Wealth of Nations, in which money is explained as an increasingly universal medium of exchange, serving an (ultimately, unlimited) expansion of trade relations in ‘advanced societies’—that is, societies based on a division of labour. Money replaces direct exchange by indirect exchange, through the interpolation of a universally available, easily transportable, infinitely divisible and durable intermediate commodity (a process described by Marx as ‘simple circulation’, C–M–C). According to Smith, monetary systems develop from below, from the desire of market participants to extend and simplify their trade relations, which increase their efficiency by continually reducing their transaction costs. For Smith, money is a neutral symbol for the value of objects to be exchanged; it should be made as fit as possible for purpose, even if it has an objective value of its own, arising in theory from its production costs. The state makes an appearance only to the extent that it can be invited by market participants to increase the efficiency of money by ‘putting its stamp’ on it, thus making it seem more trustworthy. Unlike Weber, who differentiated monetary systems according to their affinity to countervailing distributive interests, for Smith the only interest that money can serve is the universal interest in ensuring the smooth functioning of as extensive a market economy as possible.

      Remarkably, the post-war sociological tradition chose to follow Smith rather than Weber. The demise of the Historical School of Economics—and the fact that structural functionalism, above all Talcott Parsons at Harvard, ceded the economy as an object of study to Economics faculties increasingly purified in a neo-classical spirit—enabled sociology, as it became established in the post-histoire decades after 1945, to dispense with a theory of money of its own. Instead it opted for a quiet life and chose to conceive of money, if at all, in the manner of Smith, as an interest-neutral medium of communication, rather than as a social institution shot through with power—as a numerical value, a numéraire, rather than a social relation. This led to a rupture, both in sociology and economic theory, with the fierce debates of the interwar years about the nature of money and the political implications of monetary systems. These had been at the heart of Keynesian theory, in particular: see the battles around the social and political implications of the gold standard, driven notably by Keynes himself, or around Irving Fisher’s full-reserve banking model.

      Of paradigmatic importance here was Parsons and Smelser’s 1956 work Economy and Society, subtitled ‘A Study in the Integration of Economic and Social Theory’. In Parsonian systems theory, money appears as a representation of purchasing power, the capacity to control the exchange of goods. It also has the special social function of conferring prestige, and thus acts as a mediator between ‘detailed symbols and a broader symbolization’. Historically, money develops, as in Smith, through the growth of the division of labour, which demands an abstract representation of economic value so as to make the expansion of exchange possible. Money appears in this process as a ‘cultural object’ which, together with credit instruments and certificates of indebtedness, ‘constitute rights or claims on objects of economic value’—and hence in Weber’s terms as ‘mere vouchers for unspecified utilities’.

      Monetary weapons:
      That money is far more than this is something for which Parsons, and American sociology in general, might have found ample evidence in his own country—not merely in the interwar years, which after 1945 were somehow declared an exceptional era, but in its earlier history. The discovery of that evidence, however, had to await the emergence in the 1990s of the ‘new economic sociology’, which undertook the rehabilitation of Weber’s view of money as weaponry in the ‘market struggle’. A contribution to this development, as important now as it was then, was furnished in ‘The Color of Money and the Nature of Value’, a study by Bruce Carruthers and Sarah Babb of the domestic political conflicts over a new US monetary system after the Civil War. The authors adopted an analytical distinction proposed by the political scientist Jack Knight: monetary systems, like institutions in general, could not be judged merely according to ‘the coordination-for-collective-benefits conception of social institutions’—in other words, by whether they provided an inter-subjectively communicable symbolization of values and value claims. Just as legitimate and even requisite, according to Carruthers and Babb, was the conflict perspective—we might even call it the political perspective—put forward by Knight, in which a monetary system comes into existence as the result of disagreements between actors with competing interests. As such, it may possess more or less asymmetrical distributive effects and conflicting interests, which are often more important in social reality than their efficiency. ”
      https://newleftreview.org/II/95/wolfgang-streeck-why-the-euro-divides-europe

  11. May 28, 2018 at 7:48 pm

    When I read such stories as this or hear about the poor being taken advantage of I’m always reminded of the comment of Jay Gould pointing out this result is not just a “natural” result of inequality, it is deliberate. When asked what to do about the poor rising-up, Gould’s reply was, “we can hire half the poor to kill the other half.” In just two sentences Gould explained why the poor exist and how to keep them down permanently.

  12. Craig
    May 28, 2018 at 10:38 pm

    The heart of the money problem is twofold:

    1) How to remedy the inherent scarcity of free and available individual incomes in ratio to total costs/prices without causing/increasing inflation and
    2) How the current monopolistic paradigm of Debt Only enforces the continual build up of debt/additional costs, and how it also prevents the establishment of the price deflationary/doubling of individual purchasing power remedies of the dual policies of a universal dividend and a retail discount/rebate.

    • May 29, 2018 at 7:12 am

      Craig, in my view the heart of our “money” problem is the belief by politicians and others involved in liberal democracy that compromise with capitalists is possible and should be pursued. In my view, it is not possible and is not worth pursuing. For most in the capitalist group the vision of America they hold is of a pro-business, anti-socialist, minimalist government-regulated America as it had been in the heyday of early American industrialism, before the Great Depression and the rise of Franklin Roosevelt’s New Deal. They see no need to limit the methods used to get to that end. After all, they are defending western civilization and fighting the takeover by socialism. But mostly they are assuring the rich, whom they represent stay rich, and poor remain poor. Mainstream economists mostly aid them in this effort with big words and high-sounding theories that are mostly just walls behind which to hide the intentions of their capitalist employers. Economists debate the theories and the math, but the debate is meaningless. Just a smoke screen for the deliberate effort to maintain the wealthy in their place in control and ensure the poor remain always poor. Keeping in mind Jay Gould’s description of this situation. Physicists are scientists, biologists are scientists, sociologists are scientists. Economists are not scientists. Economists pretend to be scientists, but their actual work is protecting capitalism and capitalists. I suggest we take economists for what they are, rather than what they pretend to be.

      • Craig
        May 29, 2018 at 8:33 pm

        I was referring to the money problem itself, and you characterize the political part of the problem accurately. That could be most effectively addressed by showing how the best aspects of the agendas of both the left and right are accomplished by the paradigm changing policies I’ve long suggested here. For instance:

        1) A universal dividend to everyone 18 years of age and older of sufficient amount and doubled in its potential purchasing power by the discount/rebate policies immediately accomplishes the heart of the liberal agenda of economic democracy and the end of poverty.

        2) If every adult is assured a satisfactorily middle class lifestyle without employment this immediately satisfies the conservative agenda of frugality and downsizing government by enabling the elimination of all transfer taxation for unemployment insurance and welfare and their respective bureaucracies. This actually works for both the liberal and conservative agendas as both individuals and enterprise pat these taxes.

        3) With the two discount/rebates policies linearizing price deflation throughout the entire economic/productive process the erosive effects of inflation are ended for both individuals and businesses

        4) With the accomplishment of integrating monetary gifting into the now bounded and stabilized economy all but a small percentage of income taxes to keep the government legitimated (say 2-3%) will no longer be necessary because fiat monetary gifting…will be able to all but replace it. Taxation will return to its legitimate purpose of discouraging personal and economic vices instead of being a “necessary” burden on the individual and enterprise which in fact is just a way for finance to enforce austerity with its paradigm of Debt Only and also enforce the mistaken assumption that taxation is necessary to control inflation.

      • May 30, 2018 at 7:23 am

        Craig, the belief that money is created by rules, or stated in a more grandiose way, of law drives a stake into the heart of the belief that markets make all economic decisions for us. The creation and the use of money are purely political creations. Thus, changing the nature of money is a political choice, not a market result. Clearly, the political processes may be complex and difficult to describe, and may involved some market actions, but the political actions that make money always extend beyond any one or several markets. In fact, these markets are themselves creatures of cultural rules. You are suggesting changes to those rules. It’s impossible to say a priori what impacts a “universal dividend,” or an “assured middle-class lifestyle,” or “linearizing price deflation,” or “monetary gifting” will have. But certainly, these are interesting questions to consider via observation.

      • Craig
        May 31, 2018 at 1:00 am

        It’s not impossible to what the monetary and economic effects of those policies will be….because their temporal universe and mathematical effects throughout the entire legitimate economic process will be exactly what I’ve said they will be. Now you CAN say that their individual human effects may vary, yes, but their above effects….ARE what they are.

        You could also say that certain agents may try to undo or retard some of those effects, and that would very likely be correct also, but of course part of the implementation of any set of policies denotes enforcement of them and/or various levels of punishment for not doing so….like kicking cheaters/non-com pliers with such policies…out of the privileges they might otherwise enjoy.

      • May 31, 2018 at 7:25 am

        Craig, two items speak against the path you suggest. First, the always present uncertainty involved in all aspects of human society. Second, human judgement, which is involved in every action and decision of humans. Obviously, neither is predictable. The result, sometimes the cheaters win, and humans choose a path that disagrees with the one you prefer.

      • Craig
        June 1, 2018 at 2:32 am

        Yes, one can’t know which ideas will win or not. But I’m no longer concerned with that.

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