Home > Uncategorized > From Wicksell to Le Bourva and MMT

From Wicksell to Le Bourva and MMT

from Lars Syll

MMTComparing the limited work of Wicksell, Le Bourva, and MMT, we find that they share many similarities. Obviously, the institutions and issues being discussed have changed during the decades these scholars were writing, yet all three views agree on some fundamental issues. The methodology is quite similar, with a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to: the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.

Some minor differences occur when it comes to the question of why banks do not expand unlimited credit if they can. While Wicksell believes that the interbank-market debt of banks expanding their loan books relatively faster than other banks should stop further bank loan creation, Le Bourva agrees with Kalecki and sees rising risk as the major factor. In Wray (2012), it is creditworthiness and access to reserves at low costs that limit the extension of loans.

Dirk Ehnts & Nicolas Barberoux

Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:  

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank 

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of ‘cash in advance’ – LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem since fiat money means that governments can always make more of them.

  1. lobdillj
    June 5, 2018 at 2:43 am

    This is an interesting article. The critical concepts of MMT are all included. I would add that although you must pay your taxes with the fiat currency, the sovereign DOES NOT spend it. It extinguishes it after crediting you with the payment. ALL government spending is done with newly created money. After all, since it has an unlimited source of money freely available by creation, it has absolutely zero need for taxes as a source. In actuality there is no need for budgeting either. That is only a necessary trade-off for entities in the system who are strictly USERS of the currency. To me, these features of a fiat money system are critically important.

  2. Craig
    June 5, 2018 at 6:47 am

    MMT has money creation correct and other insights about fiat money systems, but concerns itself primarily with government debt which is a rather small subset of total debt/private debt which strangles the economic system nationally and internationally. IMO their contention that inflation will not follow increased government stimulus is almost as hollow an orthodoxy as the conservative/libertarian claim of general equilibrium. When an economy is controlled neither on the lower bound of cost nor the upper bound of price that is the definition of chaos not equilibrium or even disequilibrium and combined with an inherent scarcity of free and available individual income the temptation to raise prices by business owners to garner more profit when more money comes into the system is inevitable. Such chaos cries out for rational, ethical and flowing order.

    That order could be established by theorists looking where they currently aren’t, namely the moment to moment operations of commerce where incredibly significant economic and policy insights are to be found in the nature of double entry bookkeeping, the point of sale from one business model to the next and at final retail sale.

  3. June 5, 2018 at 9:53 am

    Neoclassics and MMT ― much like pest and cholera
    Comment on Lars Syll on ‘From Wicksell to Le Bourva and MMT’

    Compared to neoclassical economics, MMT looks like an improvement. But this is a rather small feat because compared to the proto-scientific garbage of mainstream economics almost everything is an improvement.

    However, after 140+ years of repetition, the critique of neoclassical economics has turned out to be pointless: “… it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

    Does MMT beat the old theory? No! MMT is macrofounded, this is the improvement compared to microfounded Neoclassics, but the macrofoundations are inconsistent.#2 Methodology tells us that if the foundations are false the whole analytical superstructure is false.

    MMT’s strong points are advertised as follows: “… a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.” (Ehnts, Barberoux) and “… MMT [is] also updated macroeconomics based on not only the existing monetary systems but also by bringing together previous contributions, notably Wynne Godley’s stock-flow consistent modeling, Abba Lerner’s functional finance, and Hyman Minsky’s financial instability theory and job guarantee proposal.” (Hickey)

    The problem is that all these elements do not fit consistently together because the underlying macroeconomic balance sheet mathematics, i.e. the sectoral balances equation, is provably false.#3, #4 From the scientific standpoint, MMT is as inconsistent and worthless as neoclassical economics. The policy guidance of both schools has NO sound scientific foundations.

    The two main blunders of MMT are value and distribution theory
    • “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them.” (Syll) This is simply false, the value of money is independent of taxation.#5
    • Because Public Deficit = Private Profit the money creation/deficit spending in all economic situations as proposed by MMTers has detrimental consequences for distribution. MMT policy proposals amount ultimately to agenda pushing for the one-percenters.#6

    The difference between Neoclassics and MMT is on closer inspection analogous to the difference between pest and cholera. There is no difference in the scientific incompetence between orthodox and heterodox economists.

    Egmont Kakarot-Handtke

    #1 Stop beating mainstream economics ― it is long dead
    https://axecorg.blogspot.com/2018/04/stop-beating-mainstream-economics-it-is.html

    #2 For the full-spectrum refutation of MMT see cross-references MMT
    http://axecorg.blogspot.com/2017/07/mmt-cross-references.html

    #3 Keynesians ― terminally stupid or worse?
    https://axecorg.blogspot.com/2017/08/keynesians-terminally-stupid-or-worse.html

    #4 Rectification of MMT macro accounting
    https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html

    #5 The objective value of money
    https://axecorg.blogspot.com/2018/03/the-objective-value-of-money.html

    #6 Austerity and the political games Progressives play
    https://axecorg.blogspot.com/2018/05/austerity-and-political-games.html

  4. June 7, 2018 at 1:46 am

    I’m unconvinced of MMT for three reasons:

    1. The value of money, including gold, comes from the positive willingness of others to give you goods and services in exchange for money. And hey do this out of the belief they’ll find other people positively willing to give them things for money, and so on in a cycle. If money was founded on a purely negative demand, say the state required taxes in seashells, people would simply not transact in seashells and pay no taxes.

    2. The model of MMT is that the state is a balance sheet, everyone has a n account in it, and the state is immune from bankruptcy constrains (it can accumulate a negative balance indefinitely). That is not an accurate model of modern states where the treasury and the central bank is separated technically (as in the US) or ideologically (as in the EU). Also, private banks exist. I’d like to see MMT present an accurate model of the world before taking it seriously.

    3. Although inflationary spending is permitted in an accounting sense, it has systemic constraints. Inflation acts as a tax where the state makes a claim (by printing money) and takes goods from the real economy. If the state claims too much it’ll ruin the economy just like a tax. Inflation also has redistributive effects where it burdens people differently than other taxes. I’d like MMT to have a theory on those rather than flippantly assume them away.

    • Calgacus
      June 7, 2018 at 6:34 am

      1. A bit hard to understand about seashells and negative/positive. If the state made seashells a money-thing AND imposed a tax like a head tax (you get to keep your head attached if and only if you pay the head tax) people would want seashells, transact with them and want to pay the tax. If it only imposed a seashell-income tax then you are right; MMT makes the point that such a tax cannot drive the initial demand for money, although it can augment demand. Seashells, like gold are only money-things. They are not and cannot be money, which is an immaterial credit-debt relationship. Seashells and gold can only represent or symbolize or be receipts for money.

      2. MMT describes the relation between the state and the CB in far more detail than any other school of economics. The upshot is that, no, that model is accurate for most countries. Yes, there needs to be some modification for the Eurozone, but that is like studying bovine anatomy based on a two-headed calf. Following Minsky & postKeynesian endogeneous money & circuitism it describes banking and relates them to the state, again outstandingly. This complaint is the diametric opposite of the truth. It is like saying “Albert Einstein’s physics doesn’t convince me because it ignores relativity.” Huh?

      3. SInce MMT is the best theory of money, banking and the state, it ties together theories, causes and remedies of inflation, and of course theorizes about your concerns rather than flippantly assuming them away.

      • June 7, 2018 at 3:13 pm

        1. A key point of MMT is that taxation drives the value of money. If that only works with a head tax, not an income tax, I think it’s pretty weak.

        2. No, in the US and UK the treasury does not have an unconstrained balance sheet. The CB does, and there’s at least some friction between them. As for the ECB, they refuse to play that role because of a certain economic dogma. I question the applicability of MMT, or at least it seems the world is moving away from it. Perhaps it’s Modern as in Modern Art (early 20th century).

        3. Lay accounts of MMT hammer the point that taxation is unnecessary since the state can “simply” create money. It may be possible but not simple, so it’s worth being precise on how much money the state can create and what the economic effect will be.

        It could be that I’m straw-manning MMT because of a lack of understanding, but I haven’t found good readable, cogent accounts of it. Certainly nothing to the level of clarity we have in this blog on how private banks do their monetary operations, and that took some digging. If you have some good references, please share.

      • Craig
        June 7, 2018 at 6:03 pm

        “Lay accounts of MMT hammer the point that taxation is unnecessary since the state can “simply” create money. It may be possible but not simple, so it’s worth being precise on how much money the state can create and what the economic effect will be.”

        What it requires is to throw off the remaining stench of general equilibrium by no longer claiming that “automatic stabilizers” will come into play in monetary mechanics.

        Even the traditional concept of free market economics is inaccurate. The economy is in a continual state of total individual income scarcity in ratio to total costs and so prices that is not controlled on the lower bound by costs nor the upper bound of price which by definition means it is in a continual state of chaos that Finance and its monopolistic paradigm of Debt Only attempts to smother into “equilibrium”.

        What economics requires is rational and wise policies that create boundaries at economically significant and effective places hence bring actual order to it and resolving its chronic problems of income scarcity and inflation with a resulting dynamically free flowing and ethical higher disequilibrium.

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