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Modern Monetary Theory

from Asad Zaman

In a rapidly changing world, ways of thinking which served us well in other eras, become obstacles to understanding, and reacting appropriately to change. Traditional economic theories, currently being taught all around the world,blinded economists to the possibility of the global financial crisis.The Queen of England went to London School of Economics to ask why “no one saw it coming?”.The US Congress appointed a committee to study why economic theories “dismissed the notion that a financial crisis was possible”. At the heart of this failure arewrong ideas about the role of money in the economy. All major schools of macroeconomics currently being taught around the globe teach that the quantity of money only affects the prices, and does not have any other effects on the real economy. Economists write that “money is a veil” – it hides the workings of the real economy, but does not play any role in it. Economists were blindsided by the crisis because models currently in use for policy making do not have a role for money, credit, banking, and debt, even though these were the factors responsible for the Global financial crisis.

The crisis made clear to all and sundry the vital role of money in the economy. Surprisingly, the mainstream economics profession has been extremely resistant to change. The same textbooks, theories and models which failed so drastically, continue to be used in teaching and policy making throughout the world. However, the space for unorthodoxy has expanded substantially, and a lot of new theories of money have emerged to challenge mainstream views.  read more

  1. November 4, 2018 at 1:29 am

    Your analysis is good as far as I can see, Asad.

    “If there are worthwhile projects which will utilize resources currently lying idle, then there is no need to be scared of the deficit numbers in spending on these projects.”

    My area of concern remains the choice of expenditure by central authority. The problem is destruction of democracy by well meaning central powers bypassing humanity and the unintended consequences of centralized investment decisions made by experts without the benefit of distributed intelligence.

    Central investment decisions are subject to a broad range of shortcomings that many long books have explored.

    • Edward K ross
      November 4, 2018 at 9:02 pm

      In reply to Garret Connelly November4, 2018 at 1:29 am

      “The problem is the destruction of democracy by well meaning central powers bypassing humanity and the unintended consequences—.”

      Here I agree that the destruction of democracy by executive forms of government oblivious to the needs of most citizens is a major problem for humanity. However in recognising this problem it becomes obvious that when the political “central powers” isolate themselves from the real world and form an elite culture they become blind to the needs of the people.

      Thus the challenge for all those concerned with restoring democracy and a democratic egalitarian form of government, to reduce the growing gap between those who have and those who do not have. Also as a few writers have already suggested that the growing inequality breaks down law and order fostering civil unrest where the only thing that matters is that one must have what one wants, regardless of the consequences to others.

      Therefore it seems obvious to me that the first step to making economics and politics relevant to the people, begins with listening to the people and addressing their genuine concerns. Ted

  2. patrick newman
    November 4, 2018 at 9:25 am

    QE virtually destroyed the traditional theories about the dangers of a ‘liberal’ money creation approach. This does not eliminate the need for high-level economic planning and taxation to ensure the economy can make the best use of money availability to meet social and productivity aims. Instead of incurring long-term debts for future generations a combination of money creation and taxation of wealthy individuals would be a real advance. The household accounts model of national debt and deficit is very useful for justifying cuts to public services and welfare benefits. PS She is Queen of the UK and a few other places and in her case, she obviously saw that the politicians and economists were intellectually in the ‘altogether’!

  3. November 4, 2018 at 6:00 pm

    I have been reading about modern monetary theory via Michael Hudson, Steve Keen, Bill Mitchell, Randal Wray, Stephanie Kelton, etc. They have all presented ways that MMT can work in the real world but they discuss money used for the public good by way of universal health care, free education, excellent infrastructure and all the other needs of ALL of society and not just the 1% as now. The problem is getting the billionaires to understand that they are part of the economy too and if they suck up all the wealth, they, too, will suffer eventually along with the rest of mankind. Of high import is trying to prevent climate change and environmental degradation which has been brought about by the high demands of the wealthiest 1%.

  4. Craig
    November 4, 2018 at 6:27 pm

    QE is the survival strategy of the dominating business model of private finance and nothing more. This after they were the primary actor in asset inflation in the form of mortgages, enticing everyone and their dog’s uncle with “tickler rate” credit card debt and creating monetary mountain ranges of “weapons of mass destruction” like MBS, CDS, synthetic CDS etc. ….all in the name of general equilibrium (cue uproarious laughter).

    Economists need to ask themselves what was the real reason “beneficial” inflation has not re-occured 10 years after the GFC? Personal/private debt of course is the answer. And they need to disabuse themselves of the flimsy orthodoxy that destructive rates of inflation will not occur if a lot more money is dumped into the economy once some debt is reduced and “normalcy” returns. It will, not because of the additional money, but because the system is monetarily austere and yet lacks good, rational and ethical control….and there is no better, rational, intelligent and ethical alternative being constructed for commercial agents in a monetarily austere economy.

    But what if you implemented a discount/rebate policy at the ending point, cost and price summing point and terminal expression point for inflation at retail sale?

    Oh,….paradigm change.

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