MMT macro final exam (1/3)
from Asad Zaman
During the last two semesters, I taught Macroeconomics based on a new approach which re-incorporates the history that Economists forgot (See Method or Madness?). The central idea of the course is that economic theories cannot be understood outside of their historical context. Conversely, economic history cannot be understood except by studying the economic theories (right or wrong) which were used by contemporaries to shape policy responses to historical events. The website for the entire course is “Macroeconomics“. In particular, Lecture 18B explains the principle of “Entanglement“. Below I provide Final Exam questions and answers, to give the flavor of the course. This post is about the first 4 out of 12 questions.
Q1: Stiglitz: “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.” Explain the theory, and arguments for it. Then explain why it is sheer nonsense. read more
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Real-World Economics Review Blog 
Canadian social and economic philosopher, John Ralston Saul, wrote that a minimization of the democratic state is a minimization of democracy itself. We can see this clearly in a number of fields but the management of fiat money creation is a clear and central example. As part of its agenda to minimize all government operations, except those which support dominant capital, neoliberals have sought to take over the management of money creation from the state.
A number of myths and subsequent formal constraints were erected to progress policy towards this goal. This was encapsulated in the theories of monetarism and the rejection of fiscal policy. Fiscal policy was put in a balanced-budget, or even surplus-budget, straitjacket. In theory, balanced or surplus budgets were to be run at all times regardless of real economic conditions. In practice, that hasn’t always happened. Deficit budgets are apparently quite acceptable if generated by lowering taxation on the rich and/or by increasing military spending but not if achieved by spending on the poor.
The outcomes of monetarism and neoliberalism are instructive but first a slight detour is necessary. Bichler and Nitzan (Capital as Power) have analyzed the phenomenon of the differential accumulation of capital. It is not the mere accumulation of capital which matters for the increase of capital wealth or capital power. Rather, it is the differential accumulation which matters. If a given portfolio of capital increases at 2% per annum when all portfolios increase at 2% per annum average then relative wealth remains the same. Only a higher rate of return than the average will increase relative wealth and it is this relative increase which capital seeks, otherwise it loses the competitive race.
A key outcome of monetarism and neoliberalism, in my view, has been the development of a new regime of differential inflation. A new regime of differential inflation will help satisfy the requirement for the differential accumulation of capital for those capitals which fortuitously or by a financial and asset engineering of their own situation can place themselves on the “right side” of the differential inflation phenomenon. One of the obvious outcomes of differential inflation under neoliberalism has been the stagnation of wages along with the inflation of certain asset classes chief of which have been shares and real estate. It’s fallacious to analyze or manage an economy by measuring a single inflation rate and applying it economy-wide.
Monetarism and neoliberalism have engineered a situation where wage stagnation and low consumer inflation (though the aggregated measurement of consumer inflation is highly debatable) have been able to develop and exist while asset inflation accelerated. This has resulted in a differential transfer of wealth from wage earners to capitalists achieved via the mechanism of differential inflation. The differential inflation regime, if it proceeds unabated, will strip the working and middle classes of assets, often inter-generationally [1], and reduce them back to the level of the precariat who already have no assets.
The post-WW2 Keynesian era where the middle class and even some working class were able to build an asset base (chiefly the family home plus some modest savings) is to be seen as an aberration. The entire non-capitalist class must be reduced back to being asset-less. Only in this manner, can all their (individually modest) wage income rapidly flow back to the landlord and rentier class. There is a lot more one could write about this but I need to wrap it up and relate it to MMT.
MMT is useful to expose the myths and mechanisms that monetarism and neoliberalism have used to manipulate money creation (fiat money and credit money creation) in ways that have helped engineer this differential inflation regime. Often it has worked by cutting social spending, decreasing taxation on the rich and only permitting deficit spending for the purposes of subsidizing business and the rich. Business welfare and tax breaks for the rich are now measurably higher than social spending on the unemployed, for example. Neoliberalism and monetarism are essentially ideologies and mechanism for providing socialism for the rich while disguising this process and the real mechanics of how it works. MMT applied correctly can demystify the mechanics of money creation and allocation and explode the current mythologies surrounding the process.
However, MMT cannot on its own overcame real shortages including those we will soon face from limits to growth. But that is another discussion.
Note 1. By this I mean that some baby boomers have been enabled to become petty bourgeoisie by capitalizing their first house, buying one or a few further investment properties and exploiting 20 or 30 years of asset inflation plus tax breaks for property owners to do so. However, the family then finds that the grown-up children will often have difficulty getting full-time employment, even with tertiary education, and houses and apartments are now price inflated beyond the means of the young; the semi-employed and even the fully employed. The family’s petty bourgeoisie wealth will then be dissipated (before and/or after the event of death and inheritance) into attempts of having the children survive financially in a highly capitalized world paying them low wages and offering mostly only insecure employment. This is my broad prediction of the future for many children of baby boomers in the West, if current neoliberal policies remain in place.