Home > Uncategorized > MMT: eliding foundational principles in the interests of journalistic simplicity

MMT: eliding foundational principles in the interests of journalistic simplicity

from Anne Mayhew

I count myself as one of those friendly critics who applaud several of the major MMT contributions to our understanding of the modern American economy. Among these contributions are the emphasis put on

  • the endogeneity of money;
  • the importance of using of a flow-of-funds approach in analysis of the macroeconomy;
  • detailed descriptions of how the FED (Federal Reserve System) actually operates, details usually missing from texts.

And from these three emphases the central conclusion of MMT is that the availability of space for fiscal expansion is larger than commonly understood. These three emphases are used to construct a forceful rejection of the argument that financial constraints can require austerity in economies with unused non-financial resources. Although much of the analysis has been focused on the U.S. economy, the MMT attack on austerity policies as necessary also has much wider application. This I also applaud.

I am, however, a critic, because in their pursuit of policy relevance, MMT advocates too often offer apparently simple solutions to complex issues of political economy. That they do so in the cause of political relevance and journalistic attention does not absolve them of responsibility for over simplifying debate about very serious economic issues. My criticism, and I suspect that of many others, is somewhat difficult to articulate because it rests upon the failure of MMT advocates to use, or at least fully use in practice, the very foundational ideas for which I applaud them. That is, in carrying out their analysis, MMT advocates often come ever so close to denying the endogeneity of money; they use a severely truncated form of flow-of-funds analysis; they do not employ an accurate description of the relationship of the FED to the rest of government. In each of these three cases sleight of hand is used so that it is difficult to pinpoint the exact difference between foundational proposition and analysis/prescription in practice. Now you see it, now you don’t is the lasting impression that I, a friendly critic, often take away from arguments about the importance and validity of MMT. I do not mean to suggest that the MMT advocates are deliberately duplicitous. Instead, I suggest that in their understandable zeal to make policy makers and the public understand how unnecessary governmental austerity most often is, the subtleties of the foundational principles are elided in the interests of journalistic simplicity.

In the pages that follow I will try to explain my understanding of these sleights of hand and discuss why they matter.   The sleights of hand of MMT

  1. Helge Nome
    October 13, 2019 at 8:18 pm

    I think it is a mistake to simply concentrate on the monetary aspect of a modern economy.
    The political/economic “climate” must be part of any theory which tries to explain the effect of an injection of money/credit into an economy: Setting a blowtorch to wet wood is not going to produce much of a fire.

      October 15, 2019 at 2:30 am

      In reply to Helge Nome October 13
      From the point of view of a non academic in the real world and from the experience gained from life in the real world. I THINK your comments stress the importance of political economics, because they interpret economic theory to suit the political objective. Thus they both play an important part in managing a nations economy. To ignore this suggests something like the post modernist approach of dismissing anything that may interfere with the objective. Ted

  2. October 14, 2019 at 2:20 am

    Thanks Anne, I’m looking forward to reading your contribution and much else in the new issue. Thanks to the editors for putting a priority on MMT. It’s a vital public issue: “How will we pay for it?”

    I will be speaking at a public forum on how the first New Deal funded its programs, and how the Green New Deal on the drawing boards – well – at least in a 14 page Congressional Resolution, might do it. So the timing is very helpful.

  3. Ken Zimmerman
    October 14, 2019 at 1:04 pm

    It seems MMT begins from the claim that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend. Most anthropologists would argue with term “social construct” since it assumes there is a social that constructs money. The social is not a thing, not any sort of object. It is the process of putting non-social things together to make an action, decision, way of life, infrastructure, war, marriage, etc. that is social. The social is the result of the work not the source of it. Assuming MMT economists recognize and accept this change, then most anthropologists I know would find MMT acceptable, and set about examining the process itself. Which, in fact they have for 100 years, but without the name MMT. For that same 100 years anthropologists have also asserted that the culture of money at the level of national elites has been skewed to serve these elites and their supporters. Once the skew is removed it becomes clear that in terms of citizen basic needs such as food, housing, health care, education, recreation, etc. we can provide for everyone. There is no need to “find” the money to “pay” for universal health care, universal top-notch education, proper diet, etc. by “cutting” the budget elsewhere. There may be logistical problems, at least initially, but there is no money problem. Most of these elites don’t work, have a job, and thus have no source of income. They are, to use a word popular in some conservative parts of the US, vagabonds or hobos. Elites define their members as employed successfully at the work of investment and capital watching and accumulation. As many anthropologists point out, however, such work is at best of limited benefit to society or most of its members. It’s also clear that the investing is more usefully and more efficiently performed by government, with the benefits, both in terms of products and services and the price of these for their users flowing directly to citizens, including the elites. Which begs the question, what benefit is gained for society of allowing elites to continue to exist? Or, as one anthropologist put it, can society afford its rich folks?

    In a reverse of former notions about the invention of money 5,000 years ago, anthropologists note that governments invented money and spread it around among its subjects (remember these were all monarchies) so they could pay taxes to the government with money rather than livestock, farm crops, etc. The government used the money to support itself (e.g., bureaucracy, army) and purchase the livestock, crops, etc. of the subjects. As they say among economists, these governments “primed the pump.” And money began to circulate and expand in use. Everyone came out better, with the government and religious elites coming out significantly better than the average subject, of course. Little of this pattern has changed today, except now one more elite has been added – financial managers and investors.

    Yet, the praise of MMT is not universal. Some claim that MMT remains ahistorical and non-relative. Many scientists believe the three greatest changes in the history of modern science are: 1) relativity; 2) quantum theory; and, 3) chaos theory. I tend to agree with this assessment. While MMT seems to force standard economics into some tight corners, MMT still suffers from the same malady as this standard economics. It does not incorporate relativity, quantum theory, or chaos theory. For example, does the amount of money matter? In some places and times, yes. In other places and times, no. Each time and place is its own truth, with many facts and explanations to back up that truth. How these appear to someone not within that time and place creates another truth, with facts and explanations attached. Which includes guides as to how to interpret and use the alien time and place. Since most of these interactions are complex, there is no fixed pattern. The relationships never repeat exactly. They are not periodic. But humans, using their experiences can and do judge whether a pattern in one set of relationships is “similar enough” to a pattern in another set of relationship to conclude that understandings gained in one will be useful in the other. Humans do this regularly. But this feat, which encompasses relativity, quantum theory, and chaos theory is, apparently beyond the scope of both standard and MMT economics.

    • Dave Raithel
      October 14, 2019 at 1:26 pm

      I do not read them to say there are “no fiscal limits on how much a sovereign currency-issuing nation can spend.” I read them to say: A sovereign issuer of money can afford to buy whatever anyone will sell it.

  4. October 14, 2019 at 1:48 pm

    I read this the other day in another posting.What stuck out was the electricity analogy. The potential granted by the constitution activates as with switching on the power to create the useful current [interesting current and currency]

    • October 15, 2019 at 9:55 am

      Yes, John. What saddens me is how MMT-ers haven’t explored the generalisation and quite simple mathematics of different kinds of electric circuits: series, parallel, the Wheatstone Bridge form where at equilibrium enables any one resistor is determined by the others, its post-Keynesian cybernetic feedback circuit equivalent in PID control systems, and very suggestively Thevenin’s theorem, illustrating what happens when there is not just one power source but many, This latter is relevant to people rather than money being the real power sources and controllers in an economy. Perhaps MMT-ers think of that as old stuff (though in Adam Smiths time electric circuits still hadn’t been discovered) but it looks as if it would be new to them, and it has become fundamental in modern living.

      • October 15, 2019 at 9:59 am

        Apologies at “Wheatstone Bridge” for the redundant ‘enables’.

  5. Gerald Holtham
    October 14, 2019 at 5:18 pm

    MMT is not a branch of metaphysics. What an economy can produce depends on the knowledge and capacities of the people and the capital stock of infrastructure and equipment they have. The set of things they can produce is not unique because people and plant can adapt or be adapted but there will be a range of possibilities at any time. Sometimes this capacity is not utilised and potential output is not realised. This can be because of a failure of aggregate demand. If households get scared and decide to save but businesses are also scared and don’t want to invest there may be attempted hoarding of money and other financial assets and a shortfall of production and hence unemployment. Neo-classical economics has lots of stories about why this shouldn’t or even can’t happen but these depend on counter-factual assumptions and patently it does happen sometimes. The government can supply aggregate demand just by employing people and paying them to do stuff. Equally it can order things – healthcare, roads, armaments – off private companies. If it pays for these services with money, it is injecting money into the system and people and companies experience this as a growth in their income. It has to run a deficit. If it raises taxes to pay for the expenditures it is simply taking income and money back out of the system. The government could finance the deficit by issuing bonds to obtain money to do this but it does not need to do so. It can “print” money by running an overdraft at the central bank or with commercial banks. MMT says why pay bond holders interest to borrow money when you can just print it? The answer is: no reason at all but you have to know when to stop. When aggregate demand rises to the point that spare capacity in the economy is exhausted, if you keep repeating the trick demand will exceed supply and lead to inflation. Eventually you are in Weimar or Zimbabwe. MMT supposes that the government knows how much spare capacity there is and when to stop and that the political system works well enough to allow the government to stop. As a Fed governor put it to take away the punch bowl just as the party is getting exciting. If those assumptions are correct, all well and good. This does not necessarily address, never mind solve, deeper problems of social organisation or income distribution.

    None of this has anything to do with relativity, quantum theory or the meaning of existence. Chaos theory currently provides only a little practical insight. It is a quasi technical debate about the monetary management of a modern capitalistic economy. Don’t get carried away folks.

    • Frank Salter
      October 15, 2019 at 8:01 am

      Your comments go to the point. If the labour share was appropriate — higher returns to labour — then the discussion would be very different. The economy would be very different.

      • October 15, 2019 at 10:53 am

        Gerald, I agree with Frank: this is very much to the point. In particular this bit: “MMT says why pay bond holders interest to borrow money when you can just print it? The answer is: no reason at all, but you have to know when to stop”.

        If money circulates like John Doyle’s electricity, one doesn’t have to switch off all the parallel circuits, but can slow down its aggregate circulation by switching off those that have done their job. With a credit card we switch on and off our own supply of credit (as needed) when we spend money and get the resultant debt written off via pay, which credits us for having done our own jobs. That can be readily and painlessly extended to crediting work which is currently done unpaid, like looking after ourselves, our social infrastructure (including housing) and our natural environment, i.e. maintaining the wealth we already have rather than “producing” anew.

    • Ken Zimmerman
      October 15, 2019 at 11:59 am

      Gerald, MMT is not a branch of metaphysics, but it does include metaphysics, since humans invented metaphysics and it’s entangled in the cultures of the people who created MMT. These cultures also include relativity, quantum theory, and chaos theory. The people who created each of these drew them from the cultures that are their home. In other words, relativity, quantum understanding, and chaos all exited in those cultures before scientists applied those concepts to other concepts drawn from those cultures – space, time, matter, acceleration, etc. What an economy can produce depends on the knowledge and capacities of the people and the capital stock of infrastructure and equipment they have. But only in part. It also depends on the passions people bring to the work, their concepts about right and wrong, good and bad, and their faith that they can trust the other people with whom they work. It also depends on a shared language and shared understanding of what’s important and why that hierarchy is as it is and is legitimate. Many of these conditions are missing in the American economy today.

      The scenario you lay out about capacity, demand, and money is certainly one potential way the story may play out. But only one. As I’ve already noted, such paths are unpredictable, imprecise, non-linear, and uncertain. That is, they are relative between cultures, can change based on the scale of the interactions involved, and begin or can change to be non-linear (chaotic).

  6. October 15, 2019 at 11:39 am

    Anne, of all the papers in RWER89 yours is the one with which I found myself most in sympathy, along with the last one telling me things I didn’t know about G D H Cole and Hugh Gaitskell’s background. Not “trying to be all things to all men”, I hope you will find my responses to John Doyle and Gerard Holtham (above) thought provoking, and to your opening points on endogeneity, flow-of-funds analysis and the questionable need for the FED.

    Incidentally, individual electrons (like our own credit card debts) don’t circulate in a battery circuit. Their return to the other side of the battery causes an electro-chemical change which “writes them off” by fixing their atomic position. (This is of course reversible by recharging in some types of battery).

  7. lobdillj
    October 15, 2019 at 3:06 pm

    An unavoidable nexus between Chemistry, Physics, and Macroeconomics

    What in the world is this all about? Well, it’s about balances of components that must obtain when conservative processes involving different quantities of the components occur. Chemists and physicists grasped the concept from the beginning of their development of the sciences. But amazingly, macroeconomists are still arguing about whether the concept of balances applies to economies.

    Mainstream economists argue that the money supply either does not change over a reporting period, or that it’s irrelevant if it does change. This is wrong.

    Not only have we missed a conservative element in defining the system, but now we can’t explain why our model doesn’t detect the onset of booms and busts (which are caused by a shortage or excess of money). Some economists avoid this problem by denying its existence.

    I know…this is illogical, but it’s true. Some macroeconomists claim that the size of the money supply is not a factor in analyzing the performance of the economy.

    The purpose of this comment is to show that the money supply is an essential factor in the money balance equation and cannot be ignored without invoking magic.

    The essential function of a nation’s economy is to provide the stuff that the population consumes and the wherewithal to get it. The population trades labor for income. Simply put,

    Source materials + Labor = Production
    —> $ transactions —> GDP.

    This equation assumes that materials and labor are present in exactly sufficient quantity to enable the consumption of all of the production and that there are no unnecessary sources or transactions in the process.

    But what if there is economic activity that produces no product to be consumed by the public? In that case the profit results from casino-like operations that produce nothing of value to the society at large. But that profit is not used by the players to grow the general economy. It remains in the casino and is used to pay interest on the new debt that fuels the next scheme to suck up all the surplus generated in the marketplace. The debt on interest grows as time passes, and the players grow more reckless as the stakes balloon.

    The masters of the scheme (investment bankers on Wall Street) have gained control and have engineered the rules so that they never suffer losses when the inevitable collapses occur. The US government will use sleight of hand to create the money to bail out the masters and bill the unwitting taxpayers with unpayable exponentially escalating debt.

    It is imperative that the mass of taxpayers be kept unaware of the inescapable fact that they are falling at an accelerating rate as long as possible so that the next crash is as profitable as possible for the masters. [In the aftermath of the 2008 crash the US government created roughly $26T and gave it to the masters, who promptly transferred it to themselves and bankrupted the victims.]

    So it is no wonder that the masters are horrified that the truth may come out and trigger class war. This is why the public is told that the money supply is not relevant to the condition of the economy and that they must accept austerity as the inevitable result of unaffordable social spending that must now be cut back.

  8. October 15, 2019 at 3:25 pm

    I raise the same criticism as always: MMT seems to imply that the sovereign can extract any amount of value from the economy by creating currency and then taxing to raise the price of that currency. That is naive on at least two grounds: A dynamic analysis of currency flow, real goods flow, growth/contraction, and price is missing. And the premise that currency is supported purely by fiat demands is unrealistic. Real currencies work because vendors are willing to sell real things for the currency, meaning that either a strong state sector or a core of friendly business creating value is what sustains a currency.

    • lobdillj
      October 15, 2019 at 5:46 pm

      IMO MMT implies no such thing. MMT states that the sovereign of a fiat currency state creates and extinguishes all currency that is used within its boundaries. The effects of excess or shortage of money in an economy is not denied by MMT. In fact, MMT embraces an employer of last resort policy designed to inhibit excess or shortage in money supply and thus inhibit unemployment and the growth of inequality.

  9. Jan Milch
    October 15, 2019 at 5:57 pm

    Randy Wray answers the critique here: MMT: REPORT FROM THE FRONT (PART2)
    Posted on October 14, 2019 by L. Randall Wray |

    PART 2

    “In Part 1 I discussed the third annual MMT conference that was recently held at Stony Brook, and you can find the program as well as videos of the conference here: (https://www.mmtconference.org/). In this Part 2 I discuss a special issue of real-world economics review devoted to MMT (http://www.paecon.net/PAEReview/issue89/whole89.pdf). As usual, my report stretched out to become too long for just 2 blogs so there will be a Part 3, coming later this week. And who knows, maybe I’ll need a Part 4.

    First, the good news. The editors seem to have played the game reasonably fairly. They invited contributions by MMT proponents and opponents. Often editors will give the opponents an advantage—for example, letting them see the contributions by MMTers in advance, without letting the MMTers see the contributions by the opponents. When it comes to MMT, editors don’t like to play fairly. It looks to me like proponents and opponents were treated equally. That is highly unusual when it comes to MMT “debates” which are almost always stacked against its proponents.

    More good news. There is one good contribution made to MMT that doesn’t come from the inner circle of MMTers. This might be a first—at least, it is the first case I can recall. The typical diatribe by critics runs like this. MMT is wrong because it does not cover topics X, Y, and Z. This will come from a critic who considers her/himself to be an expert on X, Y, Z. I do not recall any critic ever going on to try to extend MMT to cover topics X, Y and Z. This is, of course, what any scientist would do (I’m using the word scientist in a broad sense to include even social science). Our critics only want to take the opportunity to find a way to criticize us, not to actually do something that would be useful. They know that the number of core MMT researchers who have developed MMT is exceedingly small—undoubtedly smaller than the core group of social scientists who have ever worked to develop a new paradigm. But rather than joining to try to rectify the lacunae, they are only interested in bashing MMT. They are not scientists—they barely rise above the level of trolls (and I’d guess trolls would even be embarrassed to be grouped together with some of our critics).

    Look at me! Look at me! Look at me now!

    So, this issue of rwer contains what I believe to be a first—an article that tries to fill a perceived gap. Some months ago Richard Murphy had written to me arguing that MMT has not gone sufficiently in depth on the issue of taxes. I thought that was a strange accusation—since most critics argue we talk too much about taxes (as in driving the currency and fighting inflation). Further, I had added a chapter to the second edition of my Modern Money Primer to discuss taxes in more detail—good taxes and bad taxes. But what Murphy meant was taxes at the micro level. I responded that I accept the Musgrave&Musgrave approach (which I had studied—and taught; it is THE source on public finance). He responded that that is not sufficient. I remained puzzled.

    But his piece in rwer, “Tax and modern monetary theory”, clarifies his point. And, I must add, in a reasonably respectful manner. Again, this is something we rarely see from critics—who call us fascists and communists (without I suppose recognizing that there’s an ocean of difference between the two—but, then again, the critics aren’t scientists). Richard argues that “cash paid in tax is a residual figure arising from a plethora of decisions on tax bases, reliefs and allowances, as well as tax gaps that result from non-compliant taxpayer behavior”. Recognizing MMT’s argument (based on Ruml) that taxes are not really for revenue purposes, he argues for seeing “use of tax [instead] as a critical instrument in economic and social policy management”. I agree.

    My own contribution to the rwer issue actually addresses his first point, that taxes are a residual—what I call (following Keynesian theory) a leakage. They cannot “pay for” anything since the spending must come first. I argue that it is truly amazing that our Post Keynesian critics adopt the leakages and injections approach, recognizing that saving (a leakage) cannot finance investment (an injection) because injections logically come before leakages, but then drop it when they discuss government spending and taxes. The same logic MUST be true of government spending (injection) and taxes (leakage). But they all get “dazed and confused” when it comes to government. They simply abandon any understanding of basic macro theory and jump on the “taxes pay for government spending” bandwagon. Truly bizarre and rather embarrassing too.

    In many places I have also discussed the use of taxes for behavioral management (sin taxes, and the like). But Murphy’s article goes deeper than I have in the past. I recommend reading it, and I’m going to incorporate some of his arguments in my future work. I want to be clear—I’m not embracing everything in his article and I’m not convinced that his insights lead to an entirely different (and implicitly presumed to be better?) paradigm, modern taxation theory (MTT). But I’m glad he tried to make a positive contribution.

    I’m not going to talk about every contribution to the special issue of rwer. Some of them I will not read (Rochon, Palley—read at your own risk); and one of them I read but could not follow the argument (Lawson). I have not yet read Trond’s piece (parallel currencies for Euroland in crisis); and I skimmed Armstrong’s pro-MMT piece that lays out a number of issues clearly (he mentions my contribution to rwer but doesn’t cite it—I do not know whether he had it in advance); Dirk’s co-authored piece applies MMT to the euro. Many readers will find these to be useful reviews of MMT…”


    October 15, 2019 at 10:20 pm

    As an ordinary member of the public I found Anne Mayhew (The sleights of hand of MMT) very readable both in explaining the good ideas in MMT while exposing some of the weak areas that need attention. Furthermore I support her concern that austerity policies have a disastrous effect on the economy that then extends onto the general public, especially the disadvantaged. Then her ideas on the difference on credit for important things such as health education and housing that remain an asset for the public or an individual, which is quite different to debt for short term pleasure, that leaves no tangible asset or ability to service the debt.

    One of the things i like about the MMT conversation is that it provides an opportunity to compare the current monetary system with an alternative one, which could hopefully lead to addressing some of the problems in the present system.

  11. October 16, 2019 at 5:27 pm

    Wray says: “one of [the contributions to the special issue of rwer I read but could not follow the argument (Lawson)”.

    Tony’s argument seems to hinge on understanding his Obama example:

    “The only sense in which money can ever be said to be debt/credit, I shall be arguing, is similar to that in which the US President could once (but can no longer) be said to be Barack Obama. … Fundamental to this is that US President is a term used for both a position (or office) and a positioned occupant”.

    To me as a mathematician and logician, what I seem to see him talking about is an [algebraic] variable which at a particular time has an [arithmetic] value. In logical terms, ‘money’ is a concept and both credit and debit balances are instances of it. Putting these in computing terms, my Algol68-R Users Guide (edition 2) poses the conundrum:

    “What type of object is it, which remains constant but can refer to one value at one time and another at another? The answer is: a working space in store. Without itself changing, it can hold different values at different times. In high-level languages, working spaces are given identifiers and are described as variables. A consciousness of the fact that variables are receptacles is even more important in Algol68 than in other languages, as variables are objects in their own right and have their own modes” [of interpretation: i.e. types of procedure, as in going to their address, not adding them like numbers].

    As the interpretation of ‘money’ is based on ‘number’, I think that Tony would have done better to have started from the variable/value distinction. In practice, both we and our suppliers spend our credit to buy things and we write off the resultant debts by being credited for our working and their supplying goods. But I think Tony is right: the instances are not the concept. If I have a £10 note or a $1000 bank balance that is not what money is (i.e. does, notionally shifting credit from one account to another, or what is logically equivalent, recording debt in the one account and writing it off in the other). It is a limit indicating how much of our credit we can spend or what we are indebted for. In credit card terms the concept of ‘money’ is used to denote both our credit limit and how much of it we have already spent (on real things that in real economies are accounted for so nature, stores and shelves can be restocked).

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