Home > Uncategorized > MMT — debunking the deficit myth

MMT — debunking the deficit myth

from Lars Syll

defWe have already shown that deficit spending increases our collective savings. But what happens if Uncle Sam borrows when he runs a deficit? Is that wht eats up savings and forces interest rates higher? The answer is no.

The financial crowding-out story asks us to imagine that there’s a fixed supply of savings from which anyone can attempt to borrow …

MMT rejects the loanable funds story, which is rooted in the idea that borrowing is limited by access to scarce financial resources …

Government deficits always lead to a dollar-for-dollar increase in the supply of net financial assets held in the nongovernment bucket. That’s not a theory. That’s not an opinion. It’s just the cold hard reality of stock-flow consistent accounting.

So fiscal deficits — even with government borrowing — can’t leave behind a smaller supply of dollar savings. And if that can’t happen, then a shrinking pool of dollar savings can’t be responsible for driving borrowing costs higher. Clearly, this presents a problem for the conventional crowding-out theory, which claims that government spending and private investment compete for a finite pool of savings.

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand in the same way as the price of bread and butter on a village market. In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate.

As argued by Kelton in The Deficit Myth there are many problems with the standard presentation and formalization of the loanable funds theory. And more can be added to the list:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labeled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations, and capacity utilization.

2 As is typical of most mainstream macroeconomic formalizations and models, there is pretty little mention of real-world​ phenomena, like e. g. real money, credit rationing, and the existence of multiple interest rates, in the loanable funds theory. Loanable funds theory essentially reduces modern monetary economies to something akin to barter systems — something they definitely are not. As emphasized especially by Minsky, to understand and explain how much investment/loaning/ crediting is going on in an economy, it’s much more important to focus on the working of financial markets than staring at accounting identities like S = Y – C – G. The problems we meet on modern markets today have more to do with inadequate financial institutions than with the size of loanable-funds-savings.

3 The loanable funds theory in the “New Keynesian” approach means that the interest rate is endogenized by assuming that Central Banks can (try to) adjust it in response to an eventual output gap. This, of course, is essentially nothing but an assumption of Walras’ law being valid and applicable, and that a fortiori the attainment of equilibrium is secured by the Central Banks’ interest rate adjustments. From a realist Keynes-Minsky point of view, this can’t be considered anything else than a belief resting on nothing but sheer hope. [Not to mention that more and more Central Banks actually choose not to follow Taylor-like policy rules.] The age-old belief that Central Banks control the money supply has more an more come to be questioned and replaced by an “endogenous” money view, and I think the same will happen to the view that Central Banks determine “the” rate of interest.

4 A further problem in the traditional loanable funds theory is that it assumes that saving and investment can be treated as independent entities. To Keynes, this was seriously wrong. As he wrote in General Theory:

The classical theory of the rate of interest [the loanable funds theory] seems to suppose that if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shift or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shifts​, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts in an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium —  is not always compatible with the macroeconomic outcome. The fallacy of composition (the “atomistic fallacy” of Keynes) has many faces — loanable funds is one of them.

5 Contrary to the loanable funds theory, finance in the world of Keynes and Minsky precedes investment and saving. Highlighting the loanable funds fallacy, Keynes wrote in “The Process of Capital Formation” (1939):

Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.

What is “forgotten” in the loanable funds theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterward, simply isn’t enough.

All real economic activities nowadays depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channeling​ money/savings/credit — are more or less left in the dark in modern formalizations of the loanable funds theory.

Fallacy 2
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth.

Saving does not create “loanable funds” out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced … With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.

Fallacy 3
Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

  1. August 22, 2020 at 10:53 pm

    it looks like you have selectively chosen from Vickery’s 15 fatal fallacies which seems problematic.

  2. Ikonoclast
    August 23, 2020 at 3:03 am

    I have no problem with MMT, as far as it goes. MMT, Keynesian counter-cyclical financing and the functional finance thinking of Abba P. Lerner are all useful ways to look at government financing and money theory. Reform of the formal and notional is a good start. When a road-sign (or a sign system) points the wrong way, it must be repaired and set up to point the right way. However the road itself is real and if it has potholes and washouts then the road itself must be repaired. Do not imagine that repairing the sign or the operations of the sign system (finance), which utilizes equations and algorithms, will alone repair the entire real system or socioeconomic system. Assuming this is to assume the same automaticity of translation of the formal into the real which bedevils neoliberalism, monetarism and market theory in general.

    In the final analysis we still have to deal with real problems. Money and finance operations are inadequate on their own to deal with real problems. By real problems I mean the real economy, real people and real environment. Real things (as opposed to notional things) may be and indeed must be measured in the real scientific dimensions of the SI table.

    Money does not measure anything real. The belief that it does has to be discarded. The belief that money measures value (any kind of value from the quantity of a scientific dimension, like the mass of something, to a moral philosophy value, like just reward for effort, has to be discarded. Money does not measure anything real, hence it cannot model anything real. The idea that market “values” or macroeconomic quantities measured in the numéraire measure anything real has to be discarded. The money-finance system is not descriptive it is prescriptive. MMT intrinsically and incipiently gets this right so bravo for MMT in this sense.

    MMT states openly that we can prescribe different amounts of money creation for the system and different targets for the created money. It also states openly that we should then see how the formal systems and the real systems respond to said prescriptions and adjust the prescriptions accordingly: this being the empirical feed-back mechanism absent from neoliberal market fundamentalism. The only feed-back mechanisms or elements that neoliberal market fundamentalism (NMF) are formal ones (like the inflation rate and money returns to capital). NMF has not the least interest in most of the real systems of persons, societies and ecologies. NMF has no care for people, communities or ecologies. These are uncounted and disregarded negative eternalities (or even non-existences) to NMF.

    That money does not measure any real value or any ethical value is clear. Money is not descriptive in any way. It is prescriptive only. Money is used to prescribe production. As an example, a low or zero tax rate on super-profits prescribes a higher production of super yachts and a lower production of dental health clinics and dental health in the general population. Or it prescribes a higher production of gated mansions and a lower production of measures to fight epidemic and pandemic diseases like COVID-19.

    The necessary other side of MMT thinking is that we need to get into the business of measuring real things better. This implies the funding of more impact science to supplement production science. What we produce matters but what also matters is the impact of this production on people and environment. We need a statist approach to all this. I would prescribe three scientific departments in the form of a Department of Production, a Department of Environmental Impacts and a Department of Human Impacts. These deparments would be well funded and equally funded. Thus the total funding of impact study would be double the funding of production study. Production study is relatively simple. Systems of technological and industrial production are simpler than the system of humans, societies and environments.

    Government statistical offices need to be much more heavily funded. If we don’t measure real stuff (dental caries in the population for example and broken down into multiple statistical categories) then we have no idea what is happening to real people and real communities and real ecologies. All of this follows logically. If we are going to prescribe money as fiat currency (really prescribe allocation of resources) to people and the real economy then we need the diagnostic instruments to permit us to identify and target needs. The notion that money measures anything (needs and values) must be totally and radically discarded.

    A further issue is regulation. We need more regulation, not less. Back in the day, (really just the 1990s or early 2000s), an Australia LNP politician said with great pride and finality, “You can’t unscramble the omelette.” He was referring to the progress of privatization and the concomitant reductions of government departments and regulations. Neoliberal privatization was to be the omelette which we could not unscramble. It was to be an irreversible process. [1]

    Left analysis at the time [2] pointed out that the Adam Smith Institute “Omega Project” [3] (from which Thatcher took advice and guidance) intended to effect a permanent restructure of the economy and the state such that it would be “permanently re-ordered” or words to that effect. It would no longer be possible to even envisage or imagine a call on the state to provide welfare. That was the final goal of neoliberalism. We can see that this final goal has never been achieved to date. People can still envisage a call on the state to provide welfare. This call is still acted on strongly in a state like Australia when a crisis hits. Jobseeker and Jobkeeper are the empirical evidence of the continued existence and effectiveness of this call. Europe and its members also have their state programs to attempt to meet the challenges of COVID-19. I am not knowledgeable about these programs in detail.

    In the USA, the calls to meet COVID-19, for example, medically, economically and socially are much weaker and they are not acted upon, at anywhere near the scale required, when it comes to federal governance. Some states, or even quite a few, appear to be acting to some degree at their level. The USA represents the greatest “progress”, really regress, into a neoliberal conformation where crude market fundamentalism plus oligarchic kleptocracy rule federal policy making and programs. The only really significant welfare has been for the rich elites. Follow the money as the organized crime criminologists says!

    An invocation of the omelette analogy is apposite. It will take time and energy to rebuild destroyed structures. A society is not egg matter, obviously. It does not undergo an irreversible change by the application of the “heat” of neoliberal ideology. A progress towards a complexity greater again than mere market fundamentalism is possible. An integrated system of extensive markets and extensive regulations is more complex and it will carry higher up front costs. However, lack of regulation also carries costs. A system of “Rafferty’s rules” (a situation in which there are no rules, especially when referring to competition) sooner or later entails higher costs. We could pull down all the traffic lights tomorrow and declare that driving on a regulated side of the road infringes our “right” to drive wherever we like. We can imagine the chaos that would follow. Costs would rapidly escalate beyond the money, material, energetic and time costs of a regulated traffic system.

    It appears that a lot of human brains are rather like egg matter, if I may say this without being too unkind. That is to say when they are “solidified” into a given mode of thinking, by theology or ideology, it is very difficult for new dis-confirming evidence to be received and very difficult for new thoughts and new theories to be entertained. Speaking in evolutionary terms, it is probably necessary for a middling-intelligent species, like homo sapiens [4], to be mortal and to turn over generations reasonably fast (every 20 to 25 years). Only in this manner can those brains solidified by theology or ideology be replaced by the malleable brains of the young who still demonstrate adequate neuroplasticity. This is to say that our hope lies in the young and also in the old not yet too ossified to entertain the necessary changes away from neoliberalism.

    The real question is this. Do we have sufficient time and the energy left to re-build the required complexity in a new way? The neoliberal era arguably has been catabolic to a consiberable extent. “Catabolism is the breaking-down aspect of metabolism, whereas anabolism is the building-up aspect.” [5] We have both broken down environments (sixth mass extinction, complex habitat loss and climate change) and broken down social systems outside the mere market system but only to ensure growth of a particular kind: essentially the growth in wealth of the rich and perhaps the middle classes in countries like China. The middle class is already in decline in the West. We face the coming “Anthropocalypse” of the Anthropocene unless we take drastic action. There is an existential emergency on the way. The signs are now critical but that is another post.

    We need a “Delta Project”: Delta being code for change. More on that sometime too.


    Note 1: “In science, a process that is not reversible is called irreversible. This concept arises frequently in thermodynamics. In thermodynamics, a change in the thermodynamic state of a system and all of its surroundings cannot be precisely restored to its initial state by infinitesimal changes in some property of the system without expenditure of energy.” – Wikipedia.

    Note 2: I am still struggling to find my notes from that time. The analysis may have come from Quiggin, Easton, Pierson or Hogan. I cannot be more specific than that unless I find my old typed notes.

    Note 3: The Adam Smith Institute “Omega Project” was real. It’s not a conspiracy theory though it has a classic name for a conspiracy theory.


    We can note that they are still going strong, arguing against any role for the democratic state and command coming from the democratic state. And arguing for essentially continued and absolute market fundamentalism and total privatization. Note the current opposition to ARPA which opposition is replete with market fundamentalist myths.

    Note 4: Again, another reference I cannot find at short order. Some scientists have theorized that human-level intelligence will eventually (soon?) prove maladaptive and that better adaptivity occurs at lower or zero intelligence (witness SARS-CoV2) and possibly at higher than human intelligence. Distant aliens anyone? Unfortunately humans are in the anti-Goldilocks zone with just enough intelligence to get themselves into a lot of terrible trouble.

    Note 5: See Wikpedia entry “Catabolism”

  3. August 23, 2020 at 9:48 am

    Actually an excessive govt deficit COULD raise interest rates. That would happen if govt borrowed and spent MORE THAN was needed to bring about full employment. That would tend to cause excess inflation, in which case the central bank would raise interest rates so as clamp down on the inflation.

  4. gerald holtham
    August 23, 2020 at 3:40 pm

    MMT is a result of intellectual competition. When in a competitive market every supplier tries to differentiate their product. That means they exaggerate differences or assert them when they don’t exist. One way to differentiate in intellectual competition is to caricature the position of opponents so that it resembles one’s own as little as possible. Viewed dispassionately there is amazingly little difference between MMT and the post Keynesians. Very few people really believe that supply always creates its own demand (Say’s Law) so recessions cannot happen or are short-lived. That’s a straw man. Equally very few people really believe that demand always creates its own supply. It does up to a point but there is such a thing as full capacity, though it is a behavioural, not a physical limitation. At full capacity one use of resources necessarily competes with some alternative use – because there is not enough slack to do both. At less than full capacity there may well be no such conflict. Economies are not always at full capacity but nor is it true to say they are never at full capacity for practical purposes. Government deficits do not need to be financed when an economy has slack and there is nothing wrong with monetary financing of a deficit either. It is not money that becomes scarce at full capacity but real resources. Then no clever monetary policy can call into use idle capacity that does not exist. All parties to this “debate” are therefore both right and wrong and would be better employed arguing about the appropriate policy in actual situations rather than pretending there are significant theoretical differences in general. So ignore all the intellectual shadow boxing.

  5. August 23, 2020 at 4:02 pm

    I liked the material from Ikonoclast but wish to comment on his referring to the neuroplasticity of the young and changing their brains. I am in debate with a person one third my age who is an avowed Neoliberal capitalist despite being raised in at least a partially leftist home and very leftist extended family some members of which are also Neoliberals. It seems that young people are more likely to choose a counter-script to the one of their previous or parenting generation or professors that they do not like. Once again, people adopt beliefs, sometimes bad and sometimes good, out of Animal Spirits and generational effects may have less to do with it than Ikonoclast believes. And then they like to overlay that with rationalized arguments.

    I also think that his description of money and its role is confusing. But I have discussed that before. I see money as a measure of value not a commodity which is what I believe he may be criticizing when he says it is not real. I was confused by his description and wonder if perhaps is conflating the two meanings. He is correct that it is not real IMNSHO. But then neither are feet nor metres. I cannot buy feet or metres even with money. But I can buy the means to use feet or meters with an IOU that we call money. We each seem to reify the concept of money in our own unique way.

    • Ikonoclast
      August 24, 2020 at 5:07 am


      Thinking about money is difficult for all of us. How to separate beliefs from realities? In a philosophical essay-postscript to War and Peace, Leo Tolstoy essentially asks, “What are bees?” He then proceeds to discuss how bees are many things and that no single definition or description encompasses all they are and all they do. He proceeds to illustrate his point by showing how bees are complexly embedded in a set of complex interacting systems. Of course, Tolstoy does not use modern complex systems terminology but that is still his essential thesis. It’s part of his discussion on how complex history and historical causes are. Indeed, he postulates complex interacting causes for things and long chains of multiple causes from the past to the present. He amusingly caricatures simplistic histories which propose clear single or main causes for events.

      In the above sense, money is somewhat like bees. Money has multiple definitions, multiple instantiations, multiple ways to be used by humans and it means different things to different people. As you said, “We each seem to reify the concept of money in our own unique way.”
      Although, while many reify money (treating the abstract as concrete, the notional as real), there are some who attempt to de-reify money or de-mystify it.

      “Money is not real.” That is a statement I would make but only with a clear qualification. I would note that in that sentence I mean “real” to mean concretely, materially, physically real. Thus I am saying modern money is not concretely, materially or physically real in that sense that say a mole (Avogadro’s number) of water molecules is real. A mole of water has 6.022 x 10 to the power of 23 water molecules. A mole of water molecules has a mass of 18.0152 g. These values are correct if my reference source is correct. I have not double checked it.

      Thus in this sense, real means materially real and measurable in one or more of the scientific dimensions of the SI table. This kind of apparent pedantry is actually necessary if we are to properly untangle what money is in ontological terms. Money is not materially real but its counters are. A coin is materially real. Computer bits or bytes of money information are materially real in the sense that the bits or bytes are patterns in real materials or real energy fields. The counters are real as patterns in matter or energy. The money numeraire itself if notional, not real. We can see this notional or non-real aspect of money when we create it ex nihilo (out of nothing) as money creation and destroy it ab nihilo (back into nothing) when we destroy money.

      In physical reality money exists as patterns in the media which record its nominal quantities. These patterns instantiate it. In physics, patterns are or can be information. In information theory, information can be a pattern which can effect the creation of other patterns or reorder other patterns. Now we are getting somewhere. Money is not real as a material or energy but it is real as a pattern instantiated in a material or energy form. The purpose of many patterns associated with organic life (even if the pattern itself is inorganic) is that via generation, transmission, receipt and decoding of the pattern, the effect is to affect or produce other patterns, including patterns of behavior.

      As a pattern containing information, money can only affect other patterns by going through an appropriate information processing machine. There are basically two such machines these days, humans and computers. Viewed in this light, money is a behavior controlling device. It’s pattern influencing humans to make other patterns. All human constructs, static and dynamic, have pattern. Money is a control device or more accurately a control signal.

      Money does not measure value, it effects control (and thus can measure control by thresholds). We imagine we are measuring value, when we are in fact measuring control thresholds over others (others who have control of certain objects and processes) in respect of that control of the objects and processes. The purchase price is the control threshold to get control of an object or process. Money is a power system, not a value system, except in that it measures power. It is where (social) power and value get conflated.

      This is only half an argument and it leaves matters hanging and unresolved. But there are space limits on replies. I may try to write more when I can. I also don’t pretend my theory is fully formed. It is not. But economic value theory is as good as dead philosophically and empirically in my opinion, after reading “Capital as Power” by Shimshon Bichler and Jonathan Nitzan. My attempts lie in attempting an ontological analysis of why economic value theory is fallacious.

      • August 24, 2020 at 2:37 pm

        An excellent reply and I thank you for a thought-stimulating presentation. I look forward to greater elaboration from you. One clarification. I believe you meant “The money numeraire itself is notional, not real.” Otherwise, with the word “if” in place of “is, ”it did not make sense.

      • Ikonoclast
        August 25, 2020 at 3:22 am


        Quite right. I meant “The money numeraire itself is notional, not real.”

        You have probably already deduced that I was in trouble by the end of my little analysis and that that is why I wrapped it up. I think my approach has promise but I don’t think I have arrived at a fully defensible thesis as yet. This is me being intellectually honest and admitting that I don’t have the answers yet.

        My approach is (a) derivative of my own developed ontology and (b) derivative of the empirical investigations and analyses of Bichler and Nitzan (Capital as Power) and related writers such as Blair Fix and Ulf Martin.

        My own ontology I term “Complex System Monism” (CSM). It is a form of “priority monism” which term means in essence “the whole is prior to the parts”. This implies “emergence” and “evolution” as processual categories of existence. It also implies a view of processual reality as comprising both upward causation and downward causation. I’ll leave you to search those terms.

        CSM is avowedly a “single substance” philosophy asserting that all phenomena are of one “substance” (let us call it “material” substance) and are connected in one system (the cosmos). Existents exist not absolutely, independently or essentially but only in relation to other existensts i.e. only in systems of existents. In this sense, the existence of an identified existents is relative to other existents. Existence is relative and relational.

        You can see that a “single substance” monist ontology expressly seeks to avoid dualism, especially Cartesian dualism, which is where, philosophically speaking, the mistake of reification occurs. There is a split between material substance explanations and mental substance explanations and no possible causational exposition of how the material (res extansa) and the mental (res mensa) would transmit causes or influences each to the other. Worse, this split thinking permits the invocation of reified categories as aids to material explanation (without precisely explaining how they can affect the material). Think of “free will” (and thus “free choice”) as one of those handy explanations which does not actually explain anything. How does “free will” arise and how does it actually operate? Does it even exist at all? “Free will” is one of those reified (mystified) concepts, without proper content or explanation, which is then handily used by dualism to “explain” downward causation and to implicitly divide or schism it (free will) from material reality.

        Here is a paper I recently discovered on “A Monist View of Quantum Theory and Neuroscience” by Alfredo Pereira Junior. I find it dovetails nicely with my philosophical assumptions for Monism even in respect of so-called “free will”.


        Importantly (to me), I am working on the ontology of real system / formal system interactions and attempting to do so from a monist viewpoint. Hence my insistence that a formal system is patterns (implying information theory) instantiated in matter and/or energy and/or fields in real systems.This seems like a possible possible avenue to a “grand unification” theory of real system / formal system interactions.

        It seems to me to be the way forward ontologically and empirically. Patterns can perform the role of influencing (and creating) other patterns in the material monist system. This occurs through agents (humans and now computers) processing information and acting on it compliantly and honestly (or non-compliantly and “deceptively” or “creatively” in the case or humans who are more complex and/or less “literal” than computers).

  6. gerald holtham
    August 24, 2020 at 1:01 pm

    There are competing theories of market “value” and none is satisfactory. All can furnish useful insights about some particular situations. Insisting that the phenomenon of market prices cannot be studied because “value” is not measurable in STI units, effectively abolishes the study of economcs altogether. It also denies the layered nature of realty. The behaviour of dogs or the best ingredients of a stew are ultimately constrained by the second law of thermodynamics. But if you are trying to understand dogs or perfect your cooking, thermodynamics is not a sensible place to start. Similarly trying to reduce monetary theory to information theory is an ambitious but ultimately excessively long-winded enterprise. If we define our terms and observe carefully we can analyse phenomena at different levels. To understand money one should not get lost in pointless essentialist discussions of what it “is”. Define which existing assets you count as money, giving reasons for your choice, then look at how those assets are created and how they are used. Ikonoklast’s desire to get to the root of things is admirable but he risks disappearing up his own ontology.

  7. August 24, 2020 at 5:06 pm

    Thank you, Ike, for note 3 on your original comment. I didn’t know what ARPA was, and evidently Benedict Cummings has only been given the American version of the story, seen in Nevil Shute abandoning British bureaucracy for Australia and Lord Fulton pleading in vain for scientists to be given proper recognition within the public service rather than sold off to profit-seeking financiers, as happened to the old Radar Research Establishment (now Qinetic) where I worked. What no-one liked to mention was how an international consortium of information scientists came up with a multi-level Russell/Chomsky inspired scientific language for computers, and while they were still arguing about whether anyone could afford to pay for writing a compiler to translate it into machine code, three scientists hidden in a dark corner of RRE just wrote one and presented them with it. I’ve told the story of Algol68-R before
    [http://web.eah-jena.de/~kleine/history/languages/Algol68R-UserGuide.pdf] and probably that of another rare beast – a lady scientist – who took on introducing its use. [https://ethw.org/Oral-History:Susan_Bond#Developing_the_World.E2.80.99s_First_ALGOL_68_Compiler]. In any case, from https://theconversation.com/arpa-what-is-it-and-why-does-dominic-cummings-want-one-in-the-uk-130975 it seems Dominic Cummins hasn’t learned the moral of the story. ARPA went its own way, selling its very successful variant C by obscuring the philosophical point of Algol68, bowdlerising it by turning its complex type variable into a simple pointer.

    What follows from your second comment and Gerald Holtham’s reply is that neither of you yet understand what information theory is about, though you at least have the grace to acknowledge that. Relative to economics, Hume argued that impacting billiard balls – never mind Newton’s forces acting at a distance – could not get into our skull to account for how humans behave. A couple of hundred years before the concept of information was disentangled from encoded messages and linguistic diversity, he argued that all we could do was agree on what we saw, hence today’s winner-takes-all representative politics and Adam Smith’s monetarised industries. But there is a way information can get into our head: by our senses tuning in to it as one does to a radio set: pointing the aerial and adjusting the tuning for maximum clarity of signal (point by point in the case of visual or TV information) so that what one hears in one’s head has more or less the same information content as your senses are receiving (i.e. allowing for things like colour-blindness and high-frequency deafness). The digital encoding of neurons is significant but incidental: more to the point is where the information goes, where four subsystems perform the functions of Algol68’s four-level data.

    The point, then, Gerald, is that reducing economics to information theory is not an impossibly long-winded job but something that one (or better, a group of three) persons can do if they are allowed to (in the Algol68 case by their boss, P M Woodward; here, by being pensioned off). Whether they will be listened to depends on whether anyone understands the problem well enough to recognise a solution as against a possible commodity when they see it.

  8. Ikonoclast
    August 25, 2020 at 5:20 am

    This is a reply to both Gerald Holtham and davetaylor1 though I don’t yet get to davetaylor1’s specific information critiques, of my lack of formal information theory. They both make very valid points and do so with exemplary politeness. I am a character still working on his own abrasive and anti-social edges even after 66 years on this planet so I should take such lessons on etiquette from Gerald and Dave. :)

    PART 1.

    My last reply to antireifier above is a kind of explanation and apologia for my approach and in it I admit my thesis is far from fully developed. Then, even if it is developed will it have any scientific or pragmatic economic value or effect? These are valid quetions. I am an admirer of the English Empiricists and the American Pragmatists in philosophy so I certainly should not and cannot brush aside Gerald Holtham’s concerns.

    I quite agree that I risk disappearing up my own ontology. That’s a real intellectual and emotional concern, though not a real somatic (bodily) concern. :) That segues nicely into Gerald Holtham’s statement that we should analyse phenomena at different levels. There are different levels of reality and different categories of the “real”. That is perfectly true. Money is notional in one sense but real in another or in several other senses. Money is a real social creation. It has a real social instantiation as well as my claimed pattern and informational instantiation.

    Yet I hold that my fundamental informational claim is not wholly without theoretical and modelling value. For example, let us consider the “neutrality of money” thesis. If (quantities of) money in different ledgers and accounts (as dynamic and processual time and place distributions of quantities of money tokens) is information as I assert then we can immediately and easily refute the “neutrality of money” thesis. Information is not neutral in not neutral in physical systems and material monism asserts “one material system” as cosmos. Money is information. Information is not neutral (it has system influences). Hence money is not neutral. That’s a neat proof, I believe, from an a priori material monist system point of view. Economic arguments are not necessary in this case. An argument from physics theory is possible. I admit this is a fairly trivial “win”. I doubt that the neutrality of money thesis is taken seriously in many quarters today. But is it not nice and neat to have such an elegant empirical proof?

    PART 2

    Of course money is not just information. It is information to humans (and computers). This complex set of relation(s) means something. This, as it were, adds those levels of further reality and necessary level-relative investigation that Gerald Holtham is correctly talking about. We can take this thought all the way in the other direction. It can be good to examine phenomena bottom up and then top down to see if we can find linkages and consistencies which explain feed-backs and other phenomena in terms of upward and downward causation and so on. In this spirit I add the following.

    Let’s start by think of “intangible assets” in capitalist economic theory. “An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.” – Investopedia.

    A strict monist materialist and/or a complex systems theorist would argue that certain intangibles do not exist in the form claimed in capitalist apologia. Rather capitalist “intangibles” is a (potentially misbegotten) reification of psychological and social states. Which is not to say that they don’t exist but rather that they exist in a very complex manner: a manner which makes it easy to mystify or mis-attribute their provenance. See this article by economist John Quiggin.


    “The difference between the book value of physical assets and the stock price is commonly explained by “intangibles.” That term can cover all sorts of things, and is often taken to refer to some special aspect of the firm in question, such as accumulated research and development, tacit knowledge or the “goodwill” associated with its brand. …

    The main intangible asset held by these companies is their monopoly power, which arises from network effects (every extra user adds to the value of the business for all users), their intellectual property and good old-fashioned predatory behaviour. In this context, the crucial point about intangibles isn’t that they aren’t physical, it’s that they can’t be reproduced by anyone else.” – John Quiggin.

    Quiggin fingers “monopoly” as the “real intangible” and actually puts aside the physical / non-physical bifurcation of dualism (without expressly and ontologically commenting on it). Monopoly is real and it is part of second order or higher network effects, which is to say part of complex system effects.

    “Intangibles” is often a code-word for stuff that capitalist economics does not want to acknowledge openly and name honestly. That’s what Prof. J.Q. is saying, quite correctly. “Intangibles” is a conceptual mystification as the Marxists would say.

    “Mystification is the application of vague abstractions to build sophisticated metaphysical schemes, which sidetrack people from tangible material reality. According to Karl Marx, the term “material reality” means not only biological or physical existence but social and economic relationships.” – acasestudy dot com.

    Using the term “intangibles” is a very audacious move by the capitalist apologists and most people fail to see the misdirection involved by virtue of Cartesian dualism still being by far the most accepted and usually unconscious metaphysical or ontological bias of most Westerners (and now presumably many Easterners forsaking Eastern monism). This move hides the mystifying metaphysical term in plain sight and legitimatizes it. “Money” is the “philosopher’s stone” of the system. It is the object with the transformative power. Anything placed in the presence of money becomes, at least potentially, money itself. The object can be turned into money, Money is furthermore the “transforming legitimizer”. Anything placed near money partakes of its aura and legitimizing power. Any “alchemical” expansion of money is attributed so often to “invisible hands” and “intangibles”.

    Truly, this is a mystical art or rather an art of mystification. I mention the word “art” with express intention and I imply artifice as well. See “The Image” by Daniel Boorstin. Consider the leftists and anarchists, from the Marxist Autonomists to Ken Kesey’s “Merry Pranksters”, who understood that the Left also needed its performances to make its anti-capitalist point. But capitalism has the advantage. Its performances occupy almost the entire available stage. All the world is a stage. “Capitalism : The Play” is presented as being the entire real world when the fairy TINA waves her magic wand. TINA = There Is No Alternative.

    “She feels as if she’s in a play,
    And she is anyway.” – Penny Lane – McCartney/Lennon.

    Apologias for a given political economy system are performance art: art and artifice. Indeed, many actual operations of the capitalist system itself are performance art. It’s interesting to look at the concept of “Dramaturgy”. Dramaturgy in sociology (presumably taken from dramatic arts theory) “is a sociological perspective commonly used in micro-sociological accounts of social interaction in everyday life.” – Wikipedia. I do not see why such Dramaturgy theory could not also be used as a top-down macro-sociological account. Capitalism is, among other things, a performance. It is a performance where some things are put on stage and/or permitted on stage and other things are kept off-stage. Capitalism builds up an image of itself by these manipulations. Shiny, bright new things are on stage. Bleak, dark negative externalities (environmental damage, exploited workers in foreign countries) are kept off-stage as much as possible.

    Read and consider the following and mentally apply it as a macro-theory to the performance of “Capitalism – The Play” . It applies to both the individual political and personal performances in Capitalism and to Capitalism itself as a “macro-actor” in its self-authored play.


    Capitalism (as the particular really-existing political economy system I am highlighting here) will likely be found on analysis to have within its ideational, belief-justifying structures a structure which accords with two very central parts of human social thinking. I refer to our predilections for magical thinking and narrative thinking. Belief in intangibles and invisible hands for example are a part of magical thinking. Belief in endless growth, an endless cornucopia, is magical and indeed mythic thinking. Belief in specific prohibitions is often part of both magical thinking and narrative thinking. Don’t be naughty or the bogeyman will get you. That’s both an interdiction or prohibition and a potential narrative. Don’t break copyrights (and monopolies) or the bogeyman of socialism will get you and destroy all prosperity. Real dangers to life and prosperity (climate change, zoonotic disease outbreaks etc.) are downplayed, even termed “fake”, while the tenets of capitalism (copyright for example) are unbreakable rules. Transgressions will lead to mass poverty. Empirical evidence is ignored and downplayed. The idealized narrative of capitalism, and the power of its talismans, are emphasized. The talismans of course give magical protection. The rise in ignorance, denialism, anti-science and millenarian mumbo-jumbo, of Trumpism for example, go along with this intensification of magical thinking.


    Money of course is the magical item par excellence: both talismanic and alchemic, it protects and transforms. The operations of money must be prioritized over the operations of real systems. Money and the operations of money are claimed judge value better than any other item, instrument, process or human faculty. Real facts must bow down before money facts. The phrase “it is not economic” means money calculations say it should not be done. It is “not economic” to prevent climate change. It is “not economic” to save human lives in a pandemic. This is Political Economy as folk tale. Along with an analysis of capitalism as magic we could do an analysis of capitalism as folk tale.

    Take Vladimir Propp’s “Anatomy of the Folk Tale” [a few edited items thereof with my interpolations in square brackets thus].


    1. The person absenting himself can be a member of the older generation.
    (The “Fathers” of Capitalism like Adam Smith or the “Fathers” of the Constitution.)

    II – AN INTERDICTION IS ADDRESSED TO THE HERO. (Definition: interdiction)

    1. “You dare not look into this closet.”

    [Do not look into the closet of Dr. Socialism!]

    III. THE INTERDICTION IS VIOLATED (Definition: violation.)

    The forms of violation correspond to the forms of interdiction. Functions II and III form a paired element….

    At this point a new personage, who can be termed the villain, enters the tale. His role is to disturb the peace of a happy family, to cause some form of misfortune, damage, or harm.

    [The happy family of capitalism is disturbed by the actions of the villain, Dr. Socialism.]


    1. The reconnaissance has the aim of finding out the location of children, or sometimes of precious objects.

    [The villain, Dr. Socialism, will find your precious hoard of wealth and then plan to confiscate it and wreak havoc and destruction over the entire land.]

    And so it goes. The list of fairy-tale narrative elements is quite long. Rather than facts and arguments, one gets magical thinking and fairy-tale narratives from capitalist apologia.

    3. Conclusion

    These are just notes towards a systems and structural analysis of (capitalist) economics at all levels. If Gerald Holtham is right (and I think he is) that a base level “physicalist” analysis alone is inadequate, then it follows that a mid-level economic analysis alone is also inadequate. Multiple analyses are required at multiple levels inlcuding the “highest” or most “rarefied” psychological and sociological levels and these including the influences of the psychology and sociology of magical and narrative thinking. How one integrates all this is still well beyond my thinking at the moment. This is “notes towards” as I said.

  9. gerald holtham
    August 25, 2020 at 1:00 pm

    “Multiple analyses are required at multiple levels.” I agree. The appropriate level also depends on what question you are asking.
    Most apparent disagreements on this blog are not about answers to a question. They are usually because someone tells someone else that they are asking the wrong question and another question is more important. The conversation can then get hopelessly confused and I often can’t tell which question is being addressed or whether we are ranking questions rather than addressing any of them. Perhaps it is inevitable in a discussion with no question master.
    Ikonclast wants to achieve a systems and structural analysis of capitalist economics “at all levels” and says he does not know how to integrate it all. I don’t think anyone knows how to integrate it all. Certainly I don’t but I do find it more productive to identify important questions and then take them one at a a time. You can always worry how your answers fit together afterwards.
    Intangibles in a balance sheet are not the reason for the discrepancy between book value (what was paid for company assets or would need to be paid to replace them) and the stock price. Accounting intangibles entail judgement and often do, indeed, cover a multitude of sins and special pleading. The stock price embodies a different judgement: what profits the firm is going to make in future and therefore what dividends it will pay and how far the stock price will rise if expectations are realised. Those issues can be analysed largely by mid-level economic techniques. So can the non-neutrality of money. I am the first to concede that lots of other questions in political economy cannot be answered by mid-level economic techniques.

    • Ikonoclast
      August 25, 2020 at 10:32 pm

      When pushed to it I will always say the proper subject is political economy, not economics. The old meaning of political economy was the economics of the nation. The clear case, after Marx, Veblen and others, is that it is POLITICAL economy. Real world economics is primarily political. Politics determines the rules of the economic game. The rules, interacting with environment and society, determine the outcomes.

      I guess this puts me in the camp that says economics is a prescriptive discipline. Politics prescribes economics. Economics attempts to prescribe production, distribution and consumption. In a feed-back sense, the environment is now having more and more impact on political economy.

      We do need to draw a pragmatic line between quixotic “theories of everything” and concrete political demands. I agree with that. However, we can all “walk and chew gum” at the same time. Figuratively speaking, we can walk in a demonstration and ruminate on deeper ideas simultaneously. Realistically, we proceed by the twins modes of action and reflection and it is the dynamic interplay of feed-backs between action and ideational reflection which give us our pragmatic and hopefully satisficing solutions.

      It’s only a variation in method we are talking about really, or even the two sides of one coin. One method is to “identify important questions and then take them one at a a time”. This perhaps is piecemeal tinkering as Karl Popper called it but that does not give the method its full due. Changing one factor at a time permits permits a more empirical assessment of the results. But complex dynamic processes taken together do not always remain ceteris paribus (other things equal) and events sometimes move fast. Exigencies and emergencies can push us into arenas were we clearly need a new theory and need it urgently. It’s important to have some new theories ready. The broad theory method is more systems based and speculative and it seeks to erect a new system speculatively and as a model with multiple factors changed.

      In conservative, slow moving times we perhaps have the luxury to take problems one at a time. In an emergency, we must operate rapidly on many fronts. It can help to have a doctrine or manifesto for radical change ready to hand from the long pondering of theory. The key question to ask is this. Does the theory (a model for a new conformation of political economy) have valid ontological and empirical foundations?

      We are now in a global climate and zoonotic diseases (plural) emergency. Capitalism has also reached either its endgame or a radical phase change. This is a critical time where conservative approaches, one problem at a time in the current paradigm, are not going to work. In other posts in the recent past I have laid out a suggested program. It’s not novel: green new deal democratic statist socialism would cover it. The power of the big capitalists, oligarchs and corporations has to be completely broken for this to happen.

      Of course, things are going in the other direction in the USA. That country is heading towards neo-fascisitic oligarchy, plutocracy, kleptocracy and kakistocracy. That movement will accelerate collapse. It’s very difficult to know how that will play out but somehow the people have to find a way to defeat this re-emergence of fascism.

      • August 26, 2020 at 7:31 pm

        I would only add to this by pointing out that values and morality with a strong ethical base matters also.

      • Ikonoclast
        August 27, 2020 at 1:15 am

        I agree and I have said as much in previous posts on other threads. I’ve said that the values that really matters are ethical values (moral philosophy) and empirical values (science). Economics per se is about a fifth order concern. Before economics we must place our priorities thus;

        (1) Moral Philosophy and Humanities;
        (2) Democracy;
        (3) Science;
        (4) Political Economy;
        (5) Economics.

        Economics is foot-soldiery, not strategy.

  10. Ken Zimmerman
    September 12, 2020 at 3:24 pm

    In the plainest view, deficit spending happens when a government’s expenditures exceed its revenues (mostly from taxes) during a period (usually called a fiscal period), causing the government to experience a ‘budget deficit.’ Keynes ‘backdoored’ us into this ‘deficit’ event by arguing that the government could ‘stimulate’ economic activity by spending into the economy when non-governmental sources of spending slow or cease to operate. Keynes, perhaps without considering the consequences assumed that money was scarce and that the governments of the UK and US could, for example overstep their budgets through such stimulus spending and thus have a net debt. A debt to what or who has always eluded me.

    Keynes argues this debt is justified because the government’s spending creates demand and stimulates the economy. Thus, helping all members and the society itself in total. The term ‘deficit spending’ was attached to these views and actions. But not by Keynes. For Keynes, maintaining aggregate demand—the sum of spending by consumers, businesses, and the government—was key to avoiding long periods of high unemployment that can worsen a recession or depression, creating a downward spiral in which weakening demand causes businesses to lay off even more workers, and so on.

    Keynes also argues that after the economy is growing again and full employment is reached (have we ever achieved this?), the government’s accumulated debt could be repaid. In the unlikely event extra government spending causes too much inflation, Keynes argued, the government could simply raise taxes and drain extra capital out of the economy. This seems an absurd conclusion considering the original definition of inflation. Originally, inflation was the difference between the needs of the average working family and the portion of these needs that could not be met under existing wages. Since any increase in wages to fill this gap would immediately be spent, the likely result seems deflation rather than inflation as basic needs and wages are once again in balance.

    Keynes also justified “deficit spending’ by government in terms of what he called the ‘Multiplier Effect.’ Another, or secondary benefit of government spending. Keynes argues that $1 of government spending could (circumstantially sometimes yes, sometimes no) increase total economic welfare by more than $1. The idea is simple. When the $1 changes hands, so to speak, the party on the receiving end will then go on to spend it, and on and on. The acceptance of ‘deficit spending’ has varied historically. And much of its current wide rejection can be blamed on Keynes, himself.

    Those who see the national economy literally like the household economy argue that government can only spend the money it has available or is likely to have available through taxes. MMT, along with all the other social sciences except economics have repeatedly shown this conclusion is wrong. Just a simple examination of the history and anthropology of money is all that is needed to make this point. The first governments among our species invented money to meet the needs of the settled agricultural societies just being invented. Money was not intended for any sort of personal transactions but rather to pay the taxes the government created to support these new communities. A simple way to understand the relationship between money and taxes in the early human ‘large’ communities is to view taxes and their norms/rules as the adhesive that held these communities together. After all, at this point humans had no experience living within such communities. Money, on the other hand provided a physical performance of these norms and rules in practice for people to model and emulate. In other words, both money and taxes were part of human governments (just invented). Only later, with the invention of private property and private mercantile transactions was the use of money and taxes extended beyond the direct control of governments. But even here government retained it sovereign control of the creation and valuation of money. With the invention of democracy these controls became much more complex, but the basic structure remains the same till this day.

    If Keynes spun his share of half-truths and wishes, those who opposed his views on government and government deficit spending, built an entire corporation of misinformation that took advantage of every Keynes’ misstep.

    What Keynes describes as government stimulus; they describe as government interference in the economy. They also argue that deficit spending will not have the intended psychological much less stimulus effects on purchasers and investors, and economic life generally because people know that it is short-term. That ultimately all the spending will need to be offset with higher taxes and interest rates. Thus, rather than spending the stimulus and beginning the multiplier effect, people will save the money in anticipation of the money they must eventually pay in the form of new or increased taxes and/or higher interest rates. This could certainly happen if the government is restrained from putting more physical (digital today) money into the hands of everyday people as directly as possible (no banking agents or other middlemen). Which is precisely the actions those who oppose ‘deficit spending’ propose.

    To take a bad idea and make it worse, some economists claim ‘deficit spending,’ if left unchecked, could threaten economic growth. Too much debt could cause a government to raise taxes or even default on its debt. And sin of sins, the sale of government bonds could crowd out corporate and other private bonds, which might distort prices and interest rates in capital markets. This is horse hockey. First, humans do not need to build growth into economic life. As it was in the beginning of economic arrangements, such arrangements can focus on sustainability. That each member of society is provided the resources and services needed to live a useful, safe, and happy life. And society as an institution is sustained and safe. Larger private financial institutions are not necessary to achieve any of these goals. Neither is a solely private economy beyond what is reasonable to meet these goals necessary. And certainly, disparities in the resources (especially money) necessary for society and individual sustainability are not needed. In fact, beyond a small base level such disparities are harmful to all sustainability.

    Every society has its mythologies. Some more useful than others. The mythology of the dangers of deficit spending is one particularly harmful mythology that western societies need to eliminate as quickly as possible.

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