ABC’s of Modern Monetary Theory (MMT)
from Asad Zaman
I was overwhelmed by the level of ignorance displayed by distinguished economist Raghuram Rajan in his article entitled “How Much Debt Is Too Much?” published recently in Project Syndicate on Nov 30, 2020. I had meant to write a critique of the article, but to do so requires starting from the very beginning. In this post, I go over some basic MMT concepts, in order to prepare the ground for this critique. There are now many good videos explaining these basics. I will go over six questions discussed in the first ten minutes of “Modern Money & Public Purpose 1: The Historical Evolution of Money and Debt” by Professor L Randall Wray. Learning the answers to these questions provides foundations for understanding MMT which are evidently missing in Rajan’s paper. Professor Wray asks us to decide on True/False for the following six statments:
- Q1:Just like a household, a nation has to raise money to finance its spending through income or borrowing.
- Q2:The role of taxes is to provide finance for government spending
- Q3:The national government borrows money from the private sector to finance the budget deficit
- Q4:By running budget surpluses, the government takes pressure off the interest rates because more money is available to the private sector for investment projects
- Q5:Persistent budget deficits will burden future generations with inflation and higher taxes
- Q6:Running budget surpluses will provide the government with the resources needed to finance spending on retirement benefits for the ageing population in the future
It is easy to score the quiz because . . read more
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—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
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– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
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Shimshon Bichler / Jonathan Nitzan
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Real-World Economics Review Blog 
Money, as a social construct, has evolved over time from commodity money to fiat money. MMT is correct in that we should be wholly realistic about what fiat money is. It is a notional unit in a socially constructed dimension (economic value), not a real unit in a real dimension; here using the terms “units” and “dimensions” in the scientific sense as elucidated in the SI table of units (International System of Units).
Since fiat money, as quantities of the numeraire, is notional it can be created ex nihilo (out of nothing) and destroyed ab nihilo (into nothing). This accurately describes the most fundamental operations which can be applied to fiat money. Money creation can be performed by stamping, printing or bit value manipulations to create “counters”. Money destruction can be performed by operations with the reverse effect, one being taxation. Something notional can be created or destroyed “at will” (by fiat technically) by the legal and administrative authority with that legal and administrative power.
From here on in this discussion “money” means “fiat money”. Money is not neutral as the original post correctly states. Money, at the most basic level, is information and information is not neutral in real systems. We can arrive at this deduction by analyzing money ontologically. If money were standardly physically real, in the sense of being real matter and/or real energy simpliciter, it could not be created and destroyed, ex nihilo / ab nihilo, out of nothing and into nothing. Yet money is socio-economically real and it has units, counters and quantities. Money has notional or formal qualities and quantities, and not real qualities and quantities in the standard physicalist sense, as real matter and real energy in real systems. In this sense money is formal or notional, not real. However, there is one physicalist sense in which money is real. That is as information. Information exists as patterns instantiated in matter and/or energy. Hence, of course, that is why we create, store and destroy money by stamping, printing and electronic bit manipulations as patterns.
Information exists in real systems as patterns in matter and/or energy and information is not neutral in real systems. Try to tell someone with a certain recessive gene or genes (genes encode information) that the information or lack of information in the recessive gene(s) is neutral and has not affected his or her physical, somatic or neurological being in some manner. As a person with red-green color-blindness, I will tell you that I will not accept that thesis and I have excellent scientific reasons for rejecting that thesis. The correct thesis, with irrefutable empirical support, is that information is not neutral in real systems.
QED, it has been proved above that (fiat) money is instantiated in real systems as information and that information is not neutral in real systems. This is particularly so for encoded information. Both genetic information and money information are encoded information. The characteristics of encoded information are that it is coded, “stamped” or patterned from a template or templating process which can be an algorithmic process (indeed probably must be an algorithmic process) and that it can be transported or transmitted and introduced into a new site for decoding/translation and new pattern creation in new materials and energies, according to the information in the “template” code. The new patterns (in biological, manufacturing and economic processes) are usually “enlarged” meaning physically (materially and energetically) greater in quantity than the matter and energy “embodied” in the code and its transmission and this enlargement is achieved by adding more and newly introduced matter and energy at this translation stage. The new patterns are also often “qualitatively different” and it is this qualitative difference as well as the “enlargement” which is sought by biological or intentional processes if we regard the matter teleologically, meaning as a process with an objective, including a growth or maintenance objective: maintenance being the process opposing entropy, decay, breakdown (de-growth in other words).
Basically we can see that money information (e.g. this project has a budget of 1 billion dollars allocated legally and to be “spent” as per the rules of money creation, money transactions and market transactions) plus full project and construction plan information (as a set of plans, plus allocated materials and energies plus professional engineering information input etc.) to function in total as the information (and matter and energy) necessary for the progress of the (mainly) algorithmic and (sometimes) heuristic economic and physical construction processes.
Some plans or templates will not work which means they cannot be translated into a real construct. Try giving a drawing of a three-prong blivot to a carpentry or metal working department and asking them to construct it. I leave the reader to research what a three-prong blivot is. Of course in dynamic systems a “three-prong blivot” can be a request that is dynamically (even thermodynamically) impossible or at least unsustainable. A perpetual motion machine is a dynamic three-prong blivot. It can be constructed according to plan but it will not operate indefinitely according to plan.
The conventional economic system (built according to conventional economics) is a dynamic three-prong blivot or an intended perpetual motion machine. It can be built according to plan but it cannot be run indefinitely according to plan. The empirical proof is in the ecological collapse and climate collapse pudding. This soufflé (puffed up by the incorrect use of money, markets and conventional economic theory) is about to collapse.
Fiat money is a formal or notional quantity. What we do with it, simpliciter, should not be dictated by a theory of money which regards money in itself as real in any sense other than as information intended to reach objective (save the environment) or moral philosophy (decrease inequality) determined ends. That is to say, we cannot commence with an axiomatic theory of money, beyond its fiat nature itself, which “dry” conventional economics does as monetarism or the theory of “sound money”. There can be no a priori theory of sound money under conditions of modern fiat money and unpredictable empirical outcomes. There can only be an empirical feedback theory of money, in the sense that we make as much or as little, and distribute it here or there, as required by the real system; by real people, real environment, real consumption and real sustainable production. Of course, we do not ignore the effect of these processes on the tool (money). The democratic state should not blunt the tool by misuse and it should also take the tool out of the hands of bad and selfish actors (meaning criminals, market riggers, monopolies and rich oligarchs).
We must do this according to scientific ecological principles and according to our consensus moral philsopohy precepts. We rule the tool (money) to plan the economy and allocate fairly, efficiently and sustainably, we do not permit the tool as an axiomatiziced and automatic pilot system to rule us. When the tool (fiat money) rules us it is of course because a sub-group, the very large financial and corportate capitalist are ruling the operation of the tool, not the democratically elected government ruling it or managing it for all the people.
All of this would be very clear were it not for the obfuscation and mystification of what money and money operations are by the ruling elites for their benefit and against the benefit of the rest of the people and the environment.
In conclusion, what I am saying has the clear implication that MMT is good and correct as far as it goes but further theory and insights (along with potential practices) need to be drawn in from Marx and Engels, Veblen, Bichler and Nitzan, a reintroduction of genuine moral philosophy into economics and a complete “Instauration” or renovation of economic theory commencing with an “empirical ontology”: an ontology which centrally reconciles real and formal economic objects and processes in one theory. I give an example of theorizing with this monistic empirical ontology of real and formal objects, via information and complex system theory, in my discussion above. it is a “dialectic” (a “complex system feedback theory” if you prefer that terminology) of the real and the formal taken as integral parts of priority monist system existence (of the world).
Brilliantly put, Ike, but I think you need to widen your horizons on this bit:
“In conclusion, what I am saying has the clear implication that MMT is good and correct as far as it goes but further theory and insights (along with potential practices) need to be drawn in from Marx and Engels, Veblen, Bichler and Nitzan [Israeli’s], a reintroduction of genuine moral philosophy into economics and a complete “Instauration” or renovation of economic theory commencing with an “empirical ontology”: an ontology which centrally reconciles real and formal economic objects and processes in one theory”.
How about what can be learned from looking back to the wisdom of Jesus and looking forward to what I’ve been saying?
These are not just about the ethical alternative to morality and my post-materialist dialectical interpretation of your ontological monism, but e.g. about money-bags using stolen money to win themselves friends (Luke 16) and the credit interpretation of abstract money not only indebting them but leaving us free to do what needs doing for our families, localities and the stricken (if not dying) ecology of Spaceship Earth.
Money and its properties are invented. Two of these properties are a means of exchange of value and as a store of value. It works remarkably well for these two purposes. We have invented another property of money to make it a generator of value. I give you some money and you give me back more money with the passing of time. This property that useful as a convenient way to give a return on investment but it is easily abused and it leads inevitably to distortions in the distribution of wealth. We don’t have to get rid of this property but change parts of the economic system and find better ways to give a return on investment. One way to get rid of the generator of value is to give an investor back more goods and services (value) instead of more money. Doing this, in a closed group, like a not-for-profit cooperative removes the investment cost of debt and saves money within the group compared to using debt. As we produce more goods and services for the same amount of money it turns out to be economically efficient and make a real saving in the amount of money needed for investment. To find out more take a look at https://youtu.be/wbycNoiu44M
Yes, Kevin, thinking of the not-for-profit Mondragon cooperative investing where the need rather than the money was, starting with what money they could scrape together. But actually, this works well for sole traders too: both investing not so much money as thought and effort.
Asad Zaman repeats a simple error of analysis that he has made in past posts. He writes as if it is impossible to save or make a profit without increasing one’s money balances. That is simply false. Money is a store of wealth but it is not the only store of wealth. If I acquire a house or a share portfolio my wealth goes up even if my money balances do not. Similarly if a company increases assets it can record a profit whether its cash holdings are up or down. From his error, Asad draws a false inference. It is not necessary for the government to run a deficit or the country to run a trade surplus for its firms to record profits. Asad says he is surprised at Rajan’s ignorance of monetary theory; his own ignorance of the basic accounting principles underlying macroeconomics is startling.
You are right in the barter economy C-M-C’ world of conventional economics. My remarks are based on the M-C-M’ view.
Correct. It IS a monetary economy, not a veil over barter. And in the example, at the time of the original acquisition of the house or portfolio the net wealth is exactly zero because in all but an Amish community its value would be attended by an equal amount of debt. And even there you were indebted to the good graces of the community and beholden to it. And that would be fine of course, but monetary grace as in gifting, especially if it is consciously considered and contemplated on, is a more universal framework within to self actualize that concept.
Succinctly put, Asad. My version is that money is not a store of wealth, it is an ambiguous representation of wealth, such that people can be conned into thinking a mortgage on a house makes them richer and all records of revenue and profits are honest. Gerald writes “as if” he is conning himself, or defending lies by attacking a whistle-blower.
I think both Holtham and Zaman need to read “Capital as Power” by Shimshon Bichler and Jonathan Nitzan. The C-M-C’ and M-C-M’ perspectives are both invalid. Why? Read the book.
This seems to be a variant on what I’m saying: “This paper argues that money is a claim to wealth, not wealth itself”. I can see, then, that the C-M-C’ and M-C-M’ arguments are “second order” (i.e. epistemological dereferenced to ontological), but “zoomed out” to that level, not that they are necessarily invalid. I would also read B & N’s theme as an invalid claim to “power over” or “power to”, i.e. about false information, not power. But congratulations on posing your question, Ike. We need to be thinking for ourselves.
https://www.tandfonline.com/doi/abs/10.1080/09538259.2012.701932
Dear Gerald Holtham, I don’t understand. You say:
“If I acquire a house or a share portfolio my wealth goes up even if my money balances do not.”
Well, if you “acquire” a house or shares, you are paying for them; so your money balances will go down and your total assets won’t change.
Then you say:
“Similarly if a company increases assets it can record a profit whether its cash holdings are up or down.”
Similarly to what? How is the company increasing its assets? What is the source of the increase: a change in asset market prices or the accumulation of undistributed earnings that go into the asset side of its balance sheet? In both cases, if cash holdings go down they detract from the asset position of the company; in principle, this could even wipe out or even exceed the increase in asset and reduce the total asset position of the company.
Glad if you could explain.
Dear Asad, thanks for this post.
You might be interested in this recent article on the subject
http://postkeynesian.net/working-papers/2020/
Fiscal deficits are nothing but monetary gifts once removed from where they also and more importantly need to be distributed, namely directly to the individual.
MMT and all the rest of the leading economic and monetary reforms all align with the new paradigm of Direct and Reciprocal Monetary Gifting it’s just that they haven’t discovered the potential paradigm changing power of a 50% Discount/Rebate price and monetary policy at the point of retail sale.
The heterodox can be satisfied with and cling to their reforms, but they can’t hide from the obvious power and temporal universe changing deep simplicity of a paradigm change.
BB The source of the increase is production. Asad seems to think that profits cannot be made unless the money stock grows but that is not so. A given stock of money can circulate and facilitate the production of goods. Some of the goods will be consumed others can be investment goods like houses or capital equipment. Those new investment goods mean the society is better off than it was at the start of the production period, even if the money stock has not changed. It follows that somebody is better off – they made a profit. As Geoff Davies, puts it in his book Economy, Society and Nature, the economy is not money, the economy is what people do. Read the book if you don’t believe me.
Or here’s a parable. A capitalist employs 100 workers to produce wheat and bread but they can produce enough for 120 workers. He pays the workers 100 cowrie shells (the local money) and they use them to by bread. He pays them for the work and they buy bread. The cowrie shells circulate and the capitalist gets his hundred cowries shells back. But the workers produced 120 cowrie shells worth of bread. The capitalist uses the excess to get other workers to build him a house. (They buy bread with their pay).At the end of the season he has the same number of cowrie shells as he did at the start but he now has a new house too. According to Asad he made no profit because his cowries shells didn’t increase. But of course he made a profit. Production produced 120 cowrie shells worth of bread, which was paid to the workers and the capitalist got a house on top. A society able to produce more than subsistence and to invest gets richer. Money is a device that certainly helps it to happen but the money isn’t the wealth.
This has nothing to do with barter. A modern economy needs credit but there is no tight relationship between the growth of GDP and the growth of the money stock.
In a monetary economy, the game is about increasing MONEY holdings. In a barter economy, it is about increasing commodity holdings. A firm which acquires infrastructure and inventories does so ONLY for the purpose of making profits in the future – these are intermediate goods, means to make a profi.
gerald is right. Let me see if I can make his point differently.
Asad writes:
Business Profits + Household Savings = Government Injections + Foreign Injections
Because “Business Profits + Household Savings” equals S, then Asad is saying:
S = (G – T) + (X – M)
Which is wrong. Here is the correct formula for saving:
S = I + (G – T) + (X – M)
You could have an economy with no government and/or foreign injections and both businesses and households could still save. In this case, they would be laying claims to the investment that had taken place.
MMT does not say that the government and/or the foreign sector has to supply domestic private sector saving, but rather that they have to supply that saving which is in excess of investment, i.e., net saving. In which case you end up with the above formula stated this way:
(S – I) = (G – T) + (X – M)
And to be clear about saving, and quoting Basil Moore:
“Saving is the accounting record of investment.”
If investment has taken place, then so has saving. It’s an identity, true by definition, and it holds true at every instant in time.
You and Gerald are wrong. Here you haven’t defined what your letters refer to and hence whether the operations you specify are possible. Your mistake is evident in your last statement. If investment has taken place, then so has savings. But conversely, many of us save without investing, as when banks do so by talking up share prices.
Dave, your saving means someone else invested. But this is basic stuff that really doesn’t stand arguing about, believe me. Read any introduction to national accounting, e.g. the OECD’s “Understanding National Accounts” by Lequiller and Blades http://www.oecd.org/sdd/una-2014.pdf
Asad, in any economy the game is about acquiring not money but wealth. What proportion of Elon Musk’s or Warren Buffet’s wealth do you imagine takes the form of money balances? Five per cent? Probably less. Much of it is real assets or a claim on real assets, like equities.
The point you are missing is the capital goods can be the form profit takes. (like the house in my little parable) Yes the point of capital goods is to enable their owners to make more profit later. In that sense they are deferred consumption. But so is money; it is also deferred consumption. Both are forms of wealth, an unexercised claim on real resources.
Of course Gerald Holtham and Ahmed Fares are right, and express it very well.
But in my humble opinion, as a non-economist, this and similar things – are not really understood by most Ph.D., even prize-winning, economists and textbook writers, let alone students and other interested people. Even if they do understand them, they become so familiar, that they are unable to explain them. So others’ ignorances shouldn’t be startling – we shouldn’t fool ourselves that “everybody knows” or think that our own thinking is not full of other similar ignorances elsewhere, As a mathematician – I was told at an early age – by wise elders – that it is very easy, probably especially in math, to do good work, work that is important and even leading your subfield!, but not really have much of an idea of what the hell you are talking about! :-)
Even the MMTers usually explain such points badly. Referring to the National Accounts as they and others often do is circular, it puts the cart before the horse. Doing that, one can easily learn how to say correct things without any insight into them! The General Theory definition of I & S that equated them came first. The National Accounts were built on that foundation, not vice versa. So Dave’s complaint has some merit. The exposition of such points is as far as I know, invariably awful and written in reverse of the chronological and logical order. With text space allotted in inverse proportion to difficulty and importance. Basically people are given snow jobs to convince them of not lies – but truths. But as Robert Heinlein wisely noted, the best way of lying is to tell the truth in an unconvincing manner.
It’s basic stuff, yes. But these things very much stand arguing about. I would go so far as to say that hardly anything else stands arguing about. In any intellectual discipline. Understanding such trivial, basic stuff is the hard part. The complicated stuff, the fancy math is child’s play.
Alain Parguez rightly calls this, I ≡ S and its slight generalizations – as absolute identities based on Keynes’s definitions – AND the direction of causation, from investment to savings – the heart of the [incomplete] Keynesian Revolution, the real and important novelty.
There was a now forgotten debate in the 1930s as economists groped to understand Keynes’s new definitions and thinking here – which contrary to what is often said here and other places, he took pains to say was NOT the Wicksellian, Swedish outlook. Many people understood that. But even then many did not.
For instance I was looking at Kalecki’s collected works and noted a criticism of a review of some book by Kalecki by Wladimir Woytinsky. Woytinsky was a decent and sensible economist, who during the depression unsuccessfully tried to get Keynes to speak at the ILO in favor of the Keynesian policies they both rightly favored, opposed wrongly by even important Marxists like Hilferding. Not for the first, or last, time, the “liberals” were to the Left of the “Marxists” who were trapped in the thought-patterns of (neo)classical capitalism. Back to Kalecki – he tersely notes that Woytinsky didn’t seem to understand this sort of stuff and based his criticism of Kalecki on this misunderstanding. So Kalecki ruefully despaired somewhat of people getting such things straight. And like most of economics, this is something which was much better understood in Kalecki’s, Keynes’s and Woytinsky’s day than now.
Thanks for the Moore reference, I’ll give some of my own refs later.
Calgacus, you are quite right. People can proceed to sophisticated manipulation of symbols in economics without knowing what the symbols really stand for. Joan Robinson observed that concerning the notion of capital but it applies more widely.
The importance of accounting systems is that by defining variables operationally they allow data to be gathered and classified. If theories are to be meaningful they have to deal with observables not with platonic notions which cannot be instantiated. If the real data do not enable us to address our concerns we must define new, relevant concepts and collect new data. Of course no accounting system tells you anything about causation but it gives you the elements, the variables, whose behaviour is explained by a testable causal theory.
Much economics can be criticised for ignoring important things that cannot easily be measured but a still worse vice is to theorise about one thing and then to suppose it is illuminated by data that measure something else. It is likely to happen when undergraduate economists are taught about various macroeconomic models but don’t have to learn about national accounting.