Mostly empty (MMT)

There are a lot of cranks in economics, and it only gets worse all the time. I have been sent a copy of this editorial in The Oz yesterday which is a reminder of just how off the rails economists are: The promise and pitfalls of Modern Monetary Theory. The final para:

MMT certainly has theoretical appeal, even for rational, hard-nosed economists. It’s axiomatic there is no budget constraint in such a model. But we live in a complex, even messy world. Imagine telling a populist National, a clueless Green or a Labor class warrior there is no spending limit. How can you hope to manage the economy? … As an analytical tool the theory has merit. But with printing money in the real world, there is a day of reckoning or just a long stagnation. Our income can never be guaranteed, so we need to earn and pay our way.

They seem to come down against it, but only just, and hardly in a way that might alert you that any genuine application of MMT will wipe out cash-denominated savings, along with driving our economy into a wasteland of unproductive outlays. Living standards would be guaranteed to crash. Yet with government debt that way it is everywhere, why not just print the stuff up. No political leader lasts for ever. Leave things to the next lot to fix.

Economists once understood what the problem with such an approach actually is, as discussed in my Classical Economic Theory and the Modern Economy. As discussed at length within the book, until 1936 economists always first thought about the real economy and then, but only then, brought in money at the end. Here is the turning point in economic theory. From The General Theory itself where the approach taken by Mill is to examine the issues in relation to commodities and not money.

In J. S. Mill’s Principles of Political Economy the doctrine is expressly set forth:

What constitutes the means of payment for commodities is simply commodities. [That’s Say’s Law, by the way.] Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. [Principles of Political Economy, Book III, Chap. xiv. § 2.]

Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept conclusions which require Mill’s doctrine as their premise. The conviction, which runs, for example, through almost all Professor Pigou’s work, that money makes no real difference except frictionally and that the theory of production and employment can be worked out (like Mill’s) as being based on ‘real’ exchanges with money introduced perfunctorily in a later chapter, is the modern version of the classical tradition.

I might add that money was hardly introduced “perfunctorily”. Mill even explicitly states the quantity theory of money. Virtually no one today any longer thinks in real terms. In fact, virtually no one, especially economists, even know how to think in real terms – they think they do but they don’t. It’s why they are incapable of understanding even the basics that were once universally taught and understood. That is why our economies are heading straight for the rocks.

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18 Responses to Mostly empty (MMT)

  1. Rohan

    But, but but, it worked well in Zimbabwe!

  2. Spurgeon Monkfish III

    Modern Monetary Theory

    AKA Magic Money Tree Economics.

  3. billie

    how will we know when we have reached the rocks?

    what are the signs?

  4. John A

    A reminder of the full title of Keynes’ minum opus:
    The General Theory of Employment, Interest and Money

    Not of economic production, goods and services, or supply and demand.

  5. John Bayley

    Thanks for writing about this Steve.

    I first heard about MMT from one of its main proponents, your ‘colleague’ Bill Mitchell back in 2005 or so.

    It was immediately obvious to me, as a non-economist by profession (although I do have a background in financial analysis), that it was basically a lot of reheated ‘chartalist’ tosh, well-discredited 100 years ago already.

    Yet the siren song of something for nothing does appeal to many, and the premise of unconstrained spending is just what the contemporary politicians want to hear.

    It is quite disturbing that few seem to understand not only the underlying fallacy, Keynesian in origin, of course, that claims that somehow the private sector inexplicably does not produce enough ‘demand’, so the government needs to step in, but also that its spending is somehow of the same quality as that voluntarily entered into by individual market participants.

    Even worse, as I wrote here recently, MMT is deeply immoral and in fact proposes no less than true serfdom. Unlike the government, the rest of us without the magic money printer have to outcompete others in the same industries/business areas, in order to win clients/customers over, so we can sell them our goods or services.

    We get regulated to death, and if we still survive, we get taxed. MMT proposes, however, that the ‘obvious’ tax is not enough, and that whatever we managed to save should be surreptitiously stolen by the government via monetary inflation.
    As Keynes himself stated, the average Joe can easily be fooled when it comes to confiscation of his savings through inflation; it is much easier to slip that past him than impose an outright tax.

    MMT blathers about ‘accounting identities’ while ignoring the fact that money itself is not, and can never be neutral, and that government spending, especially when money from thin air is involved, always reallocates resources from the productive to the non-productive.

    That Mitchell and the likes of him are not only laughed at, but outright tar-and-feathered, is one of the many sad features of our times.

  6. John Bayley

    That Mitchell and the likes of him are not only laughed at, but outright tar-and-feathered, is one of the many sad features of our times.

    …NOT laughed at…
    (The Cat does need an ‘edit’ function’!)

  7. Mother Lode

    It really is something that ought to be drummed into the minds of the punters – when the government prints more money then the bit you have is worth less.

    Steeped in the reassuring pronouncements of Keynesian economics acolytes they have grown to associate the idea that the economy growing meaning they themselves get richer. Funnily enough, if you were to ask them how you would probably finally find people who espouse ‘trickle down’ economics where the source of warm golden seep (yes, it is urine) is the government.

  8. Alex Davidson

    Printing money is a good example of the double standards that exist between the behaviour of government and that of its citizens. If you or I were to print up $100 notes backed by nothing but thin air and put them into circulation we would be rightly branded as criminals and sent off to jail. Yet when this very same activity is carried out by the government, it is somehow no longer counterfeiting, but given some other euphemism like QE or MMT, and apart from a few Cats, few seemed concerned about it at all.

  9. MMT has no value at all, even as a theory or analytical tool.

    In fact it’s worse. The idea is simply harmful.

    Magic pudding economics does not work in reality.

    Unless we can go to Hogwarts for realsies.

  10. gafa

    Build a house with no solid foundation and it will eventually crack and collapse!

  11. TPL001

    Lower time preferences, a greater preference for future and not present consumption goods, is also implicitly a desire for an increase in capital investment. Individuals allocate more to savings. This facilitates lower interest rates on the loan market, thus increasing the profitability of long-term production in higher-order capital goods. This contrasts with lower investment in shorter-term or lower-order production, of goods closer to consumers. If time preferences remain lower, investment and the economy expand. It leads to a lengthening the capitalistic structure of production, and provides more consumers’ goods from the original volume of the factors of production. It produces a higher standard of living.

    Monetary expansion appears as an increase in credit and the money supply. The market rate of interest decreases. But time preferences have not changed. Savings have not increased vis-à-vis the money supply. Higher-order industries are stimulated. But savings have remained the same. The corollary is credit expansion, boom and bust, which is a different outcome to expansion via MMT.

    MMT argues for increased budget deficits. These are financed by debt monetisation. Banks can increase money reserves by the purchase of new government securities (i.e. debt). The goal is to increase employment and stimulate real GDP. This is in effect higher government spending. MMT and the Keynesians neglect the relationship between time preferences and the structure of production. Interest rates are not viewed as a price that coordinates the structure of production.

    MMT’s call for increased government spending via deficits is tantamount to increased spending by government on consumption goods (e.g. military, infrastructure). It reveals itself in an increase in time preferences. The funds are spent by government. They do not enter via the loanable funds market. However, if the funds are all financed by the central bank through the purchase of new debt securities it also enters the banking system, setting in motion the chain of events leading to a boom and bust cycle. If not the latter then MMT leads to higher time preferences and a shorter structure of production.

    “ … debt monetization just causes the economy to stagnate and permanently lowers living standards. This stagnation is aggravated after the higher inflation from the monetization leads to capital consumption and further increases time preferences.”

    Newman, P. 2020, ‘Modern Monetary Theory: An Austrian Interpretation of Recrudescent Keynesianism,’ Atlantic Economic Journal (48), pp. 23–31. https://doi.org/10.1007/s11293-020-09653-7.

  12. John Bayley

    @Alex Davidson #3508324:

    Well, it seems you need to be a really good counterfeiter, and then even the US Federal Reserve will recognise your talents:


    Master counterfeiter who printed off $250million in fake bills walks out of jail after just a month and a half.

  13. Mother Lode

    Master counterfeiter who printed off $250million in fake bills walks out of jail after just a month and a half.

    I am guessing the people he bribed could not believe their luck. All fresh crisp bills too.

  14. Squirrel

    Sadly, this b/s won’t be going away – particularly if Biden wins, which will greatly embolden the Magic Pudding brigade in Straya.

  15. 2dogs

    In fact, virtually no one, especially economists, even know how to think in real terms – they think they do but they don’t.

    They are also incapable of thinking about economic management at any level of granularity other than that one at which a central bank exists. They are hopelessly lost when it comes to individual Euroland countries.

    As soon as block-chain currencies replace central bank issue, all their notions will be trash.

  16. Iampeter

    There are a lot of cranks in economics, and it only gets worse all the time.

    Like classic economists supporting nationalism?

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