Not sure why the original thread was deleted. At any rate I'm copying my last post here, by request:
I'll reply with general principles. If you feel I left something out, forgot to respond to a particular point, let me know.
0. The place to learn AE is not from my poor posts, but from the free books available here. Economics in One Lesson is a great place to start. It's short, it's clear, it's important.
1. I'm glad we agree that the govt operates by force and violence, and that therefore there is a huge moral and ethical issue here.
2. I'm also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.
This point lies at the heart of the difference between AE and Keynesian economics [in all its flavors]. Keynes starts with the economy in a recession. Plenty of unemployment, little buying, why did this happen? It's animal spirts, replies Keynes, meaning people being perverse and stupid, suddenly not buying for no reason at all. But it doesn't matter why, really, says Keynes. We have to do something about it. Gobble up what is in the factories, which will force them to make more, hire more people, and all will be well.
The Chicago school says the reason is not enough paper money in the system. Solution: print more.
But AE has a different answer to the question of how did this happen. In very broad strokes, the cause is money printing and low interest rates for a few good years BEFORE the recession. These combine to give people plenty of money to invest, and they invest it foolishly. Those factories operating below full capacity are doing so because they should not have been built in the first place. They are making things people never wanted in the first place. An example is the recent housing bubble. Too many houses were built, more than people can afford to buy. Or the dot.com bubble. Money and [therefor resources] was put into companies that could not turn a profit. Or take GM. They foolishly built cars people don't want, those huge SUVs in times of rising gasoline prices.
That being the case, is the solution to make sure artificially that more houses and unsound companies and SUVs get built? To make sure the SUV factories are running at full capacity, to keep on making more and more undesired gas guzzlers? "Tis madness. Once we recognize the problem as being too many undesired things being made, the solution becomes obvious. Let GM go bankrupt, so that the fools who made the wrong decisions no longer are in charge, sell off their plants and machinery to someone who knows what he is doing, and have the factories make cars people want. Exactly the opposite of what MMT and all the other schools of thought suggest.
3. We also seem to diagree about the power of accounting principles to enlighten. Do you agree or disagree with what I wrote earlier, and will copy here for you?
When the govt spends and gives the private sector paper money and takes away "what money can buy", it shows up on the books as an accounting identity. But that accounting identity is an equation. It is saying two numbers are equal. The number written on the paper money, and the number on the price tags.
But no accounting identity in the world can claim, or does claim, that paper money has the same value and usefulness as "what money can buy". The govt is printing up piles of useless paper and taking away our resources.
If you agree, then you will understand that accounting is a way of keeping tabs on what went where, but does not teach anything meaningful about the objects involved.
For example, if a company buys a lemon of a car and overpays for it, the books show that the car is worth what they paid for it. But it's not.
To give an extreme example, let us say that the govt, instead of paying for what it buys with money, paid with piles of dung. The books would show that all the goods and services they took are equal to, and have been adequately compensated by, piles of dung. But of course an appeal to accounting in such a case hides what is going on, as opposed to shedding light on it.
Come to think of it, thats not so extreme an example.
If you disagree, please tell me why.
4. A lot of your points stem from my not being precise in my use of the word money. When I say that the govt takes our money, for example, you reply that the govt spends by printing money, not taking ours. So replace "money" with "wealth" and you'll have it. For example, printing money takes away our purchasing power. Always. By the law of supply and demand. This is true even if the economy is not "running at full capacity". Which I have explained above is a mythical situation. What you call "not running at full capacity" I call "running at correct capacity".
This will explain my statement “Where does the govt get the money to be so helpful? By taking it away from the people.” The more accurate statement would be: "At what cost to us is the govt so helpful? At the cost of taking away our purchasing power and/or resources, i.e. our wealth."
5. About taxes. Please explain to me what the govt does with the money it collects in taxes? Does it buy things with it? I assume the answer is yes. Once the govt takes away my money by taxing me, can I spend that money? I assume the answer is no. So basic accounting principles tell me that the govt, by taxing me, has taken away my purchasing power, and then takes away resources from the private sector. Thus taxes impoverish us all [except for the govt] in two ways.
I think I see what the OP meant when he said taxes reduce aggregate demand and the money supply. He meant they reduce it from the priavte sector. But that is a meaningless fact. Because when the govt goes to the store, it spends money just like everybody else. If we take all the people in California and rename them "outside the private sector", then we can say that money spent by Californians is spent outside the private sector. But so what? it gives us no furthe understanding of what's going on, in fact it creates misunderstanding.
6. The advantage of a gold standard is not that eliminates fractional reserve banking. The chance of a run on a bank is the same whether they have to keep reserves of paper money or of gold.
The advantage is that the govt cannot print all the money it wants. because every single pice of paper they print is a promise to give someone gold. If they print too much paper, more than the gold they have, they will run into trouble, obviously. Which is exactly why all govts hate the gold standard. It restricts how much they can spend.
7. As for the use of the word "credit" in an accounting sense. Are you agreeing that the sentence ""Govt deficit spending credits the private sector" can be accurately and truthfully restated as "Govt spending gobbles up resources from the private sector and gives the private sector paper money"?
There is a propaganda difference between the two. The first makes it sound like the private sector got something worthwhile. The second tell us what is really going on. Which is the kind of error made over and over by the MMT analysis. It thinks accounting teaches us something. I explained this earlier.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I'm not sure either - there is no note of it in the mod forum and nobody posted in it before it was deleted as to why they were going to delete it. Generally, I believe that stupidity should not be banned, but apparently some mod-vigilante decided to take matters into his own hands in this case.
Political Atheists Blog
Smiling Dave:Not sure why the original thread was deleted.
I have the same question also, but at this point . . . I don't care anymore.
Krazy Kaju,
Generally, I believe that stupidity should not be banned, but apparently some mod-vigilante decided to take matters into his own hands in this case.
Edit: BTW I have some of my replies typed up. Just a bit busy at the moment. I'll just and have them posted ASAP.
This post is in reply to the other thread which was closed.
Edit: For a great overview of MMT I'd suggest the following http://pragcap.com/mmt-and-the-operational-realities-of-the-monetary-system
If there are any questions or criticisms please ask me and I'll do my best to answer them. BTW I haven't forgotten the rpelies from the other thread. I will do my best to have that done as soon as possible.
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One point that I wish to clarify about MMT is the following: You can separate MMT into two groups: The first is a description of how the economy works at an operational level. This is where stock flow consistent modeling comes into play* The second part is the normative part, where MMT proposes policies based off on the operational realities. It is perfectly valid to accept the first part but reject the second part. What I wish to discuss is only the first part. So I’d like to focus discussion on how our monetary system actually works, rather than how it should work. I think this is an important foundation that must be understood before we can move onto how we think the system should work. As I am currently learning and I am searching far and wide for critiques on MMT and MMT is only a recent school of thought, I don’t believe I can move onto the next step without exploring and looking at counter arguments to MMT. Another point: where I wrote government deficits equal the non-government savings, that should read: government deficits equal the non-government NET savings. *I’m not sure what the official MMT position is, but at some level, you do need to rely on presuppositions when interpreting identities. For instance, who is to say that an identity is an ex post identity or an ex ante constraint? An example would be related to the Government Budget constraint and Money multiplier. Johnny doe,
“What if you think that the government(a minarchy) should be financed directly/consecutively by the actual fruits of the citizens labor(or something that represents those fruits), and that banks/central banks should be private and issue money that represents the fruits of the citizens labor. Can the government then restrain it`s spending until it receives the fruits of the citizens labor? And what if you`re an anarchists and don`t think there should be an all powerful government at all, can people in such a society trade, and can private banks issue money that represents the fruits of the citizens labor?”
“i do not get what you mean about how all Keynesians school have some level of orodoxy except from the post Keynesians.”
BTW read what Esuric said in the previous post. I don’t agree with his assessment of Post Keynesians, but he nonetheless shows that the labeling of Post Keynesian as Keynesian isn’t entirely correct. Hope that helps.
Not sure what will happen to this thread, but the previous thread (moved to "Deleted Posts") is here:
http://mises.org/Community/forums/t/22384.aspx
Operational: What I wish to discuss is only the first part. So I’d like to focus discussion on how our monetary system actually works, rather than how it should work. I think this is an important foundation that must be understood before we can move onto how we think the system should work. As I am currently learning and I am searching far and wide for critiques on MMT and MMT is only a recent school of thought, I don’t believe I can move onto the next step without exploring and looking at counter arguments to MMT.
But we already understand how the monetary system works. You're merely redefining terms, such as money, for example, in order to support your untenable hypothesis, which is fundamentally flawed. MMT may claim to be modern, but it's merely the regurgitation of older economic fallacies, which have already been thoroughly refuted. Mises obliterates Knapp in the Theory of Money and Credit. The burden of proof is on you to demonstrate why Mises' arguments, which are now part of the orthodoxy, are incorrect. You can't just say, "times have changed." This is not a coherent argument.
If you mean, that labour needs to produce something before it can be purchased, then this is trivially true,
This is anything but "trivial." In order to consume you must produce.
but the government could also just purchase the labour itself and put that labour to work.
Of course the government could purchase labor and "put it to work," but this begs the question. Where does the government get the resources to do so, and what are the effects of such a policy?
Either way, the facts remain:
MMT is merely one giant non sequitur.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Operational: Krazy Kaju, Generally, I believe that stupidity should not be banned, but apparently some mod-vigilante decided to take matters into his own hands in this case. That’s an unfair assessment. I responded to your comments in that thread. I didn't think what I said why stupid. I'd honestly appreciate you point out why what I said is wrong and/or why I am stupid. Edit: BTW I have some of my replies typed up. Just a bit busy at the moment. I'll just and have them posted ASAP.
I never got a chance to respond, as the thread was deleted, but your response was downright ludicrous. The government does not spend money into existence, instead, the Federal Reserve regulates the supply of money by purchasing and selling assets, mainly government bonds. But the Fed could just as easily control the supply of money by buying/selling other assets, such as gold, silver, or foreign currencies. In fact, many central banks, including the Fed, already use foreign currencies, private debt, and gold to a significant degree in order to regulate the money supply. Thus, if the federal government were to retire its entire $14 trillion debt someday in the future (and this would be a long, long process), the supply of money would not be hampered at all.
As for the comment along the lines of "government debt is an asset for the private sector," well, so is private debt. And the fact of the matter is that government debt forces private debt out of the picture, by gobbling up the available credit, thus pushing interest rates up. This is a very, very bad situation, as this means that private investment is crowded out in favor of unproductive (or should I say anti-productive?) government spending. If the federal government began paying off its $14 trillion debt (through a balanced budget, not by monetizing the debt), investors would get their cash back and they would be interested in seeking alternative investments in the private sector. Thus, it's not as if government deficits are by nature good for the private financial sector and government surpluses evil. It's the other way around.
BTW, why do you have multiple accounts? This is against forum rules. Was your previous account banned? Again, there is no note of this in the mod forum...
I have no idea why such hostility is being directed at me. I haven’t abused anyone or called anyone stupid.
Esuric,
“But we already understand how the monetary system works. You're merely redefining terms, such as money, for example, in order to support your untenable hypothesis, which is fundamentally flawed. MMT may claim to be modern, but it's merely the regurgitation of older economic fallacies, which have already been thoroughly refuted. Mises obliterates Knapp in the Theory of Money and Credit. The burden of proof is on you to demonstrate why Mises' arguments, which are now part of the orthodoxy, are incorrect. You can't just say, "times have changed." This is not a coherent argument.”
The definition of money being used is that money is a financial asset with a matching liability. Do you deny that money is financial asset with a matching liability, and more importantly do you deny that it is a balance sheet item?
The key proposition of Knapp was that the government can make the unit of account whatever it wants, by setting that as ‘that which is necessary to pay taxes’. Mises somehow assumes that what Knapp said that the state can set the unit of account solely by declaring it legal tender.
Your claim that it is merely regurgitation of old fallacies is baseless. Yes there are some similarities and ideas based of off Knapp’s ideas, but the MMT is only a recent school which has gone under considerable development in the last two decades.
“Of course the government could purchase labor and "put it to work," but this begs the question. Where does the government get the resources to do so, and what are the effects of such a policy?”
I don’t follow what you’re trying to say. My point of saying that something needs to be produced to be consumed as being trivial, is that it doesn’t need to be stated, it should be common knowledge. For something to exist it must be created first.
What resources are you referring to? Let’s say the government wants to hire workers to do star jumps for 8 hours a day. The only resources it needs is labour. The effect of such a policy will depend upon whether or not the economy is at full capacity. If it is at full capacity, this will divert resources away from private sector uses, with possible price adjustments. If the economy is not at full capacity, then there are idle resources and these will not be diverted away from some other use. If the government is operating in our current monetary system, then, it will simply spend its liabilities into existence. Which will result in net financial assets for the private sector.
“People don't demand money because the government expropriates a portion of their annual income; they demand money because they wish to engage in exchange and avoid the problems associated with barter.”
When did anyone say otherwise. The key MMT point is that anyone can create money, the issue is getting your liabilities accepted. The government gets its liabilities accepted by declaring that these are necessary to pay taxes in.
“There is no relationship between the average tax rate and the demand for money and the supply of money, though budget deficits do create a political incentive to inflate. Likewise, there is no relationship between average tax rates and the general price level.”
I’m not sure where you got this from, but the point that MMT states is that taxation reduces reserves from the private sector, all else equal. Deficits add reserves to the private sector. Do we agree on these points?
“The government does not create money solely because it engages in deficit spending. The government can create money, and often has created money, even when it runs budget surpluses.”
Yes it is true that whenever the government spends money is created. This is a key point of MMT, hence the phrase: the government spends by either crediting private sector bank accounts, or issuing a cheque upon itself.
The point is about net changes. Assume a closed economy for convenience. If the government runs a surplus, then the private sector is running a deficit, as a matter of accounting, money is destroyed by the amount equal to the surplus. Assuming that the government does not engage in any operations to offset the reserve effect.
If a government is running a deficit, then the private sector is running a surplus. Then the net result is that money has been created.
“The government does not control the entire supply of money. It only directly controls the supply of base money. The vast majority of money is created endogenously through the banking system”
I’m sorry but when has it ever been stated that the government controls the money supply? There is nothing in the MMT literature that suggests otherwise. The MMT and Post Keynesian point is that the monetary base is endogenous, and bank credit is endogenous.
Atleast we can agree on the latter, that bank credit is endogenous.BTW if it is endogenous, then the banking sector is setting a price.
Lets break this down a bit. The central bank is the monopoly issuer of reserves. Because of this it can either set the price, and defend that price or set the quantity. In other words, if it decides to control the monetary base, then the price at which reserves are obtainable must fluctuate. The reserve effect of treasury operations will cause the price to be extremely volatile. Not to mention that central banks everywhere will always allow banks to obtain the necessary reserves. In countries with reserve requirements, the accounting for reserve requirements is usually a lagged system and the central bank will always allow banks to obtain the necessary amount of reserves.
Anyway, we know that central banks everywhere have a target price. The monetarist experiments of the 1980s were a disaster. But you can read that this is what central banks do from their own publications, e.g. RBA, NYFED, and BoC. You will usually read something along the line of ‘the central bank accommodates the demand for reserves in order to maintain its target rate’. So if the bank is setting the price, and it is allowing the quantity to float (it is supply the necessary amount of reserves to maintain its target rate), then the monetary base is endogenous determined.
The bank credit as we agree is endogenous determined. Few quick points: the banking sector cannot create reserves, the banking sector cannot destroy reserves, it can only shuffle them around. Do we agree with this?
Banks do not care about their reserve position when making a loan. They care about the price. Banks are constrained by their amount of capital (in shorter periods) and by credit worthy customers.
When a bank creates a loan, a deposit is simultaneous created. Do we agree with this?
Where reserve requirements are in effect, banks engage in a number of operations, such as attracting deposits and liability management.
“The fact that base money is created by the state does not mean that money is inherently a statist institution/instrument, unless we choose to define money as such.”
All MMT is saying is that the state can decide that which is necessary to pay taxes. This ability to do so creates demand for whatever the state has set as money. MMT continue from this point and argue that there is a hierarchy of money, with state money at the top, bank credit below, and more private forms of credit. State money serves as the clearing mechanism of the banking sector, and bank credit is the clearing mechanism of the non-bank private sector.
“The idea that fixed exchange rates and monetary nationalism creates financial stability is debatable.”
I have absolutely NO IDEA where this has come from. NO ONE, I mean NO ONE in the MMT camp has suggested that we go back to fixed exchange rate system. MMT prefer our system, as our monetary system changes the operational requirements of the state and eliminate its financial constraints, though it does have real resource constraints (hence the issue of full capacity).
“MMT is merely one giant non sequitur.”
That is questionable considering that a number of your points were made up or misinterpreted by you. The best example is the last point. No one who is familiar with MMT or who has bothered to read what has been written in this post or the other could make such a claim.
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I haven’t forgotten the rest of the posts. I will try and reply as soon as possible. I’ve just been busy.
Krazy kaju, I did have an account here ages ago. I’m on a new computer now, and I couldn’t remember the account name and login details (my browser always logged me in automatically). Sorry if I broke any forum rules.
The thread was deleted because it was a monster.
I started the thread to ask for a decent, thorough, Austrian critique of MMT, and what ensued was a mud fest full of people who have no idea what MMT is.
I do not agree that MMT ought to be, but much of their description is an accurate telling of how the monetary system works.
Integrating the revelations of classical theory with MMT, pointing out what effects it could have on the production structure especially, would be the focus.
I did not want a bunch of people saying "gold is better because..." "MMT is for insane people..." "MMTers believe in a free lunch..." etc.
Basically, a bunch of people were talking not knowing what about and it was annoying so I requested it deleted.
merrickwt:Basically, a bunch of people were talking not knowing what about and it was annoying so I requested it deleted.
Thanks for the info.
This one is starting to go the same way, it is becoming an info session for people to learn about MMT when all they need to do is go read about it themselves. Why don't people just go read about MMT and then bring better critiques to the table instead of accusing MMTers of believing things that most of them have never claimed to think?
What hostility?
The definition of money being used is that money is a financial asset with a matching liability.
This, even if true, is an entirely unessential characteristic of money. Money is defined as the commonly employed medium of exchange; it is an economic good with perfect liquidity used to facilitate exchange. The fact that money shows up as an asset on a firms balance sheet, or a liability on the FED's balance sheet (though the FED doesn't really have liabilities), is entirely immaterial.
What resources are you referring to? Let’s say the government wants to hire workers to do star jumps for 8 hours a day. The only resources it needs is labour.
All transactions are ultimately settled with real tangible economic goods. Individual's don't truly work for money; they work for the goods and services that can be purchased with money. In order to employ those laborers the government needs to first expropriate resources from the real economy, or it can borrow and inflate (which amounts to expropriating resources from the real economy but also yields general and relative price inflation).
The effect of such a policy will depend upon whether or not the economy is at full capacity.
Inflation is always and everywhere a monetary phenomenon. Cost-push and demand-pull theories of inflation are theoretically untenable. There is no causal relationship between the utilization of resources and the general price level. We had a decade of simultaneous "underutilization" and general price inflation here in the U.S. and in the U.K. There have been hyper-inflationary depressions throughout history (e.g., Yugoslavia and the Soviet Union). Inflation is merely an expansion in the supply of money (in the broader sense) beyond the demand for cash holdings.
The key MMT point is that anyone can create money, the issue is getting your liabilities accepted. The government gets its liabilities accepted by declaring that these are necessary to pay taxes in.
People do not pay taxes with government liabilities. There is a demand for government liabilities (treasury bonds, bills, and notes) because they pay interest and they are seen as the safest financial asset. Again, you're entire argument rests on a rather spurious notion of money and its function.
Not at all. Again, there is no relationship between the average tax rate and the general price level. Taxation neither reduces nor increases reserves in the banking system, which is entirely determined by the whims of the FOMC. Deficits don't directly add to the reserves either; they only indirectly do so when the FED engages in open market purchases. Borrowing resources from the real economy, and them monetizing your debt, doesn't make society any wealthier.
Yes it is true that whenever the government spends money is created.
This is not true at all. I don't know how you reach this conclusion. Money is created either by the banking system through fractional reserve banking, or it is created by the Federal reserve system via open market purchases. The Federal reserve, just recently in fact, expanded the supply of base money by buying private securities (MBS). The Federal Reserve system could theoretically triple the supply of money even if the federal government reduced spending to zero.
The central bank is the monopoly issuer of reserves. Because of this it can either set the price, and defend that price or set the quantity.
This is also incorrect. The price of money is its purchasing power; It is determined by the demand for money in the broader sense, and the supply of money in the broader sense. Since the Federal government only directly controls a small portion of the total supply of money, then it can only influence the price of money, but it does not determine the price of money (the purchasing power of money). Again, the monetary base is merely one small, but important, component of the entire money supply. The only way that you can reach this conclusion, namely that the federal government directly controls the price of money (its purchasing power) is if you assume that velocity is absolutely fixed.
All MMT is saying is that the state can decide that which is necessary to pay taxes
But only the market decides what is and what isn't money. Kings, throughout history, attempted to supplant the gold standard with other forms of money, including paper fiat money, but Gresham's law would take hold (in the case of arbitrary exchange ratios set between different forms of money), or society would flatly reject the king's fiat money. The king did not force society to employ gold as money; society forced the king to accept gold.
I have absolutely NO IDEA where this has come from. NO ONE, I mean NO ONE in the MMT camp has suggested that we go back to fixed exchange rate system.
Exactly, but there are those who would argue that a fixed exchange rate regime is relatively desirable. Thus, the belief that floating exchange ratio's create financial stability, as MMT asserts, is controversial/debatable...
You're right; I don't understand MMT at all. It's entirely incoherent. For example,
Money is always created by the state and must therefore be regulated by the state....Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.
This is incorrect, but even if it were correct, it would be one giant non sequitur. Also, MMT is starting to sound a lot like the RBD (real bills doctrine).
I'm pasting this post here from the other thread that was closed. This is for reference purposes, and if anyone wishes to respond.
Esuric: Operational:Disclaimer: I am currently a student of economics. I am sympathetic to MMT and Post Keynesian economics. My general opinion of economics is that it is a joke. I try and keep my mind as open as humanly possible, so friendly criticisms of MMT and debate are welcome. Post Keynesians are not really Keynesians at all, though they claim to be the "true followers" of Keynes (even though they reject 70% of the General Theory and all of the Keynesian-based models introduced during the New Keynesian era). They're basically Neo Ricardians who reject Ricardian capital theory (they have no capital theory), and the only theoretical connection they have with Keynes is that they tend to stress uncertainty. But stressing uncertainty does not make you a Keynesian, or else Austrians would also be "Keynesians." The arguments you've made on this forum cannot be found in the General Theory or in any other book written by Keynes. Just a few things: The demand for money is a function of its liquidity, i.e., the fact that it is the commonly employed medium of exchange. I don't demand money because the government expropriates a portion of my annual income; I demand money because I wish to engage in exchange and avoid the problems associated with barter (double coincidence of wants). The use of money predates taxation. So again, there is no relationship between the tax rate and the demand for money. Velocity does not fall when taxes rise nor does velocity rise when taxes fall. Money is not solely created by the government. The government only creates a tiny portion of the total supply of money, namely M0 (the monetary base). Most of the money is created endogenously through the banking system, i.e., the private sector. In a free banking environment the total supply of money, in the broader sense, is constrained by the total demand for money. But in our current system, where the government is able to magically create reserves ex nihilo, the banking system is only constrained by the reserve ratio (set by decree) and other banking regulations (any additional injection of reserves by the central bank reduces the interest rate below the natural or equilibrium rate and therefore creates an additional demand for money and credit). There is a demand for government liabilities because they pay interest and they are seen as the safest financial asset. Government deficits mean that total government inflows exceed total government outflows (expenditure). In order to finance such deficits the government is forced to borrow from either American creditors and/or international creditors (it is not true that “we owe it to ourselves”), but every dollar that the government borrows is a dollar that the private sector cannot borrow (there isn’t an infinite supply of loanable funds). The more the government borrows, the more upward pressure it places on interest rates (elevated demand for credit) which constricts general economic activity (the crowding out effect). This, in turn, creates an incentive to monetize government debt which yields general and/or relative price inflation. Taxation does not destroy money. There is no relationship between the average tax rate or marginal tax rate and the general price level. This is because the government does not burn the income (in the form of money) that it confiscates; it uses it to satisfy the demands of special interests, to finance wars, etc. The money, therefore, never leaves circulation. Government expenditure is limited by (a) the amount of income that it is able to expropriate through taxation (which suffers from diminishing returns, that is, the more the government taxes, the more it constricts general economic activity, and therefore reduces the total amount that it can expropriate through taxation) and by (b) the inflation that it creates (which also suffers from diminishing returns). The laws of economics are universal. The fact that different nations have different monetary systems, and that different monetary systems (both domestic and international) have been employed at different periods does not mean that we require different economic laws. Money is the commonly employed medium of exchange which emerges naturally through free market activity. It has many different forms (sea shells, feathers, gold, silver, green paper notes, etc), and any changes in its supply affects nominal and real variables.
Operational:Disclaimer: I am currently a student of economics. I am sympathetic to MMT and Post Keynesian economics. My general opinion of economics is that it is a joke. I try and keep my mind as open as humanly possible, so friendly criticisms of MMT and debate are welcome.
Post Keynesians are not really Keynesians at all, though they claim to be the "true followers" of Keynes (even though they reject 70% of the General Theory and all of the Keynesian-based models introduced during the New Keynesian era). They're basically Neo Ricardians who reject Ricardian capital theory (they have no capital theory), and the only theoretical connection they have with Keynes is that they tend to stress uncertainty. But stressing uncertainty does not make you a Keynesian, or else Austrians would also be "Keynesians."
The arguments you've made on this forum cannot be found in the General Theory or in any other book written by Keynes.
Just a few things:
Thinkblue,
Don't worry, I will responding to all the questions raised in the other thread.
Just got a few things to work on (Posting here has turned it into a last minute job )
No problem Operational. Take your time. I'm interested in alternative points of view.
There is no such thing as critiquing or refuting MMT since it is only a description of the way the monetary system actually works. You can't refute it because to do so is to admit that you don't understand how the monetary system actually works.
The only theory is in its application and unfortunately a handful of Keynesians dominate the MMT headlines and promote job guarantees and other such nonsensical Keynesian ideas.
FWIW, I posted a refutation of the Forstater Mosler paper here: http://mises.org/Community/forums/p/22477/395425.aspx#395425
As an expert on MMT I can assure you that Dave has no idea what he is talking about. He should be ignored as a reliable source.
Where's a complete explanation of MMT? A book is fine.
Isn't that called ad hominem? And appeal to authority [...as an expert on MMt I can assure you...]? How about addressing the ideas I presented? Which does not mean a blanket, "He doesn't know what he's talking about."
I quoted from Mosler's paper, which all the MMTers here seem to agree is the gospel, and explained line by line what's wrong with it. Dare you do the same to my posts?
The ideas have been presented by Mosler and Roche in detail. You clearly can't seem to grasp them. It is not my duty to explain MMT to people who can't understand it. Roche's explanation is s easy that it is being used in college courses as explanation.
How do MMTheorists explain mediums of exchange prior to fiat?
What is the role of the Treasury, and the Fed as described by MMTheorists? How do they reconcile the widely accepted contrary understanding to how those institutes operate?
MMter, please look at my latest posts to you in the deleted thread and respond to them. If you refuse to explain to me what you see as the correct understanding of MMT to my satisfaction, I will consider you to have conceded the debate. Thanks in advance.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Solid argumentation!
Reminds one of the proof of the Action Axiom; to deny it is to affirm it.
Esuric: MMter:There is no such thing as critiquing or refuting MMT since it is only a description of the way the monetary system actually works. You can't refute it because to do so is to admit that you don't understand how the monetary system actually works. Solid argumentation!
MMter:There is no such thing as critiquing or refuting MMT since it is only a description of the way the monetary system actually works. You can't refute it because to do so is to admit that you don't understand how the monetary system actually works.
Indeed. To build on this, MMter's quote above is a great example of question-begging or circular reasoning. His "argument" can be re-stated as follows:
The two are entirely different. To deny the action axiom is to engage in a performative contradiction (saying that individuals do not act is an action in itself). Denying MMT, on the other hand, just means that you understand basic economic theory (you don't believe that private savings exist because of government deficits, or that the government is not constrained in its spending, or that the government shreds the revenue it receives in taxes, etc...).
Believe it or not, there are quite a bit of economists who believe that money was created by the state.
Smiling Dave, “The place to learn AE is not from my poor posts, but from the free books available here. Economics in One Lesson is a great place to start. It's short, it's clear, it's important.” I’ve actually got some Austrian books (e.g. mises: TMC). I’ve briefly read through them, but nothing substantial. At some stage I would like to read more and if I want to be an economist when I finish studies I owe it to myself to look into it. I’ve said it here and I’ve said it in other places, at my current limited understanding of ABCT I believe that there are some important questions which the ABCT raises. I also like Schumpeter, but I know most Austrians do not consider him an Austrian (e.g. Rothbard).
“1. I'm glad we agree that the govt operates by force and violence, and that therefore there is a huge moral and ethical issue here.”
“2. I'm also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.”
“This point lies at the heart of the difference between AE and Keynesian economics [in all its flavors]. Keynes starts with the economy in a recession. Plenty of unemployment, little buying, why did this happen? It's animal spirts, replies Keynes, meaning people being perverse and stupid, suddenly not buying for no reason at all. But it doesn't matter why, really, says Keynes. We have to do something about it. Gobble up what is in the factories, which will force them to make more, hire more people, and all will be well.”
“3. We also seem to diagree about the power of accounting principles to enlighten. Do you agree or disagree with what I wrote earlier, and will copy here for you?”
“But no accounting identity in the world can claim, or does claim, that paper money has the same value and usefulness as "what money can buy".
The govt is printing up piles of useless paper and taking away our resources.”
“If you disagree, please tell me why.”
“4. A lot of your points stem from my not being precise in my use of the word money. When I say that the govt takes our money, for example, you reply that the govt spends by printing money, not taking ours. So replace "money" with "wealth" and you'll have it. For example, printing money takes away our purchasing power. Always. By the law of supply and demand. This is true even if the economy is not "running at full capacity". Which I have explained above is a mythical situation. What you call "not running at full capacity" I call "running at correct capacity".”
“5. About taxes. Please explain to me what the govt does with the money it collects in taxes?”
Edit: Warren Mosler - Soft Currency economics: http://129.3.20.41/eps/mac/papers/9502/9502007.txt (sorry about the format, there's plenty of other versions online) Bell, S. Do taxes and bonds finance government spending? Journal of Economic issues. Vol. XXXIV no. 3 September 2000. Pp. 603 – 618. Fullwiler, S.T. 2007. Interest rates and fiscal sustainability. Journal of Economic issues.Vol. XLI. No. 4. Pp. 1003 – 1042. If you have trouble tracking them down I will see what I can do. I might be able to find the working papers. I’d also suggest this blog post by Bill Mitchell (a MMTer. His blog is a good source for MMT information. Check out debriefing 101. Be warned that Bill does introduce a lot of normative claims into his posts. You should remember that MMT has two components, a descriptive component and a normative component. You don’t have to and most likely won’t agree with his beliefs on what the government should do) which goes through central bank operations: http://bilbo.economicoutlook.net/blog/?p=9392
Does it buy things with it? I assume the answer is yes. Once the govt takes away my money by taxing me, can I spend that money? I assume the answer is no. So basic accounting principles tell me that the govt, by taxing me, has taken away my purchasing power, and then takes away resources from the private sector. Thus taxes impoverish us all [except for the govt] in two ways”
“I think I see what the OP meant when he said taxes reduce aggregate demand and the money supply. He meant they reduce it from the priavte sector. But that is a meaningless fact. Because when the govt goes to the store, it spends money just like everybody else. If we take all the people in California and rename them "outside the private sector", then we can say that money spent by Californians is spent outside the private sector. But so what? it gives us no furthe understanding of what's going on, in fact it creates misunderstanding”
“6. The advantage of a gold standard is not that eliminates fractional reserve banking. The chance of a run on a bank is the same whether they have to keep reserves of paper money or of gold.”
“The advantage is that the govt cannot print all the money it wants. because every single pice of paper they print is a promise to give someone gold. If they print too much paper, more than the gold they have, they will run into trouble, obviously. Which is exactly why all govts hate the gold standard. It restricts how much they can spend.”
“7. As for the use of the word "credit" in an accounting sense. Are you agreeing that the sentence ""Govt deficit spending credits the private sector" can be accurately and truthfully restated as "Govt spending gobbles up resources from the private sector and gives the private sector paper money"?
Jonathan M. F. Catalán, Keep in mind that there are two components of MMT: 1.Descriptive component based of accounting principles and operational realities of our current monetary system. 2.Normative component, such as policy proposals and what the government should do. It’s perfectly fine to accept the former, but reject the latter. A good place to start would be:
Edit: Warren Mosler - Soft Currency economics: http://129.3.20.41/eps/mac/papers/9502/9502007.txt (sorry about the format, there's plenty of other versions online) Understanding Modern Money: the key to Full employment and price stability – L. Randall Wray. Bill Mitchell’s blog: Particularly debriefing 101: http://bilbo.economicoutlook.net/blog/?cat=11&paged=5 Articles: Bell, S. Do taxes and bonds finance government spending? Journal of Economic issues. Vol. XXXIV no. 3 September 2000. Pp. 603 – 618. Fullwiler, S.T. 2007. Interest rates and fiscal sustainability. Journal of Economic issues.Vol. XLI. No. 4. Pp. 1003 – 1042. If you have trouble tracking them down I will see what I can do. I might be able to find the working papers. If you have any questions when reading them don’t hesitate to ask. ------------- Filc,
How do MMT theorists explain mediums of exchange prior to fiat?
What is the role of the Treasury, and the Fed as described by MMTheorists?
How do they reconcile the widely accepted contrary understanding to how those institutes operate?
Denying MMT, on the other hand, just means that you understand basic economic theory (you don't believe that private savings exist because of government deficits, or that the government is not constrained in its spending, or that the government shreds the revenue it receives in taxes, etc...).
Operational: The MMT claim is that whenever the government spends, it credits private sector bank accounts, or issues a cheque, the end result is that reserves are created in the private sector.
Government expenditure does not create reserves in the banking system, period. The money that the government confiscates though taxation never leaves circulation; it does not shred it. The banking system gets additional reserves only when people increase their savings rate, or when the Federal Reserve system creates them ex nihilo. But there is no relationship between government expenditure and private savings; the latter is a function of time preference.You can have a positive savings rate when government expenditure is zero.
Operational: Imagine a situation where there is unemployment (excluding structural and frictional), then there must be idle resources in the economy. If the government was to purchase these unemployed persons, you are saying that this would be taking resources away from the private sector, and bidding up prices. My objection is that these resources are idle, and not being used, and therefore, the bidding up of prices will not occur.
First, Austrian's don't differentiate between structural and cyclical unemployment; the two are intrinsically connected.
Next, If the government elevates the supply of money beyond the demand for money, in order to bid away resources from the private economy, then it must necessarily yield general price inflation. There is no relationship between the "utilization of resources" and the general price level. Again, we had a decade of simultaneous general price inflation and an "underutilization of resources" here in the U.S. and in the U.K. (and there have been hyper-inflationary depressions).
Additionally, the fact that the economy operates under full capacity during recessions is actually an efficient economic condition. Entrepreneurs are rationally responding to heightened uncertainty, and this will set in motion the liquidation and realignment process required for recovery. Any attempt to prevent this liquidation/readjustment process will yield extended stagnation (e.g., Japan)
But let's hold off on trade cycle theory. I want to understand and judge the MMT's underlying premises.
Operational: Post Keynesians and MMT argue that capitalist economies are almost always demand deficient, and hence operate below capacity. For instance, Post Keynesians point to empirical studies which show firms usually operate at 70% to 80% capacity."
This doesn't prove that there's "demand deficiency;" it only proves that entrepreneurs take precautions, i.e., they rationally deal with uncertainty. Prices fall whenever there's "excess demand." Additionally, there cannot be any general demand deficiency (but the demand for current and future goods may fall due to an elevated demand for money).
Operational: If these demand deficiencies are to be overcome, there are three options: the government runs a deficit, the current account balance turns to surplus, or the private sector engages in credit expansion.
First, fiscal deficits don't necessarily yield current account surpluses. The U.S. currently has large fiscal deficits and a current account deficit. Furthermore, credit expansion, consumption, and government deficits were at, or close to, all-time high's right before this recession.
Operational:If as Esuric claims Austrians believe that the money supply is endogenous, then how can you claim that causation runs from the money supply to prices?
I don't understand this question.
Well, Operational, I must say I am pleased and impressed by your posts from Day 1. Your last was another good one.
Before we begin, here's a quote from Keynes.
"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
“2. I'm also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.” If any economy is not operating at full capacity, then we have idle resources, the notion that we are diverting resources away from some other use isn’t applicable. Increased demand, rather than divert resources away from other uses, and hence possibly bid up resources, will instead be met with an increase in production, as the economy moves towards its full capacity (or full utilization rate). I don’t understand how you can suggest otherwise. Could you please explain your reasoning.
Here is a real world example. GM makes builds a factory that makes gas guzzling SUVs, thinking people will love them. But it turns out they guessed wrong. People want economy cars. The GM SUV plant, due to lack of demand, makes 10% of the SUVs it could be making. It is not operating at full capacity. AND IT SHOULDN'T BE. The plant needs to be closed down, and a plant for economy cars should take its place. Maybe it should make way for an Ipod factory, in fact. How do we know what is the best use of the land and building and machinery and labor and raw materials that is being wasted in that SUV factory? We don't. We do know one thing, though. Since GM is not turning a profit from that factory, it should be closed down. It is a waste of resources. When someone buys them out and uses the resources profitably, then we know they are not being wasted.
It also goes deeper than that. Some things cannot be recycled. The money and labor and materials spent on specialized machinery that will just have to be scrapped was a waste of resources even before the plant opened, if the whole factory was doomed to failure from the start.
The whole concept of the govt buying stuff because people don't want it or can't afford it boggles the mind. People don't want it. They can't afford it. Why should it be manufactured at all? And all the resouces used up to manufacture things nobody wants, so the govt can buy them, is an incredible waste of resources. They could have been used to make other things.
Let's imagine some backward landlocked African country, where everyone is poor. There is a factory there that makes yachts. It cannot operate at full capacity, because for some mysterious reason nobody there wants or can afford yachts. So is the solution to take money away from the already poor Africans, give it to the govt, and have the govt buy yachts? Of course not. The solution is to close down the factory, and start making things they need and can afford. How can it be otherwise?
Closer examination tells us that those yachts use up tons of cloth which, instead of making clothes for the poor Africans, is being used to make curtains in the yachts. Now would anyone say that if the govt buys up all the yachts the factory makes then we have increased productivity and haven't wasted any resources? Sure, we have increased productivity of white elephants, but who needs them? And of course we have gobbled up desperately needed resources. The Africans, rather than being clothed and happy, are naked and miserable, all because someone noticed that the yacht factory is "not operating at full capacity".
The African yacht story also shows us that striving for "full utilization rate" is barking up the wrong tree. The correct goal is "making things people want and can afford". If the whole world is working full speed ahead making five legged trousers, we may have a full utilization rate, but we are going to be in a huge mess.
As Bob Dylan once said, the hour is getting late. I'll discuss the other points later.
In a closed economy without a government sector, the private sector cannot net save.
What does this mean? I could try to interpret this, but I don't want to misrepresent your positions.
I haven’t forgotten your posts. I’ll try and reply ASAP.
Please, take your time.
1.
The govt is printing up piles of useless paper and taking away our resources.” The MMT claim is that whenever the government spends, it credits private sector bank accounts, or issues a cheque, the end result is that reserves are created in the private sector. The transaction has a financial flow from the government to the private sector, and a real flow from the private sector to the government.
Reserves of paper money for the private sector, and a real flow of useful things to the govt. Sounds like we agree here, just using different words.
2. For this part, I will quote your psot and add my comments in bold:
The MMT and Post Keynesian definition of money is that money is a financial asset with a liability.
I see a few problems with that definition. Because there are plenty of financial assets with a liability that are not money.
Also, if we are discussing fiat money, as I assume we are, the govt incurs no liability when it prints money. In the old days, if the govt or a bank printed a note, it was redeemable for gold, or for something. Fiat money is not redeemable for anything. I fail to understand how you can say that an economy operating below full capacity still adjusts by price rises.
It's called stagflation, and we had it in the 70's. Zimbabwe has it now, in fact all countries with high inflation usually are a big mess in other ways, certainly not operating at full capacity.
The reason for this is very simple. The price of a good is determined by three things: The supply of that good, the demand for that good, and the amount of money in the economy. As supply goes up, it will tend to lower the price, all other things being equal. Demand going up tends to raise the price. Amount of money going up tends to raise the price as well. [That last is a consequence of the law of supply and demand applied to money].
So that even if demand is very low, because a lot of people are unemployed, if enough new money is printed, that can overcome the low demand sooner or later and raise prices. It happens all the time.
This is how I am interpreting what you’re saying: Imagine a situation where there is unemployment (excluding structural and frictional), then there must be idle resources in the economy. If the government was to purchase these unemployed persons, you are saying that this would be taking resources away from the private sector, and bidding up prices. My objection is that these resources are idle, and not being used, and therefore, the bidding up of prices will not occur.
My previous post explained this for resources other than labor. Labor and unemployment is a very messy subject, because so many distortions have been introduced into the economy by govt meddling. After all, the govt can make a law that will seem to defy economic laws. For instance, when there is a scarcity of some resource, the laws of economics say the price will go up. But the govt can impose price controls, so that prices will not go up. [Of course, all kinds of bad things will happen because of that. But that's another story].
Back in the day of small govt, there was no unemployment. Everyone had some job or other. So that absent govt meddling, when people get laid off they find another job pretty quickly. The unemploymet we suffer is caused by all kinds of govt meddling, from minimum wage laws to union laws to rules and regulations and taxes choking business opportunities.
So that I don't consider the whole unemployment situation to be one that can be discussed by citing the real world as it is now.
If the economy was at full capacity, then I would agree with you. Post Keynesians and MMT argue that capitalist economies are almost always demand deficient, and hence operate below capacity.
"Demand deficient" makes it sound like the entrepeneur would like to manufacture more, but there is no one to buy the stuff.
For instance, Post Keynesians point to empirical studies which show firms usually operate at 70% to 80% capacity. They argue that this reason firms operate with excess capacity is the same reason why agents and entities hold monetary balances, lines of credit, and firms operate with stockpiled inventories, these function as a buffer to unplanned events; firms operate with excess capacity so that they can respond to demand fluctuations (such as an increase in demand).
This part contradicts the above, in that it says not operating at fuill capacity is a business decision fo various reasons, but not because of lack of demand. Esuric also pointed out a flaw in this part. If these demand deficiencies are to be overcome, there are three options: the government runs a deficit, the current account balance turns to surplus, or the private sector engages in credit expansion.
They don't have to be "overcome". And there is a fourth option. That unprofitable business has to close down.
MMT argue for the first option, and argue that the second option is unrealistic for every country (because of an accounting identity, as not every country can run a current account surplus at the same time) and the last option is potentially unsustainable.
The first option involves destroying the purchasing power of the currency. How can this be considered "overcoming" the problem? It's like getting rid of a head ache by jumpoing off a building. If as Esuric claims Austrians believe that the money supply is endogenous, then how can you claim that causation runs from the money supply to prices?
You lost me at endogenous.
1. About taxes. I asked what the govt does with tax money it collects. You replied that there are all kinds of different and complicated bookkeeping schemes used to funnel the money here and there.
But the point I'm trying to make is that after all is said and done, tax money is spent by the govt to take away our resources. Even if it is deposited somewhere or other for a while, I don't believe it just sits there for eternity. If it does, why do politicians love raising taxes? They won't get to spend the money. And how is raising taxes a way of balancing the budget? The tax money won't get spent, so it can't be used to pay for things on the budget.
I admit that I don't intend to read the papers explaining what gets done with tax money. Because I cannot believe the IRS puts people in jail just to get money it won't spend.
You wrote "Once it is realized that bonds and taxes do not function to finance government spend, then it follows that these are separate operations from the act of spending." But I deny this. I cannot believe that the money from selling bonds and collecting taxes is not spent. Of course it is.
I looked up Taxes in Wikipedia, and it mentions over and over that tax money is spent. Always. Not a word about its being shredded, or locked in a vault to rot. It is spent. So of course it "finances govt spending". Operational, you sound like a smart cookie. How can you fall for that crazy assumption, that taxes are collected and then burnt in some huge bonfire, or equivalent?
2. About accounting. I don't deny that we can probably learn something from looking at the books. But not basic principles, as I will explain.
Once you have agreed that accounting principles cannot magically make money and real good and services of equal value, then that pretty much ends the argument, as far as I'm concerned. Because I think I've detected instances of MMT implicitly assuming exactly that. I've mentioned it in posts scattered around here.
And my disagreement goes deeper than that. Ultimately, people don't want money, they want what money can buy. They don't pay for things [honestly] with money, but by exchanging what they have to offer [in goods or labor] for what they want. The true ebb and flow of an economy is really barter. Money is just a convenience for making exchanges easier. Real understanding of economics always depends on going back to the question, "What has been traded for what?"
Thus we can understand why govt spending cannot improve an economy. An improved economy is one where more things are created than before. This is done by not consuming everything, but using part of what we have to make new machinery etc. Just as new food comes from the seeds of uneaten foods, so too increased production comes from unconsumed previous production.
That being the case, we have to ask ourselves "What resources has the govt brought into the world when it prints money?" Answer: None. "What tangible resources does the govt underconsume when it prints money, thus making them available for new production?" Answer: None. "So how does govt spending grow or improve the economy?" Answer: It doesn't.
There are one or two other minor points I am not responding to, agreeing as I do that we should stick to the essentials.
OK, that's all I got.
Operational:In a closed economy without a government sector, the private sector cannot net save. Keep in mind we are referring to financial assets.
I agree this makes no sense what so ever. I feel like there exists an over-emphasize regarding money, and an unhealthy ignoring of underlying assets and services money represents. Savings isn't just about idle money sitting in bank accounts somewhere, its about the freeing up of actual natural resources which are then used for the creation of more round-about processes.
The one thing the MMTheorists seem to be ignoring in their theory is everything else in the economy besides money. The irony being that money is nothing but a tool which services everything else in an economy. Money is not the economy.
This is sounding more and more crankish to me.
I'm going to cut straight to the heart of the issue: the MMT's definition of "money".
Operational:The definition of money being used is that money is a financial asset with a matching liability. Do you deny that money is financial asset with a matching liability, and more importantly do you deny that it is a balance sheet item?
This is a very interesting definition. Let's take a look at the definition of the word it depends on the most, "financial". According to Wiktionary, "financial" is defined as "related to finances". Okay, so what's the definition of "finance"? Wiktionary gives three definitions, all of which I include below:
finance (plural finances) The management of money and other assets. The science of management of money and other assets. In plural (finances), the monetary resources, especially those of a public entity or a company.
So here we can see that to define money as a financial asset with a matching liability, when "financial asset" means, in essence, "monetary asset", is an inherently circular definition. Either this definition cannot stand, or some different definition of "finance" is implicitly being used. Which is it in your case, Operational?
Yeah this is gonna come down to definitions, and I predict much breath will be wasted talking about other things in the meantime. By the way, "[money] is a balance sheet item" also seems circular/vague, but perhaps the MMTers have a clearer definition.
Why anarchy fails