Ok, I tried this once before and now it looks like another thread has taken off where my last one was left.
What I'm looking for is a formal, thorough, critique of MMT from an Austrian perspective.
Please do not post unless you understand MMT, meaning you have read something like the explanations by Cullen Roche and Warren Mosler.
A decent critique has been done at Seeking Alpha, but it fails by over criticizing in some areas and not going into much of the Austrian concepts I am interested in hearing about, like interest rates and the production structure.
If you know of an article, or are willing to provide your own insight I would very much appreciate it.
Kristjan:I know what happens when people lose their trust in the currency but this is not the point here. Esuric:The legal characteristics of various types of money are entirely unessential for economic theory. I don't understand the point of this statement. Are you trying to say that Soviet Union rubles were the same as US dollars? Legal framework doesn't matter right?
Esuric:The legal characteristics of various types of money are entirely unessential for economic theory.
I don't understand the point of this statement. Are you trying to say that Soviet Union rubles were the same as US dollars? Legal framework doesn't matter right?
Here is what Esuric said earlier, which should clarify:
Esuric:The laws of economics don't need revision every time there are institutional changes. They are laws; they are applicable in any location and at any time. It is precisely because we understand such laws that we can understand the ramifications of such institutional changes.
In other words, the laws of economics (economic theory) are not subject to legislative revision, but are universally true, irrespective of the legal system, time, place, or culture.
This is a fundamental Austrian position from the earliest days of the Austrian school.
By the way, it might be helpful for all of you to learn how to quote on the Mises forums:
http://mises.org/Community/forums/t/18184.aspx
@ Think Blue
Thanks, I was already looking for this thread. But with the keywords "how to quote" it is not findable with the search function. But I tried now with "how+to+quote". This works..
Thanks anyway!
@ Kristjan
"I don't understand the point of this statement. Are you trying to say that Soviet Union rubles were the same as US dollars? Legal framework doesn't matter right?"
AE does state certain economic laws, it does not make the statement that any kind of money (be it Gold, USD, Soviet Rubles or Weimar Marks) has the same qualities (The legal status is of course part of the qualities), far from that, Austrians demand sound money.
Take the law of gravity for example: It says that a mass will accelerate with 9.81m/s² in the direction of center of earth near surface (gravity is decreasing with increasing distance to earth), but only in case of vacuum. Depending on aerodynamic drag, current location, current direction of movement and current speed different objects won't necessarily perform the same movement with the same acceleration. But this does not mean the law of gravity has changed, just because certain parameters are different. A starting jet does not invalidate the law of gravity. Gravity is still affecting the jet in the same way as it is affecting a falling stone, even if you cannot see it in the moment of the start.
So you can see the legal status as a parameter that has of course an effect on the real world outcome, but not on the law itself.
"The laws of economics don't need revision every time there are institutional changes. They are laws; they are applicable in any location and at any time. It is precisely because we understand such laws that we can understand the ramifications of such institutional changes."
No they are not. Monetarily sovereign governments are not to looked like households or non sovereign governments. There are completly different set of rules at play.
You can see this error every day around you when debt hawks scream that interest rates will go up when governments are running deficits. And they are not going up no matter of the size of the deficit. That is a theory that migt be true for monetarily non sovereign governments but not for monetarily sovereign governments.
Like I said completly different set of rules at play. MMT describes that correctly.
Why not? This is a pure assertion.
Prove it.
Freedom of markets is positively correlated with the degree of evolution in any society...
Kristjan:No they are not. Monetarily sovereign governments are not to looked like households or non sovereign governments. There are completly different set of rules at play. You can see this error every day around you when debt hawks scream that interest rates will go up when governments are running deficits. And they are not going up no matter of the size of the deficit. That is a theory that migt be true for monetarily non sovereign governments but not for monetarily sovereign governments.
So you are saying that the economic law how interest rates react on higher borrowing from the government is different with a monetarily sovereign government as with a non sovereign government. This is wrong. The only difference is there is a different set of parameters or a different set of rules set by the government itself. But not a different economic law. The law says that if the government borrows more the interest rates will rise, but only if everything else is equal! If the money supply is expanded then an additional factor has changed! The US government does not borrow existing money but newly created money, so this is perfectly in line with the common economic law of how interest rates behave. And so the law will predict, that if the government borrows more, but from the FED, which has unlimited funds of fiat, and does refund the interest it gets from the government back to the government, then interest rates won't rise necessarily.
Just because so called "debt hawks" are not able to apply this law correctly and miss to take all variables into the equation does not mean the law is wrong!
Kristjan:Like I said completly different set of rules at play. MMT describes that correctly.
A different set of rules is not a different economic law. The different set of rules you speak of is set by the government. The economic law still is the same as described above, and I thought I already made clear with the gravity example which should show that different paramaters cause different real world outcomes, though the same law is working
So Æ describes that correctly. If you think different, make a clear example without conflating government rules with economical laws.
"A different set of rules is not a different economic law. The different set of rules you speak of is set by the government."
Sure rules are set by the government. In regard to economic law you are talking about relations in between different parameters. Am I right? Let's say one of those is the size of the government debt and the other is the interest rate on that debt. One relation that might hold in one monetary system doesn't in another. You can call It a law but It's nothing but a theoretical statement. I got some definition for economic law.
http://www.businessdictionary.com/definition/economic-principle.html
Statement or inter-relationships among economic factors that explains what may cause what, or what may happen under certain circumstances. Also called economic law.
I can safely say that inter-relationships among economic factors are different in a fiat monetary system than they are in a currency board regime. I hope you agree. Not all of them of course.
Besides that the so called economic laws that you are talking about are theoretical. I'll give you a good example. Most Austrians when they see CPI inflation they blame It on the money supply and the monetarists do too. (well for Austrians It's monetary expansion anyway-that's how they even define inflation). For me that law is nonsense.
Best wishes!
Kristjan: Besides that the so called economic laws that you are talking about are theoretical. I'll give you a good example. Most Austrians when they see CPI inflation they blame It on the money supply and the monetarists do too. (well for Austrians It's monetary expansion anyway-that's how they even define inflation). For me that law is nonsense.
Please explain.
@AGB
My position on the money suplly?
Money supply is stock and not flow. What is required is spending. That's one thing, another thing is we cannot even define the money supply. It's all credit.
When you help your neighbor clean his yard and he promises to give you apples for It and you go to a local grocery store where the owner knows your neighbor and you give him your neighbor's promise for a bottle of beer then you just used credit money to pay for the bottle of beer. Your neigbor's promise to pay got monetized. That's why we don't exactly agree where the money ends. For creditarists all the credit is important, even train tickets are. :)
But let's say we all agree what money is and let's say that somehow that makes it so too. Let's say It is M1, demand deposits and cash. For growing economy there needs to be more money unless you are expecting deflationary growth(CPI). And that is so even at full emlpoyment. Let's say there is not full employment just like right now. 10% of labor resources are not utilized(more if you consider underempoyment) What do you think will happen when those people are offered a job? Are they going to demand more money than the people who are working now just because they were offered a job or are they going to be happy to be working at current labor prices? Are the companies going to jack up prices because they have more orders now even if they have the capacity to meet the extra demand? Or are they afraid of losing their market share to their competitors and they are not jacking up prices as long as they have the extra capacity? They can of course jack up prices but I think they don't.
you cannot just look at the money supply and ignore what is going on in real economy. Just because there is correlation between growth in the money supply and inflation doesn't mean that growth in money supply causes inflation. You cannot say anything about the causation here because money supply growth has not been targeted for 30 years now and CBs don't control money supply. And there is not always even correlation.
So in some systems conditions vary from other systems, and therefore the laws in operation vary too. In a world without gravitational forces, the law of gravity doesn't hold. It's nothing but a theoretical statement. I'm not sure what point you think it is you're making here.
This merely affects which laws are operant or not. Nothing else.
Which laws of economics does the existence of a fiat monetary system obviate, exactly, and why?
Besides that the so called economic laws that you are talking about are theoretical.
Indeed. What of it? What law isn't theoretical, exactly?
I'll give you a good example. Most Austrians when they see CPI inflation they blame It on the money supply and the monetarists do too. (well for Austrians It's monetary expansion anyway-that's how they even define inflation). For me that law is nonsense.
That's nice, but it's purely your opinion.
you cannot just look at the money supply and ignore what is going on in real economy. Just because there is correlation between growth in the money supply and inflation doesn't mean that growth in money supply causes inflation.
Growth in the money supply is inflation. You're talking about price increases. Correlations are neither here nor there. Austrians argue only an expansion of the money supply can occasion a general increase in the price of goods, because absent it money will simply be diverted from less valued goods to more highly valued goods which have grown more expensive, which will not occasion a general rise in the price of goods.
You cannot say anything about the causation here because money supply growth has not been targeted for 30 years now and CBs don't control money supply. And there is not always even correlation.
Of course there increases in the money supply are not always followed by a straightforward increase in prices across the board, because other things are not necessarily equal (e.g. productivity increases might lower the price of a good that is otherwise being chased by more money than before.) BTW, central banks definitely do control the Ms but not directly by printing money. Rather, they do so indirectly in the form of their dual mandate of maintaining price stability (low "Inflation") and high employment, usually in the form of open market operations. They also influence capital and reserve requirements for banks and therefore the pace of credit expansion. It'd help to know what Austrian theory is before repudiating it.
"So in some systems conditions vary from other systems, and therefore the laws in operation vary too. In a world without gravitational forces, the law of gravity doesn't hold. It's nothing but a theoretical statement. I'm not sure what point you think it is you're making here."
In a system with negative gravity you have different laws to go by.
"Statement or inter-relationships among economic factors that explains what may cause what, or what may happen under certain circumstances. Also called economic law.
This merely affects which laws are operant or not. Nothing else."
I guess you can say It that way but you can also say that the law changed, and the new law is not like the old one because It changed so much :)
Look at the privious answers.
"Besides that the so called economic laws that you are talking about are theoretical.
Indeed. What of it? What law isn't theoretical, exactly?"
All of them.
"I'll give you a good example. Most Austrians when they see CPI inflation they blame It on the money supply and the monetarists do too. (well for Austrians It's monetary expansion anyway-that's how they even define inflation). For me that law is nonsense.
That's nice, but it's purely your opinion."
Sure, my opinoion against yours.
"you cannot just look at the money supply and ignore what is going on in real economy. Just because there is correlation between growth in the money supply and inflation doesn't mean that growth in money supply causes inflation.
Growth in the money supply is inflation. You're talking about price increases. Correlations are neither here nor there. Austrians argue only an expansion of the money supply can occasion a general increase in the price of goods, because absent it money will simply be diverted from less valued goods to more highly valued goods which have grown more expensive, which will not occasion a general rise in the price of goods."
"Growth in the money supply is inflation" That's your opinion, not mine. Mainstream doesn't think so either.
"Austrians argue only an expansion of the money suplly can occasion a general increase in the price of goods" Again It's their opinion. By the way It has a big error in It. Money supply can contract and there can be CPI inflation.
"Of course there increases in the money supply are not always followed by a straightforward increase in prices across the board, because other things are not necessarily equal (e.g. productivity increases might lower the price of a good that is otherwise being chased by more money than before.) BTW, central banks definitely do control the Ms but not directly by printing money. Rather, they do so indirectly in the form of their dual mandate of maintaining price stability (low "Inflation") and high employment, usually in the form of open market operations. They also influence capital and reserve requirements for banks and therefore the pace of credit expansion. It'd help to know what Austrian theory is before repudiating it."
Again you have a big error in your reasoning. Central Bank like any monopolist cannot control both quantity and price. As we all know they set the price and the rest of the economy adjusts to that price. And you are wrong about the reserve requirements assumtion because we are not on gold standard. Bank lending is not constrained by reserves. Like I said before the price is set and they can borrow as much reserves at that price as they desire. The quantity is not limited by central bank. The reserve requirement has nothing to do with It yet you think It does because you are set on money multiplier myth. Canada has no reserve requirements how about that? The ability to create credit is unlimited and the money supply should end up hypersonic?
I have to give you that much credit as to whether different laws apply or It's just how to apply the different laws to different systems.
I have a question for you: Ausrians repeat that you need to save to invest. Does that hold true in monetary economics on a macro level?
Thank you!
Kristjan:I have a question for you: Ausrians repeat that you need to save to invest. Does that hold true in monetary economics on a macro level?
four words: Austrian Business Cycle Theory
My Blog: http://www.anarchico.net/
Production is 'anarchistic' - Ludwig von Mises
Kristjan:In a system with negative gravity you have different laws to go by.
So you reject the law of supply and demand? Because it is supply and demand that describes the relationship between borrowing of the government and the interest charged for it. This is the first time somebody is telling me supply and demand does not apply anymore, because some legal status has changed.
I have a question for you. Do you also think that if the government sets the price for a bottle of beer at half the price of the market price, that supply and demand also has been “deactivated” ?
Kristjan:I have a question for you: Austrians repeat that you need to save to invest. Does that hold true in monetary economics on a macro level?
You don't need to save monetary units to invest. You need to save real goods, which is true in all worlds. It is physically not possible in any other way. What you mean I think is in a fiat world it is thinkable that no person is using any of his monetary income whatsoever to save and invest it in new business, because theoretically all of this could be done by the government. It just writes onto itself a check (expands money supply which drains buying power of the people to the government) and then uses this buying power to invest. This means although all people use all their money to consume, they cannot consume all stuff that is produced, because government uses its newly created fiat funds to invest some of the goods that are produced. This would be some kind of forced saving. If a private person would borrow newly created funds it is similar except he cannot write the check onto himself which just means, he will have to save monetary units later to pay back his debt. This does not shake any of the Austrians claims. Real goods have to be saved to invest!
Kristjan:Canada has no reserve requirements how about that? The ability to create credit is unlimited and the money supply should end up hypersonic?
A bank needs to secure its ability to pay out money on demand of its customers. If it would not keep any reserve it would soon face a bank run. The reserve requirement is for one point a tool which the central bank could utilize to control the amount of fiat issued by private banks, and as a safety regulatory tool to avoid greedy bankers facing a bank run. But it’s not preventing instant hyperinflation. Where do you get such assertions from? Show me please where Mises Hayek Rothbard or whoever said, that the reserve requirement is the only thing that prevents instant hyperinflation in a fiat money regime?
What books have you already read of AE?
And this does not change one whit that the law of gravity is still considered such in systems where it exists. See my point?
What would an example of this in economics be?
Indulge me.
Then what's gained by applying the term?
If you want to convince me, substantiate it.
s/inflation/increase in the general price level. Who suggested the "real economy" should be ignored? I'm not arguing based on correlations here. If the amount of money in the economy increases and all else remains equal, inflation will result. That much not even mainstream economists question, whose opinion you seem to cherish.
That's your opinion, not mine. Mainstream doesn't think so either.
They'll fall into trouble when trying to define inflation as an increase in the general price level, then, which is the phenomenon they're trying to explain (because, if money supply remains constant and prices begin to increase, expenses will by force be diverted to more urgent goods from less urgent ones as the former grow in expense, occasioning a fall in the price level of the less urgent goods; ergo, there's no across-the-board increase in the price level.) I don't care whether "mainstream" economists disagree, by the way. Only their reasons for doing so matter.
Again It's their opinion.
It's actually an argument with premises and a conclusion, so either demonstrate where it's wrong or hush.
By the way It has a big error in It. Money supply can contract and there can be CPI inflation.
...how is that an error in it? Where does it preclude the possibility of this? I'm getting the feeling you don't have a very solid grasp of economics, mainstream or otherwise.
Central Bank like any monopolist cannot control both quantity and price. As we all know they set the price and the rest of the economy adjusts to that price.
Where are you getting this from? What in the theory of monopoly implies a monopolist cannot control both (and I mean the real thing here, not what the state defines as a monopoly)?
And you are wrong about the reserve requirements assumtion because we are not on gold standard. Bank lending is not constrained by reserves.
Actually, it is. The level of reserves a bank has with the Fed (or any other central bank) limits by how much it can expand credit in the form of loans. Now, whether this is enforced or whether there are loopholes that one may avail themselves of is another story.
Like I said before the price is set and they can borrow as much reserves at that price as they desire. The quantity is not limited by central bank. The reserve requirement has nothing to do with It yet you think It does because you are set on money multiplier myth. Canada has no reserve requirements how about that? The ability to create credit is unlimited and the money supply should end up hypersonic?
I'm not seeing your point. OK, some central banks allow private banks to go unhinged in credit expansion (and then ensure sufficient liquidity to shield them from bank runs.)
...so what? Are you trying to say this will have no consequences on the real economy, or that it changes the laws of economics, or what?
"Need" to in what sense?
"So you reject the law of supply and demand? Because it is supply and demand that describes the relationship between borrowing of the government and the interest charged for it."
I don't reject the law of suplly and demand but supply and demand is not what describes the relationship between "borrowing" of the government and the intrerest rates. It's not borrowing really and the monopolist sets the interest rate. I guess you could still say that It's supply and demand, just the monopolist is altering supply but this is pointless. The monopolist sets the price.
"This is the first time somebody is telling me supply and demand does not apply anymore, because some legal status has changed."
I didn't tell you exactly that but loanable funds theory doesn't apply. It is in every textbook out there. If government borrows the interest rates will go up......:) No, they stay where the government wants them to stay. 0 rates forever are possible and 20% rate tommorrow is possible if the monopolist decides so.
"I have a question for you. Do you also think that if the government sets the price for a bottle of beer at a half the price of the market price, that supply and demand also has been “deactivated” ? "
I haven't said that.
"You don't need to save monetary units to invest."
You might need them on personal level.
"You need to save real goods, which is true in all worlds."
What do you mean by that? You start saving corn?
"What you mean I think is in a fiat world it is thinkable that no person is using any of his monetary income whatsoever to save and invest it in new business, because theoretically all of this could be done by the government."
I have never said that. Just investment precedes savings in real world. And we are talking about monetary savings. When we speak of aggregate savings we are not talking about all the real assets that America has. No, we are talking about monetary savings. Loans create deposits. When money is loaned(created) and invested that's how aggregate savings go up. When you start saving in your piggy bank then someone else in economy dissaves exactly the amount you are saving. Aggregate savings don't increase. With the bank loan non government is not net saving because every financial asset created this way has a corresponding liability. When government deficit spends then non government net savings go up. I strongly suggest for you to come out of your idelogical bubble and learn how modern monetary system operates. As much as you hate It and as much as you love gold money, the gold money logic just doesn't apply in a fiat system.
And sure the real resources have to be there to invest but you don't have to warehouse them. This is just what people like you are suggesting right now-warehouse the unemployed. My suggestion for you is to read MMT. And yes I have read Austrian Business Cycle Theory
I didn't say anything about Rothbard and you are totally wrong about the reserves. This guy too doesn't understand monetary economics at all http://mises.org/daily/4499
Can't leave a comment on that article.
Good luck!