Academic Agent versus “Adam Friended” on Price Inflation and MMT

Academic Agent has got into another row on MMT, but this time with someone called “Adam Friended.”

In brief, “Adam Friended” responded to Academic Agent in the following video on the issue of MMT and price inflation:



Academic Agent then produced this response on MMT here:



Academic Agent is correct that Covid welfare payments and furlough schemes were not the fundamental drivers of inflation in some goods. It is also true that the Western world is far from full employment (though wage rises clearly can be a driver of price inflation through cost-based mark-up prices).

Unfortunately, “Adam Friended” did not correctly describe the causes of the price inflation in certain goods at the moment, and worse still he does not himself properly understand MMT or Post Keynesian economics, and fails to understand that the naïve Quantity Theory of Money is rejected in MMT and Post Keynesian economics. So this debate between Academic Agent and “Adam Friended” stems from the failure of the latter to correctly state MMT or Post Keynesian theories.

The fundamental causes of the inflation seen in certain goods recently are as follows:

(1) disruption to supply chains because of Covid and lockdowns has caused supply-side inflation, especially in factor inputs. Some nations have also restricted exports of key goods, and lockdowns, in some cases, badly affected production in places like China. In other cases, some nations hoarded supplies of certain food and medical supply products, which restricted overseas exports and caused some inflation.

(2) the price of oil has been rising sharply since last year, and since energy is a fundamental factor input cost, the rise in costs is passed on via cost-based mark-up prices;

(3) there has been disruption of agricultural production and inflation in certain food products and in some agricultural inputs. For example, lockdowns and closing of borders have disrupted production and processing of agricultural goods.

The evidence for this can be seen in this IMF paper called “The Impact of COVID-19 on Inflation: Potential Drivers and Dynamics”.

So, in other words, the recent inflation in certain goods prices is mainly and fundamentally caused by real factors like supply disruptions, lockdowns, hoarding and shortages, not monetary factors.
Some demand-pull inflation after supply disruptions has happened, but the real factors are more important, and, as we will see below, Austrians like Academic Agent fail to understand the true extent of demand-pull inflation.

However, it is important to put this into perspective via the general price indices.

American and UK inflation is historically low, as we can see here for the US and here for the UK (just click on the “25Y” or “Max” tabs above the graphs to see the long-run historical inflation rates). None of this has caused high or even moderate general price inflation.

Academic Agent’s fundamental claim in his video (see his comments from 35:18 and 36:09) appears to be that expansion of the money supply via central banks is the fundamental driver of the price inflation in some goods today. This is absurd, and the actual evidence, as I stated above, shows real factors were the driver of the inflation because of supply disruptions, lockdowns, hoarding and shortages.

Worse still, Academic Agent in his reply video makes other errors and fails to understand MMT and even his own Austrian theory.

Let’s review these errors below.

The Austrian Theory of Price Inflation
Academic Agent is so ignorant he actually states in his video that the “Austrian theory would say ... inflation is always a monetary phenomenon” (see 11:36–11:42). By “inflation” Academic Agent clearly means “price inflation” and not merely expansion of the money supply.

Academic Agent is blatantly wrong about Austrian theory.

The idea that “inflation is always and everywhere a monetary phenomenon” is a Monetarist theory on the basis of the Quantity Theory of Money.

In reality, the Austrian school does not wholly subscribe to the Quantity Theory of Money, but have their own criticisms of it, because of the issue of Cantillon effects, as well as other criticisms.

Academic Agent is apparently unaware that the Austrian school actually has serious criticisms of the orthodox Quantity Theory of Money.

First let us take the view of Ludwig von Mises:

“ [sc. Mises] … agreed with the classical ‘quantity theory’ that an increase in the supply of dollars or gold ounces will lead to a fall in its value or ‘price’ (i.e., a rise in the prices of other goods and services); but he enormously refined this crude approach and integrated it with general economic analysis. For one thing, he showed that this movement is scarcely proportional; an increase in the supply of money will tend to lower its value, but how much it does, or even if it does at all, depends on what happens to the marginal utility of money and hence the demand of the public to keep its money in cash balances. Furthermore, Mises showed that the ‘quantity of money’ does not increase in a lump sum: the increase is injected at one point in the economic system and prices will only rise as the new money spreads in ripples throughout the economy. If the government prints new money and spends it, say, on paper clips, what happens is not a simple increase in the ‘price level,’ as non-Austrian economists would say; what happens is that first the incomes of paperclip producers and prices of paper clips increase, and then the prices of the suppliers of the paper clip industry, and so on. So that an increase in the supply of money changes relative prices at least temporarily, and may result in a permanent change in relative incomes as well” (Rothbard 2009: 15).

In other words, Mises denied that a given increase in the money supply (say, 5%) would lead to a direct, proportional and mechanistic rise of 5% in the general level of prices.

Strictly speaking, then, Mises denied the orthodox Quantity Theory of Money.

The naïve monetarists believe that there is a “monocausal” explanation of inflation: money supply growth which will cause direct, proportional increases in the price level, at the very least in the long run, even if Monetarists will accept short-run non-neutrality of money.

Friedrich von Hayek believed that a simple form of the quantity theory was a “helpful guide,” but was nevertheless a critic of the theory, both in the version of it propounded by Irving Fischer and the restatement of it by Milton Friedman (Arena 2002).

In particular, “Hayek criticized Friedman for concentrating too much on statistical relationships (between the quantity of money and the price level), claiming that matters are not quite that simple” (Garrison 2007: 3). Modern Austrians continue to be critical of Quantity Theory of Money, like Jesús Huerta de Soto, who has the following to say:

“[sc. The equation MV=PT of the quantity theory] contains an undeniable element of truth inasmuch as it reflects the notion that variations in the money supply eventually influence the purchasing power of money (i.e., the price of the monetary unit in terms of every good and service). Nevertheless its use as a supposed aid to explaining economic processes has proven highly detrimental to the progress of economic thought, since it prevents analysis of underlying microeconomic factors, forces a mechanistic interpretation of the relationship between the money supply and the general price level, and in short, masks the true microeconomic effects monetary variations exert on the real productive structure” (Huerta de Soto 2009).

The Austrians think that quantity theory is inadequate because it ignores their theory that increases in the money supply distort relative price and the productive structure of an economy, which is, in essence, the Austrian Business Cycle Theory (ABCT).

If we dig deeper into Austrian view of inflation, we can find some surprisingly sensible analysis.

Frank Shostak has this view:

“the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services .... While increases in money supply (i.e., inflation) are likely to be revealed in general price increases, this need not always be the case. Prices are determined by real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant – i.e., inflation is high – prices might display low increases.”
Frank Shostak, “Defining Inflation,” Mises Daily, March 6, 2002.

The statement that prices “are determined by real and monetary factors” is empirically correct, but requires that the Monetarist view – defended by Academic Agent – that “inflation is always and everywhere a monetary phenomenon” is false.

So Academic Agent does not even understand the Austrian theory he comically defends!

Of course, even the Austrian view of Frank Shostak is seriously flawed in that it does not understand endogenous money or the widespread existence of cost-based mark-up prices.

In reality, most prices are cost-based mark-up prices which are relatively inflexible with respect to demand, either as compared with the 19th century or in the grossly unrealistic models of the worst sort of Neoclassical economics and Austrian theory. This means that increases in demand or purchases of goods via new money (most of which is simply created by private banks anyway via new loans) simply do not bid up prices rapidly or significantly in the way Austrians imagine, precisely because of relative price rigidity. This means that the extent of demand-side price inflation – though it does exist – is grossly exaggerated by Austrians.

To be clear: demand-pull inflation certainly exists, but it is often not the main cause of price inflation in the modern world, and its extent is much more limited.

Changes in the general price level are a highly complex result of many factors, and not a simple function of money supply.

Businesses will raise their prices for all sorts of reasons independently of a money supply expansion.

Often general price inflation is a cost-push phenomenon, in which

(1) workers or unions demand higher wages and businesses agree to these increases and/or

(2) prices of other factor inputs rise, and then businesses raise prices to reflect higher unit costs.

While a long-run, sustained price inflation does need a growing money supply to sustain it, the money supply is often not the causal factor in such price inflations, but the intermediary factor. Often, it is business and corporate use of cost-based mark-up prices and their pricing decisions, on the basis of the need for more profit or higher unit costs, which drive price inflations.

Monetarists make the mistake of thinking that the intermediary medium (money supply) is the only and fundamental driver of price inflation, when real factors underlie many movements in prices.

The MMT Job Guarantee
Academic Agent asks how a Job Guarantee will not cause high inflation under MMT.

The answer is that the MMT job guarantee is designed to pay a minimum wage, so that workers can be bid away from it to the private sector with higher private sector wages.

In cases where private sector employment already pays above minimum wage (which is very many sectors), there is no significant inflation issue.

It is true that there might be some wage inflation where private sector employment already pays a minimum wage and private businesses have trouble finding workers, but this process happens already, and is not going to cause the type of huge or significant inflation Austrian-school supporters like Academic Agent pretend will happen.

Quite simply, low-level price inflation is better for a modern economy than price deflation, since price deflation causes devastating macroeconomic effects, like profit deflation in the face of money wage rigidity, debt deflation, deferral of purchases of goods, and pessimistic business expectations.

The Austrian complaint that the MMT job guarantee might cause some low-level inflation is utterly spurious, since low-level price inflation is far better than price deflation.

BIBLIOGRAPHY
Arena, R. 2002. “Monetary Policy and Business Cycles: Hayek as an Opponent to the Quantity Theory Tradition,” in J. Birner, P. Garrouste, T. Aimar (eds.), F. A. Hayek as a Political Economist: Economic Analysis and Values. Routledge, London.

Garrison, R. 2007. “Hayek and Friedman: Head to Head”
http://www.auburn.edu/~garriro/hayek%20and%20friedman.pdf

Huerta de Soto, J. 2009. “A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money,” Economicthought.net
http://www.economicthought.net/2009/07/a-critique-of-the-mechanistic-monetarist-version-of-the-quantity-theory-of-money/

Rothbard, M. N. 2009. The Essential von Mises. von Mises Institute, Auburn, Alabama.

Shostak, F. 2002. “Defining Inflation,” Mises Daily, March 6
http://mises.org/daily/908

A Refutation of Academic Agent’s “Debunking Modern Monetary Theory (MMT)”

Academic Agent – a YouTube libertarian and unusually ignorant advocate of Austrian economics – tries to refute Modern Monetary Theory (MMT) in this video:



Let us run through this video and refute Academic Agent’s arguments point by point:

(1) Academic Agent fails to Refute the Three Core Principles of MMT
There are three fundamental principles in Modern Monetary Theory (MMT), as follows:

(1) Most sovereign governments today are the monopoly issuers of their own fiat currencies (since the gold standard has been abolished);

(2) Because of (1), the government is not revenue-constrained in the way it was under the gold standard, because it is the creator of its own fiat money;

(3) In a fiat money world, taxes and bond issues do not, technically speaking, finance government spending.

Even if Academic Agent thinks that a central bank creating money directly to fund a government budget deficit results in excessive inflation or hyperinflation (which is one of his arguments), he still has failed to refute these three core principles of MMT.

In fact, it is difficult to see how any sane libertarian would deny propositions (1) and (2), because these are their primary objections to fiat money!

(2) Emergence of Commodity Money in modern POW Camps or Prisons does not vindicate Menger’s Theory of the Origin of Money
Academic Agent notes (from 1.34 in the video) that commodity money has emerged in modern jails and thinks this confirms Menger’s theory of the origin of money.

In reality, this does no such thing. Ultimately, libertarians like Academic Agent rely on such things as the work of R. A. Radford (“The Economic Organization of a POW Camp,” Economica 12.48 [1945]: 189–201) that demonstrates the emergence of a cigarette money in a POW camp. But situations in which barter is observed in groups of human beings in modern times where some good emerges as a medium of exchange can hardly be regarded as confirming the barter-origin-of-money theory, because the people concerned in these cases were already perfectly familiar with money and a price system (Graeber 2011: 37; see also Ingham 2006: 264–265), and were not like ancient people who lacked a monetary system.

(3) Carl Menger’s Theory of the Origin of Money is False as a Universal Theory
Carl Menger’s theory of the origin of money is defended by Academic Agent against Chartalist theories, often used by advocates of MMT.

However, it is important to note that even if Chartalist theories of the origin of money are false, then this still does not refute the macroeconomic theories and policy recommendations of MMT applied to modern capitalist economies, since these things are, logically, two separate things.

However, there are good reasons for rejecting Carl Menger’s ideas as a universal theory of the origin of money.

Briefly, Menger imagines a pre-monetary world where people exchange goods for goods in spot transactions (barter). The famous problem of the double coincidence of wants is overcome as certain goods with a high degree of saleableness (that is, that are much more likely to sell than other goods) are desired to overcome the double coincidence of wants, and eventually the most saleable good (or goods) becomes the medium of exchange (Menger 1892: 249). This is taken to be a universal theory of how money emerges on markets by many modern Austrians and libertarians, although Menger’s own position was much less extreme than this.

If we read Menger’s classical article of 1892 in its English translation by C. A. Foley published in the Economic Journal, we find an interesting qualification that Menger makes to his theory:

“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.” (Menger 1892: 250).

That leaves open the possibility that money can be instituted by a modern government, but no doubt libertarian halfwits like Academic Agent are blissfully ignorant of this more reasonable opinion of Menger.

The trouble with Menger’s theory is that, while it is probably true that money in some historical circumstances can emerge from barter (especially in long distance trade), money can arise in other ways, and Menger’s theory is therefore flawed and cannot be considered a universal theory.

Historically speaking, money might arise in various ways, as follows:

(1) money can arise from so-called “ceremonial money” that was originally prized as a prestige good, or for magical power (and not as the most saleable good), and first used mainly for social reasons, but then used in wergild (compensation for murder) and other penalty systems, where penalties are calculated in terms of a common unit of account;

(2) money can arise as an abstract unit of account imposed from above by ancient government-temple institutions using weight units of metal from their economic planning systems.

We can review these points below.

First, in pre-monetary societies, we find that barter spot trading within that community is far less prevalent than is imagined in Austrian and Neoclassical economics. Sometimes money – in the true modern sense – does not even develop at all. Primitive societies can overcome the double coincidence of wants problem by a system of gift exchange and debt–credit exchanges, and many such societies without money can function quite well, and limit significant barter trade to trade between geographically distant regions and people.

In some such pre-monetary societies studied by modern anthropologists, there emerges what anthropologists call “non-commercial money” or “ceremonial money,” which is non-commercial in the sense that it is not used for everyday purchases of goods and services, or only rarely for such ordinary goods: thus it is non-commercial in the sense that it is not a universal medium of exchange. Such “primitive ceremonial monies” include shell money in the Americas or Papua New Guinea, cattle money in Africa, bead money, feather money, and so on. These were rarely used to buy everyday items in the societies that used them. Instead, they are employed in social relations like marriages and to settle disputes (Graeber 2011: 60).

Such “non-commercial money” (or “ceremonial money”) is most frequently used in social interactions, often formal social events such as marriage, wergild and bloodwealth payments (that is, compensation for murder), political relations (e.g., potlatch, moka), and fines and other compensations (compensation for adultery, or for things lost), and may only be rarely used, if at all, for everyday purchases or commercial transactions (Grierson 1977: 15–16).

In time, some societies move to the next stage where a prescribed and traditional system of compensation payments are calculated in terms of “ceremonial money” as a common unit of account to simplify calculation of payments, which later spread to the wider community in economic transactions as a modern form of money (Grierson 1977: 29). So it is possible that in some societies money arises from its previous role in systems of legal compensation.

Secondly, we have evidence from ancient Babylonia and ancient Egypt that money arose there from an abstract money of account in the temple and palace institutions.

In ancient Mesopotamia, for example, an abstract money of account seems to have been developed in the temple and palace institutions. These temples and palaces were institutions with large internal centrally-planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. Many prices were set and administered in the money of account which developed from weight units. The two units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley (Hudson 2004).

Silver money of account spread to the private economy mostly as a means of reckoning debts to temples and palaces (Hudson 2004: 115). But many ordinary people could pay in commodities, and the administered pricing system in terms of silver/grain that was developed in the temples was to assist in calculation of payments in kind.

And it is likely precious metals were used as non-commercial money or ceremonial money in ancient societies before they became abstract units of account. Given their scarcity, it is unlikely that silver would have arisen as a unit of account and medium of exchange in, say, Mesopotamia from internal barter trade as the most saleable good precisely because there wasn’t enough of it.

Finally, the first metal coinage in ancient Lydia and Greece was an invention of the state, and the first Lydian coinage was struck in electrum (not gold or silver) and used to pay soldiers and mercenaries. This was most probably a high prestige object and perhaps even non-commercial money. At most, it was simply one of many goods used in conventional barter trades: there is no convincing evidence that it was the reigning medium of exchange (money) that had already emerged as the most saleable good in spot barter trades before it was adopted by the Lydian state.

Much more detailed analysis of the origins of money with scholarly citations can be found in these posts:

“Menger on the Origin of Money,” January 5, 2012.

“Menger’s Nuanced View on the Origin of Money,” November 6, 2012.

“George Selgin versus David Graeber on the Origin of Money,” March 30, 2016.

“Larry White on the Origins of Coined Money: A Critique,” August 26, 2017.

Reply to Selgin on the Origin of Electrum Coinage, Part 1, September 3, 2017.

The Majority View in Modern Scholarship on the Origin of Electrum Coinage: An Update, September 4, 2017.

“Reply to Selgin on the Origin of Electrum Coinage, Part 2,” September 5, 2017.

“The Origin of Money and Coinage in Western Civilisation: The Case of Ancient Greece,” April 5, 2013.

(4) Academic Agent fails to Understand Widespread Relative Price Rigidity
Academic Agent’s major argument against government spending and MMT-style deficit spending is Cantillon effects (from 9.42 in the video).

The Cantillon effect is the idea that price level changes caused by increases in the quantity of money depend on the way new money is injected into the economy and actually where it affects prices first. New money will then spread out altering the level of prices and structure of prices or relative prices (Blaug 1996: 21). Another way of saying this is that, although prices rise as the quantity of money increases, contrary to the naive quantity theory of money, prices do not rise proportionally, but in a complex manner that depends on who received the money and how they spent it.

Libertarians are fond of using this “Cantillon effect” argument against government spending where money supply rises: the argument is essentially that only those who first receive the new money will benefit from it, and all other people who latter receive the new money will suffer rapid and serious inflation.

But this argument is absolutely dependent on the false view that all or most prices in modern capitalist economies are highly flexible and rapidly responsive to changes in demand. This is utterly false, and the reality is that even mainstream Neoclassical economists recognise that modern capitalist economies have a high degree of relative price rigidity.

Most prices are cost-based mark-up prices, relatively inflexible with respect to demand, and the empirical evidence for this as given in the post below is overwhelming:

Mark-up Pricing in 21 Nations and the Eurozone: the Empirical Evidence .

So the idea that goods prices rapidly respond to demand increases is a falsehood. Cantillon effects are largely mythical precisely because of relative price rigidity, and to the extent there are marginal or minor Cantillon effects this would occur in response to any type of new spending in an economy, whether this was new foreign purchases of domestic goods or new spending from money creation by private capitalist fractional-reserve banks. Since minor Cantillon effects would also occur from privately-induced changes in the quantity of money, as well as from government-induced ones, it cannot be a serious objection on its own against government intervention raising the quantity of money unless it also invalidates all private causes of the expansion of the money supply, such as, for example, foreigners bringing in new money via large flows through a country’s capital account into financial markets, foreign direct investment, purchases of exports, or spending on tourism, etc.

To turn to the evidence for relative price rigidity, we can look at some data.

Blinder et al.’s Asking about Prices: A New Approach to Understanding Price Stickiness (New York, 1998) reported the results of one of their survey questions, asked of 200 firms selected to be representative of total US GDP, which was as follows:

“How often do the prices of your most important products change in a typical year?” (Blinder et al. 1998: 84).

The results were:

(1) less than 1 | 10.2%
(2) 1 | 39.2%
(3) 1.01 to 2 | 15.6%
(4) 2.01 to 4 | 12.9%
(5) 4.01 to 12 | 7.5%
(6) 12.01 to 52 | 4.3%
(7) 52.01 to 365 | 8.6%
(8) more than 365 | 1.6%.
(Blinder et al. 1998: 84).

It follows that 78% of US GDP consists of goods that are repriced quarterly or less. But of this fully 49.2% of firms reprice their goods only once a year or within a period over more than a year.

Blinder et al. (1998: 84) conclude that the US does have an auction-like market sector where prices are highly flexible, but it is very small indeed.

In fact, we have just seen massive relative price rigidity in response to increased demand in many goods prices during this pandemic crisis. Although of course some goods prices have risen where production is inelastic (such as in fresh fruit and vegetables) or where supply-side issues have happened, in many cases large supermarkets have maintained the prices of goods like toilet paper, tissues and hand sanitiser, even when shelves are empty.

Academic Agent is an idiot who denies the price rigidity in many goods right before his eyes.

As an aside, Academic Agent also commits a gross contradiction in his reasoning if he wants to defend the orthodox Quantity Theory of Money and the existence of Cantillon effects at the same time, since Austrian economics requires the rejection of short and long-run money neutrality, but money neutrality is a fundamental assumption of the Quantity Theory of Money (more on this in the next section).

For more refutation of the libertarian concept of Cantillon effects, see this post:

“Are Cantillon Effects an Argument Against Government Spending?, September 27, 2011.”

(5) The Quantity Theory of Money is Empirically Wrong
Academic Agent relies on the flawed Quantity Theory of Money as his explanation of inflation. Now nobody denies that demand-side inflation is real, nor that hyperinflations can happen. But the Quantity Theory of Money is much more than the claim that demand-side inflation occurs.

This section is, unfortunately, highly technical.

The Quantity Theory of Money is the theory that, when the money supply expands or contracts, this is the cause – when other variables are constant – of proportional or equal changes in the price level. The standard equation often used to express the Quantity Theory of Money is the Cambridge Cash Balance Equation.

The standard form of the Cambridge Cash Balance Equation as used today is usually given as follows:

M = kPY or
M = k_d PY
where M = the quantity of money;
k or k_d = the amount of money held as cash or money balances;
P = the general price level;
Y = real value of the volume of all transactions entering into the value of national income (that is, goods and services).

In the Cambridge approach, the variable k was held to be superior to Irving Fisher’s “velocity of circulation” concept V, because, unlike V, k is supposed to be empirically measurable.

The Quantity Theory of Money makes the following assumptions:

(1) the size of the money supply is exogenously determined by the central bank, and there is an independent money supply function;

(2) the assumption of long-run money neutrality;

(3) the direction of causation as assumed in the quantity theory equation is from left to right (that is, from the money supply to the price level). That is to say, an exogenously-determined money supply is the fundamental cause, or driver, of price level changes.

But these assumptions are wrong.

First, price inflation is a complex phenomenon, and there is no simple, monocausal explanation of price inflation, because one major factor is the high degree of relative price rigidity that happens in modern economies. An increase in the money supply does not necessarily cause corresponding increases in the general price level, either in the short run or long run, when so many prices do not automatically respond to increased demand. Thus assumption (2) above is simply false!

Secondly, the Quantity Theory of Money makes the false assumption of an exogenous, independent money supply under the direct control of the central bank. But in reality the modern money supply is endogenous.

What this means is that normally broad money creation is credit-driven. That is, most money is created by private banks in the form of demand deposits (denominated in the fiat currency of their nation) and its quantity is determined by the private demand for credit or demand deposits. This is the essence of endogenous money: in an endogenous money system, even the “monetary base” is normally endogenous too, given that the central bank must accommodate the banks’ demand for high-powered money to avoid financial crises and banking panics. Of course, the central bank does control the ability to create fiat money and is the monopoly issuer of its national fiat currency, but a lot of the money supply in any nation is actually credit money in the form of private-bank demand deposits, which is denominated in the national fiat currency.

A truly independent money supply function does not actually exist in an endogenous money world, because private-bank credit money comes into existence because it has been demanded (Rogers 1989: 244–245). So the broad money supply is not independent of money demand, but can be demand-led (Ingham 2004: 53). Thus assumption (1) above is false.

Thirdly, assumption (3) is also false. In an endogenous money system, the direction of causation is generally from credit demand (via business loans to finance labour and other factor inputs) to money supply increases. Therefore the direction of causation generally runs:

(1) business demand for credit (to pay for goods and labour factor inputs, whose prices may have risen against previous production periods) + demand for demand deposits

→ (2) increases in broad money supply (driven by changes in the level of demand deposits)

→ (3) banks’ demand for more reserves (high-powered money) when they need to clear obligations.

→ (4) the central bank creates the needed reserves.

Changes in the general price level are a highly complex result of many factors, and not some simple function of money supply. Businesses will raise their prices for all sorts of reasons independently of a money supply expansion.

Often general price inflation is a cost-push phenomenon, in which

(1) workers or unions demand higher wages and businesses agree to these increases and/or

(2) prices of other factor inputs rise, and then businesses will need to obtain higher levels of credit from banks.

While a long-run, sustained price inflation does need a growing money supply to sustain it, the money supply is often not the causal factor in such price inflations, but the intermediary factor. Often, it is business and corporate use of cost-based mark-up prices and their pricing decisions, based on the need for more profit or changes in unit costs, which drive price inflations.

So inflation might be driven by demand for higher wages or supply-side factors. Hence broad money supply growth rates rise in an endogenous money world which generally accommodates the demand for credit, but this rise precedes further price increases because businesses will generally raise mark-up prices to maintain profit margins at a later time, given that most firms engage in time-dependent reviews and changes of their prices at regular intervals. In extreme situations, a wage–price spiral might break out: this involves the same process as above but in a vicious circle.

In short, with (1) the Quantity Theory of Money being a false theory and (2) the real world having a high degree of relative price rigidity, virtually all libertarian objections to MMT based on inevitable and rapid inflation fall apart.

Of course, this does not mean demand-side inflation never happens nor that hyperinflation never happens, but then MMT does not advocate causing excess demand-side inflation or hyperinflation.

A full refutation of the Quantity Theory of Money, with citations, is here:

“Why is the Quantity Theory of Money Wrong and can Anything be Salvaged from it?,” September 15, 2014

For some other links against the Quantity Theory, see here:

“Inflation is NOT Always and Everywhere a Monetary Phenomenon,” August 4, 2014

“So-Called ‘Long-Run’ Monetarist Correlations and Non-Ergodicity,” August 7, 2014.

“What is a ‘Long-Run Trend’?,” August 5, 2014.

(6) Academic Agent relies on a Strawman Argument from William H. Hutt
Academic Agent cites the work of William H. Hutt, who is one of the most ignorant and stupid critics of Keynesianism ever produced by libertarianism.

Hutt’s criticism of Keynes and Keynesian concepts are often ridiculous strawman misrepresentations.

To take one example, the concept of “full employment” was never meant to include normal frictional and seasonal unemployment as a problem to be ended. “Full employment” does not mean a 0% unemployment rate, and never did.

This is completely absurd. Rather, frictional and seasonal unemployment are of course always going to happen, and “full employment” actually means persistent involuntary unemployment. In a modern capitalist economy, “full employment” has often been estimated as somewhat below a 4% unemployment rate.

Academic Agent’s entire attack on “full employment,” based on Hutt, is a ludicrous parody, and not to be taken seriously.

All in all, Academic Agent fails to refute MMT, and reveals the profound flaws in Austrian economics.

BIBLIOGRAPHY
Blaug, M. 1996. Economic Theory in Retrospect (5th edn), Cambridge University Press, Cambridge.

Blinder, A. S., Canetti, E. R. D., Lebow, D. E. and J. B. Rudd (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.

Graeber, David. 2011. Debt: The First 5,000 Years. Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money. Athlone Press and University of London, London.

Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes. Edward Elgar, Cheltenham. 99–127.

Ingham, G. 2006. “Further Reflections on the Ontology of Money: Responses to Lapavitsas and Dodd,” Economy and Society 35.2: 259–278.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Rogers, Colin. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

A Quick Point about Bill Mitchell’s Views on Speculative Capital Movements

Bill Mitchell sketches his views on international speculative capital movements here:

“… I do not think that the imposition of country-by-country capital controls is the best way to eliminate the destructive macroeconomic impacts of rapid inflows or withdrawals of financial capital.

If we consider that the only productive role of the financial markets is to advance the social welfare of the citizens – that is, advancing public purpose – then it is likely that a whole range of financial transactions, which drive cross-border capital flows, should be made illegal.

Capital inflows that manifest as FDI in productive infrastructure are relatively unproblematic. They create employment and physical augmentation of productive capacity which becomes geographically immobile.

However, financial flows that are speculative (especially short-term flows) and not connected with the real economy are unproductive and should be declared illegal. You may consider this is an extreme direct control. However the policy should be introduced on a multi-lateral basis spanning all nations rather than being imposed on a country-by-country basis. The large first-world nations should take the lead. I don’t see that leadership being forthcoming.”
Bill Mitchell, “Are Capital Controls the Answer?,” Billy Blog, April 28, 2010.

It seems to me that this would impose a serious problem for the Third World as follows:

(1) with a large volume of speculative capital movements banned, this will reduce capital account surpluses, and probably cause balance of payments crises in the Third World as trade deficits cannot be financed, and

(2) this will mean MMT-style fiscal policies will not be able to be pursued in the Third World, and there will also be a serious crisis of development in the Third World, and some new mechanisms will have to be designed to provide foreign exchange for economic Third World development.

That would require a total reform of the international payments system, including the World Bank and IMF, which would have to provide such foreign exchange for countries that need it.

Bill Mitchell on the Euro, Austerity and MMT

Nice, short interviews.

Limits of MMT

The Modern Monetary Theory (MMT) idea – or at least the idea shared by some supporters of MMT online – that imports are only ever a benefit and MMT is a viable policy for all nations are badly mistaken ideas.

Now MMT would work for the US, Western Europe, Australia, Japan, South Korea or Taiwan, but not for much of the Third World.

That is, MMT-style policies are best suited for advanced capitalist nations, not necessarily for Third World countries, because most of them face severe balance of payments constraints. Increasing aggregate demand would, for many Third World nations, simply cause a balance of payments crisis, as imports surged. Moreover, a huge stream of imports from the developed world tend to cripple the development of a domestic manufacturing sector in developing world nations, just as in the 19th century our Western civilisation smashed up so much of the Third World by free trade and the de-industrialisation caused by pushing our manufacturing exports on them (Bairoch 1993: 88–89). What is needed for much of the Third World is heterodox development economics, not MMT.

And, unfortunately, MMT has its limits even in the developed world. Imports aren’t always a good thing. Domestic production matters a lot. Self-sufficiency is a good thing in many commodities, e.g., food, agricultural and primary industries. Energy independence matters a lot.

Exports matter a lot even for some developed countries, because exports bring in foreign exchange if you can’t attract foreign exchange via the capital account (that is, via people bringing in foreign exchange to buy your domestic financial and real assets).

Finally, manufacturing matters – a lot. You can’t be a really great power and maintain great wealth and an advanced modern economy without manufacturing.

The US – despite what some people think – needs to remain a manufacturing colossus to remain a great power, and to be politically independent. Self-sufficiency in many commodities and a huge manufacturing sector translates into national power. You need national power to exist in a hostile world, to make credible trade deals, and to make sure you are not the victim of aggressive, bullying policies by other national powers.

Otherwise, any large enough trading power can start a trade war and cripple you by cutting off imports.

If you think imports are only a benefit, look at the devastating de-industrialisation of large parts of the Western world, e.g., in the US, look at the hollowed-out inner cities, devastated crime-ridden communities, the de-skilled, long term unemployed workers, and the collapse of all the related industries that rely on manufacturing.

BIBLIOGRAPHY
Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Bill Mitchell on how “Democracy in Europe requires Eurozone Breakup”

Bill Mitchell has written a great post here about the Eurozone’s threat to democracy:

Bill Mitchell, “Democracy in Europe requires Eurozone Breakup” Billy Blog, January 6, 2016.

It is a pity that more professional Post Keynesian economists do not take this view, for it is so obviously true.

Post Keynesian Economics: A Bibliography of Recent Introductory and Advanced Books (Updated)

Books on Post Keynesian economics and Modern Monetary Theory (MMT) appear every year, but over the past 9 years or so – especially after the financial crisis of 2008 – there seems to have been an embarrassment of riches in that many very good introductory and advanced books have appeared.

I update below my earlier list of these recent books:

Introductory Studies
Davidson, Paul. 2009. The Keynes Solution: The Path to Global Economic Prosperity (1st edn). Palgrave Macmillan, New York and Basingstoke.

Lavoie, Marc. 2009. Introduction to Post-Keynesian Economics (2nd rev. edn.). Palgrave Macmillan, Basingstoke, UK.

Skidelsky, R. J. A. 2010. Keynes: The Return of the Master (rev. and updated edn.). Penguin, London.

King, J. E. 2012. The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham.
This is the second and updated edition of this work (1st edn. King 2003) that gives excellent short essays and overviews of all major subjects in Post Keynesian economics. This is a splendid first port of call for any research, especially for the beginner.

Wray, L. Randall. 2012. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Palgrave Macmillan, New York.

King, John E. 2015. Advanced Introduction to Post Keynesian Economics. Edward Elgar, Cheltenham.
An advanced introduction to Post Keynesian economics by John E. King, whose work is always outstanding. Publisher details and the contents can be seen here. In particular, Chapter 8 is a discussion of the global financial crises of 2008 as interpreted in Post Keynesian theory.

Advanced and Specialist Literature
Hayes, Mark. 2006. The Economics of Keynes: A New Guide to The General Theory. Edward Elgar, Cheltenham.

Tily, Geoff. 2007. Keynes Betrayed: Keynes’s General Theory, The Rate of Interest and Keynesian Economics. Palgrave Macmillan, New York.

Godley, Wynne and Marc Lavoie. 2007. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave Macmillan, New York, N.Y.

Mitchell, William and Joan Muysken. 2008. Full Employment Abandoned: Shifting Sands and Policy Failures. Edward Elgar, Cheltenham.

Davidson, Paul. 2009. John Maynard Keynes (rev. edn.). Palgrave Macmillan, Basingstoke.

Hein, Eckhard and Engelbert Stockhammer (eds.). 2011. A Modern Guide to Keynesian Macroeconomics and Economic Policies. Edward Elgar, Cheltenham.
A recent collection of essays on many different subjects.

Keen, Steve. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn.). Zed Books, London and New York.
This is the revised and updated version of Keen’s earlier work (Keen 2001).

Davidson, Paul. 2011. Post Keynesian Macroeconomic Theory: Foundation for Successful Economic Policies for the Twenty-First Century (2nd edn). Edward Elgar Publishing, Cheltenham.

Harcourt, G. C. and Peter Kriesler (eds.). 2013. The Oxford Handbook of Post-Keynesian Economics. Volume 1: Theory and Origins. Oxford University Press, New York.

Harcourt, G. C. and Peter Kriesler (eds.). 2013. The Oxford Handbook of Post-Keynesian Economics. Volume 2: Critiques and Methodology. Oxford University Press, New York.
A two volume collection of essays and advanced overviews of many different issues in Post Keynesian economics.

Lee, Frederic S. and Marc Lavoie (eds.). 2013. In Defense of post-Keynesian and Heterodox Economics: Responses to their Critics. Routledge, London.

Jespersen, Jesper and Mogens Ove Madsen (eds.). 2013. Teaching Post Keynesian Economics. Edward Elgar, Cheltenham, UK.
A collection of papers by leading Post Keynesian economists.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.
This is the newly updated and expanded version of Lavoie’s earlier work (Lavoie 1992). It runs to 680 pages, and is possibly the best and most authoritative work available.

Davidson, Paul. 2015. Post Keynesian Theory and Policy: A Realistic Analysis of the Market Oriented Capitalist Economy. Edward Elgar Publishing, Cheltenham, UK.

Mitchell, Bill and L. Randall Wray. Modern Monetary Theory and Practice (forthcoming, 2015).
This textbook on MMT is forthcoming. There is a table of contents here.

Further Reading
“A Bibliography on the History of Post Keynesian Economics (updated),” September 6, 2014.

“Post Keynesian Textbooks,” July 5, 2011.

“Bibliography on Post Keynesian Economics,” July 6, 2011.

“Bibliography on Post Keynesian Methodology,” September 16, 2013.

“Bibliography on Keynes’s Theory of Probability (Updated),” July 6, 2014.

“Bibliography on Uncertainty in Post Keynesian Economics (Updated),” May 21, 2014.

BIBLIOGRAPHY
King, J. E. (ed.). 2003. The Elgar Companion to Post Keynesian Economics. Edward Elgar, Cheltenham, UK and Northhampton, MA.

Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences. Zed Books, New York and London.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Bill Mitchell on Reframing the Progressive Agenda

Bill Mitchell speaks here on MMT as part of reframing the progressive agenda, presented in London on August 27, 2015.

Marshall Auerback Interviews Bill Mitchell on Modern Monetary Theory

A very nice interview here with Professor Bill Mitchell by Marshall Auerback on Modern Monetary Theory (MMT), which was done at an Institute for New Economic Thinking (iNET) conference in April 2014 in Toronto, Canada. More details here.

Robert Murphy at Sea on MMT

The Austrian economist Robert Murphy was recently interviewed on MMT:

“Tom Woods Talks MMT With Me,” Free Advice, 14 November, 2013. (You can access interview from this post).

Like most of his other efforts, it ends in disaster.

Murphy tells us that he understands the point of MMTers that the government is not revenue constrained, yet his major attempt to refute MMT is an analogy (from 14.05) where he just assumes that the government is like a private household. The analogy also bizarrely assumes that government deficit spending is not just immoral but criminal, in a totally absurd example of begging the question by assuming the truth of libertarian ethics.

Murphy is also committed to the flawed and unrealistic Austrian theory of price inflation. He seems oblivious of any of the empirical evidence on administered prices and the way that demand drives private sector output and employment.

Murphy is also guilty of astonishing intellectual inconsistency. At 22.43 onwards, Murphy’s explanation of recessions and idle resources invokes the Austrian business cycle theory (ABCT) that he himself says is grossly flawed by its reliance on the Wicksellian natural rate of interest (see Murphy 2003). But both the arguments of Murphy’s PhD and this paper are conveniently forgotten as he preaches to the choir and invokes the ABCT – and blames the lowering of the rate of interest below its natural rate – as the explanation of recessions.

Here is a man who tells us that he agrees with John Maynard Keynes that interest rates are a monetary phenomenon, but then in this interview throws that to the wind and requires that the interest rate is a real phenomenon caused by loanable funds and the real forces of productivity and thrift, despite the fact that his other published writings logically require a rejection of both ideas.

Further evidence of Murphy’s hapless inability to understand MMT – or even Keynesianism – is Murphy’s implied belief (from 24.58) that he thinks that MMTers or Keynesians wish to stop or abolish all frictional or seasonal unemployment. That is just rubbish.

One can note that the interviewer – one Tom Woods – is even more ignorant and incapable of understanding MMT or the theories underlying it.

BIBLIOGRAPHY
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest. PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.” http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Bill Mitchell on the Need for Full Employment

A nice video here of Professor Bill Mitchell (an Australian Modern Monetary Theory economist) of Billyblog discussing the arguments for full employment focusing on the issue of discrimination, part of a University of Western Sydney Open Forum, held on January 16, 2012.

Also, there is a good post over at his blog on the anti-democratic nature of neoliberalism.

Randall Wray on the Basics of MMT

L. Randall Wray is interviewed here on the basics of Modern Monetary Theory (MMT) in terms of its theory of the origins of money and the state.




N.B. There should be a Part 2 of this interview, but I am unable to find it.

Some of my posts on MMT and the history of money are below:

“The History of Modern Monetary Theory,” January 3, 2012.

“The Origin of Money and Coinage in Western Civilisation: The Case of Ancient Greece,” April 5, 2013.

“Randall Wray on MMT and the US Economic Crisis,” May 24, 2012.

Miscellaneous Links

Some recent links of interest:

(1) Steve Keen, “The Euro as the SDR of Europe?,” Debtdeflation.com, July 26th, 2012.
A nice analysis form Steve Keen on why the Eurozone is such a disaster. Keen makes the point the point that economists “as widely apart ideologically as Wynne Godley and Milton Friedman observed long before the Euro began that it would fail (a) because it imagined that a market economy would reach a harmonious equilibrium on its own without government intervention—which Godley correctly characterized as a deluded neoclassical fantasy; and (b) because it pushed together widely disparate nations which Friedman noted were utterly unsuited to a currency union.

(2) Thomas Palley, “More on the Spurious Victory Claims of MMT,” Thomaspalley.com, July 25th, 2012.
Thomas Palley criticises MMT with reference to the Eurozone crisis (and is also reprinted over at the Naked Keynesianism blog). Palley charges that “MMT lacks a convincing theory of interest rates, over-simplifies the economy by assuming an L-shaped supply schedule that ignores the effects of sectoral bottlenecks and imbalances, lacks an adequate theory of inflation, and ignores expectations and exchange rates,” which seems a bit unfair to me, given that MMT take ups previous Post Keynesian theories of both interest rates and inflation. L. Randall Wray now has a good response to Palley here.

(3) Paul Davidson, “Is Economics a Science? Should Economics Be Rigorous?,” Real World Economic Review 59.
An article from Paul Davidson on the nature of economics and methodology.

(4) Ann Pettifor Interview on the Eurozone Crisis and Integration

Some Serious Criticism of MMT

Normally, criticism of Modern Monetary Theory (MMT) comes from libertarians, and is laughably ignorant and incompetent criticism at that.

But now some thoughtful criticism can be found here at the Naked Keynesianism blog:

Sergio Cesaratto, “The Spurious Victory of MMT,” Naked Keynesianism, July 2, 2012.

In short, MMT would be fine for

(1) the US,
(2) those nations with strong trade surpluses (say, Germany and Japan),
(3) those nations that seem to run near perpetual current account deficits but attract a lot of foreign capital (say, Australia), and
(4) even the Eurozone, if it were suitably reformed with a union-wide fiscal policy, would be able to achieve full employment via MMT-style policies.

But those nations, especially developing nations, that face real constraints on their current account deficits would perhaps find it difficult to maintain full employment via MMT, if balance of payments crises ensued in response to surging imports.

All this underlines the need for reform of the international payments system. It’s time to give developing countries the support from the IMF and World Bank (suitably reformed) that they need for infrastructure and industrial development to achieve some degree of export balance and internal wealth, to make MMT work.

To be fair, I think Bill Mitchell has tried to address some of these criticisms here:

“… a nation might have a food supply problem just because of location. Then they have to import food. For example, in Kazakhstan where I am working at the moment, they face really significant problems in winter getting fresh vegetables and fruits. Many of these nations also have very little that the World wants by way of their exports. The fact that such a country’s national government is sovereign in its own currency and can spent how ever much it likes in that currency will not solve the problem – there is not enough goods and services (in this case) food for the sovereign government to purchase.

In those situations, a country requires foreign goods and they need to export to get hold of foreign currency or receive development assistance from the rest of the World. In the latter case, I see a fundamental change is required in the role of the IMF (more or less back to what it was intended to do in the beginning). Where are country is facing continual current acccount and currency issues as a result of the need to import essential goods and services, the IMF might usefully act to maintain currency stability for that country. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.

They also never really say anything about private imports of luxury cars (so-called positional goods) into developing countries. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.”
Bill Mitchell, “Current Accounts and Currencies,” Billy Blog, October 25, 2009.

There is serious debate to be had here, not because of any hostility to MMT (indeed I personally regard MMT with sympathy as a more radical form of Post Keynesianism), but in the spirit of constructive criticism.

Robert Murphy Mangles MMT

Robert P. Murphy has a new article here attacking people he calls “Greenbackers” and then MMT from an Austrian perspective:

Robert P. Murphy, “The Follies of the Modern Greenbacker Movement,” The American Conservative, June 27, 2012.

The trouble with his article is that Murphy touts it on his blog as some kind of serious critique of MMT (“I ask for a comeuppance by the MMTers in this new piece at The American Conservative,” he says). In fact, the article only really gets to MMT in the last few paragraphs, and does not actually seriously engage with it.

Murphy’s largely anonymous targets appear to be non academic writers and people who advocate “debt free fiat money” – not even academic proponents of MMT.

From a quick search, Murphy’s “Greenbackers” seem to be the following:

(1) Ellen Brown of Webofdebt.com (indeed Murphy refers to her specifically in his post).

(2) Stephen Zarlenga of the American Monetary Institute (AMI), and author of the The Lost Science of Money.

(3) other supporters of both Ellen Brown and Stephen Zarlenga’s theories.

I am not sure whether Michael Rowbotham and the now largely defunct Social Credit movement might be included in Murphy’s list of “Greenbackers,” but what should be perfectly clear is that his targets are not, as far as I am aware, self-identified supporters of MMT at all.

Let us now see below how virtually the whole article is a waste of time and essentially mangles what MMTers believe.

Take some of Murphy’s major assertions:

“It’s here where the modern Greenbackers go awry. Recognizing the absurdity of allowing bankers to issue new money, then lend it to the government (taxpayers) at interest, the Greenbackers want to cut out the middleman. They want the government to reclaim control of the printing press—which of course need not even “print” money in this age of electronic financial transactions—and to issue new money whenever its spending exceeds its revenue.”

Whatever the “Greenbackers” like Ellen Brown believe is irrelevant to MMT, for such people are not even MMTers at all. In fact, in an MMT system, bonds would still be issued to the private sector, to control interest rates, though there might be some direct purchases by a central bank from the Treasury.

And the system the MMTers propose really isn’t that new: under the ‘tap system’ of issuing government bonds after WWII, a number of Western countries (like Australia) for many years actually had their central banks purchase government bonds directly when such bonds were not all bought by private bondholders. The system is explained by Bill Mitchell of Billyblog:

“[around 1981] the Australian Office of Financial Management was set up as a special part of the Federal Treasury to management federal debt. Previously, bond issues were made using the “tap system”, whereby the government would announce some volume of debt it wanted to issue at a particular rate and then sell whatever was demanded at that yield. Occasionally, given other rates of return in the financial markets the issue would not be fully subscribed – meaning some of the Government’s net spending would be covered in an accounting sense by central bank buying treasury bills (government lending to itself!). The neo-liberals hated this system and regarded it providing no fiscal discipline on government. They knew that by linking deficits $-for-$ with private debt they could more easily mount the debt hysteria and maximize their pressure on government to cut deficits and withdraw from the market.”
http://bilbo.economicoutlook.net/blog/?p=3416

Murphy then resorts to scaremongering nonsense:

“The fundamental danger is that an unchecked power to issue new money might prove too tempting for political officials, who would seek to curry favor with the public through various spending programs that were “paid for” through a general rise in prices.”

Again, whatever “Greenbackers” think is not what MMTers think.

Australia had a type of system not far from MMT in its “tap system” of funding deficit spending, and yet contrary to Murphy’s rhetoric the system wasn’t destroyed by evil “political officials” causing some hyperinflationary disaster with their profligate spending: Australia’s inflation rate from 1940 to 1981 was in line with other countries where bonds were always issued to the private sector.

Murphy next moves to ideas that have never been held in MMT:

“In the limit, one could imagine the Greenbacker program not only abolishing government deficits but also all forms of taxation itself. Every year, the government could decide how much it wanted to spend, and then simply “print” that much new money. The IRS could be shut down, and no one would ever need to fill out a tax form again. Besides the savings in explicit tax payments, individuals and businesses would be spared the expense of hiring CPAs. Furthermore, removal of the tax burden would instill a massive dose of “supply-side” incentives for more work and output.

At first blush this sounds like a wonderful proposal.”

Now I have to say I am not familiar enough with the works of Ellen Brown or Stephen Zarlenga to say whether they really think taxes should be completely abolished, but no MMTer, to my knowledge, has ever proposed abolishing taxation, since, as in Keynesianism, MMT sees taxation as a fundamental way to manage aggregate demand. Hence in an MMT system taxes would never be completely abolished. And, as I have said above, bonds would still be issued to the private sector to control interest rates.

Murphy then proceeds from the imagined scenario above to a “debunking” of the “Greenbacker program” by invoking the horrors of hyperinflation and currency collapse.

But it is at this point that Murphy’s article becomes the hogwash that I suspected it would be before reading it: his implied claim to have penned some serious critique of MMT all falls apart when he says:

“To be sure, today there is a sophisticated school of thought—called Modern Monetary Theory or MMT—that is aware of these difficulties. For precisely the reasons I have given, MMTers want to retain the government’s power to tax, in order to “extinguish” money from the system when price inflation is unacceptably high.”

In other words, all Murphy’s objections do not apply to MMT, for MMT never in the first place proposed abolishing taxes or completely “monetizing deficits”*.

Finally, MMT says that, even though deficits are not “financially” constrained, they face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, the unemployment level, and external balance.

In short, Murphy’s article does not need to taken seriously: he does not even engage with anything but a straw man version of MMT.


Note
* I know MMTers object to the phrase “monetising a deficit,” so I will place quotations marks around the phrase.

Randall Wray on MMT and the US Economic Crisis

Randall Wray gives an enlightening talk here called “Money and the Public Purpose: The Modern Monetary Theory Approach” (Capitalist Mode of Power: Past, Present, Future Conference, October 20, 2011, York University, Toronto), on MMT and the current economic crisis in America.

Excellent analysis and explanation of MMT. Wray speaks first, but there is a second speaker after him (so Wray’s talk is only the first half of this video).

Pavalina Tcherneva on MMT

Another interesting video here: Pavalina Tcherneva (Assistant Professor of Economics, Franklin and Marshall College) is interviewed on “At Issue with Ben Merens” on economic issues and MMT.

Pavlina Tcherneva on an MMT Employment Program

Pavlina Tcherneva speaks in this interview about an MMT solution to unemployment: a direct employment program. Some good remarks on the inadequacy of the old IS-LM models and neoclassical synthesis Keynesianism.

The History of Modern Monetary Theory

My last post got a bit hijacked by my attempt to write a digression on the origin of Modern Monetary Theory (MMT), which has also been called Chartalism, neo-Chartalism, the Kansas City approach, and soft currency economics. It strikes me that the subject deserves a post in its own right, so I will attempt one here (bear in mind there is some repetition).

Chartalism in the historical sense should be distinguished from Modern Monetary Theory. Chartalism was a theory of money developed by Georg Friedrich Knapp (1905; English translation 1924), which he called the “state theory of money.” This was taken up by Keynes in his Treatise on Money (1930). It appears to me that economists in the late 20th century associated with Post Keynesianism revived Chartalism as a theory, with the work of Alfred Mitchell-Innes (1913 and 1914) on credit money, including Charles A. E. Goodhart (although, strictly speaking, Goodhart does not regard himself as a Post Keynesian; see Goodhart 2005: 817).

Chartalism has been one source of MMT, and an early proponent L. Randall Wray appears to have used the term to describe the macrotheory he was developing. Randall Wray states:

“... somehow [sc. Chartalism] ... got the name Modern Money Theory. We think the first time those exact words were used might have been in a comment to Bill’s blog in 2007; if anyone can find that comment or a previous use, please send it along. It also looks like Bill used the term “modern monetary theory” in an academic paper in 2008.”
L. Randall Wray, “MMP Blog #30: What is Modern Money Theory?,” January 1, 2012.

The broader sources of Modern Monetary Theory are as follows:

(1) G. Frederick Knapp’s work (1905; 1973 [1924]);
(2) Mitchell Innes’s work (1913; 1914).
(3) Keynes;
(4) Abba Lerner’s functional finance model (1943; see also Lerner 1944; 1947; 1951);
(5) Post Keynesianism (with influence from both Keynes and Michał Kalecki), and
(6) Hyman Minsky’s work (e.g., the employer of last resort idea and the financial instability hypothesis).

Economists who stand out as inventors of Modern Monetary Theory include L. Randall Wray (1998), William F. “Bill” Mitchell, and Warren Mosler.

L. Randall Wray explains the origin of MMT:

“[sc. the origin of MMT] ... goes back to PKT (Post Keynesian Thought) in the early 1990s—the first internet discussion group I ever heard of. It started off with all the stars of heterodox economics—Paul Davidson, Herb Gintis, Michael Perelman, Ed Nell; even Hyman Minsky contributed a post or two. And then there was ... Bill Mitchell ... He had little tolerance for Keynes but otherwise I found myself agreeing with him more often than with anyone else. On Kalecki, on Marx, on fiscal policy, and especially against the Austrians that were slowly but surely killing PKT.

And one other guy stood out—a hedge fund manager named Warren Mosler who was continually pushing two things. First there was something he called soft currency economics. It sounded to me like good old Keynesian economics from the Treatise on Money, which followed Knapp’s state theory of money. ....

What Warren also added was a much deeper understanding of bank reserves and treasury bonds. I came at this from the PK endogenous money, horizontal reserves view of Basil Moore. There’s nothing seriously wrong with that, but it never understood why a sovereign government would sell bonds. Warren explained bond sales as a reserve drain, and lightbulbs went off. Exactly right: government sells bonds to hit the overnight interest rate target. I think it was Mat Forstater who brought the final piece of the puzzle: Lerner’s functional finance approach.”

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.

By 1995, Warren Mosler called his theory “soft currency economics.” I quote Warren Mosler:

“The origin of MMT is ‘Soft Currency Economics’ .... I had never read or even heard of Lerner, Knapp, [Innes], Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations ... .”
http://mmtwiki.org/wiki/History_of_MMT

Mosler, as I understand it, has a connection with Paul Davidson (see also this interview for Mosler’s passing remarks about Charles Goodhart and the LSE). One of Mosler’s early publications was published in the Journal of Post Keynesian Economics (Mosler 1997-1998: 167-182).

Chartalism clearly was an important influence on other Modern Monetary Theory economists, but MMT, as it now exists, goes well beyond the original theories of Knapp or Mitchell-Innes.

The leading proponents of MMT hold that it is now an independent macroeconomic theory (by contrast, the Cambridge Post Keynesian Mark Hayes regards MMT as a sub-branch of Post Keynesianism). At the very least, Post Keynesianism can be regarded as the important macro-theory that stands behind MMT as one of its intellectual fathers, so to speak.

Perhaps it is even possible to think of MMT economists as a new generation of Post Keynesians—that is, as a younger generation that has developed Post Keynesian theory in new ways.

Appendix
I will end this post with a list of advocates and supporters of MMT (mainly academics):

Warren Mosler
Randall Wray
Bill Mitchell
Pavlina Tcherneva
Stephanie A. Kelton (formerly Stephanie Bell)
Mat Forstater
Ed Nell
Scott Fullwiler
Mike Norman

BIBLIOGRAPHY

Bell, S. 2000. “Do Taxes and Bonds Finance Government Spending?,” Journal of Economic Issues 34.3: 603-620.

Goodhart, C. A. E. 2005. “What is the Essence of Money?” (Reviewing: Geoffrey Ingham, The Nature of Money, Polity, Cambridge, 2004), Cambridge Journal of Economics 29: 817–825.

Keynes, J. M. 1930. A Treatise on Money, Macmillan, London.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1918. Staatliche Theorie des Geldes (2nd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1921. Staatliche Theorie des Geldes (3rd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1944. The Economics of Control, New York, Macmillan.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Lerner, A. P. 1951. The Economics of Employment, New York, McGraw Hill.

Mitchell, Bill, 2011. “MMT is Biased Towards Anti-Crony,” December 28.
http://bilbo.economicoutlook.net/blog/?p=17528#more-17528

Mitchell, W. and J. Muysken. 2008. Full Employment Abandoned: Shifting Sands and Policy Failures, Edward Elgar, Cheltenham.

Mitchell-Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell-Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Mosler, W. 1995. “Soft Currency Economics,”
http://www.mosler.org/docs/docs/soft0004.htm

Mosler, W. 1997-1998. “Full Employment and Price Stability,” Journal of Post Keynesian Economics 20.2: 167-182.

Mosler, W. 2010. The Seven Deadly Innocent Frauds of Economic Policy, Valance Co., St Croix, U.S.V.I.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.
http://neweconomicperspectives.blogspot.com/2011/12/mmt-doubly-retrospective-analysis.html

Bill Mitchell on MMT

Professor Bill Mitchell has been interviewed by the Harvard International Review in an online interview here:

Winston Gee, “Debt, Deficits, and Modern Monetary Theory, An Interview with Bill Mitchell,” October 16, 2011.

Required reading!