Saturday, December 15, 2012

Robert Murphy on MMT: An Unimpressive Critique

Robert Murphy supposedly “exposes the fallacious reasoning, slight-of-hand [sic] semantics, tautologies, and other tricks employed” by MMT here:
I am rather astonished to say it, but I was pleasantly surprised by this interview.

Murphy’s understanding of MMT has improved; some points are constructive (e.g., on the sustainability of the trade deficit).

Nevertheless, on the whole, the interview does not really refute MMT. In fact, we hear again and again that MMT is “technically correct”! Then when Murphy goes on to dispute the usefulness or validity of MMT analysis (despite many things being “technically true”) his counterarguments are rather feeble.

The interview mostly focuses on Warren Mosler and his book Seven Deadly Innocent Frauds of Economic Policy. Murphy puts the emphasis on Warren Mosler as the leading figure of MMT. While one cannot deny that Warren Mosler is a prominent exponent of MMT (and I do not wish to downplay his role), nevertheless, if we were to consider MMT as a macroeconomic school, Murphy fails rather spectacularly to notice that MMT has some other important academic economists as its intellectual leaders: the outstanding Bill Mitchell and L. Randall Wray.

Other problems with this interview:
(1) At one point the interviewer seems to think that MMT advocates spending without limit or without taxation. That is obviously false.

(2) I see Murphy revisits his “government-debt-will-rob-our-children” debate. On this issue, Murphy is unconvincing. His comments on how retired people would sell their bonds in the future to people with money they have saved does not refute the idea that bond repayment in the future simply redistributes wealth.

First, curiously, Murphy ignores inherited wealth that people hold and do not wish to spend on consumption (there can be no foregone wealth involved in saving if a person never wanted to spend his/her inherited wealth on consumer goods). Secondly, his argument could be used against all private sector saving! We could show how any process by which someone chooses to save for retirement and sells private sector financial assets to other people in the future involves making some people poorer by their acts of saving. We could actually show how any private sector financial assets to be sold in the future must rob some people in some sense!

(3) On the issue of government deficits adding to savings, here Murphy says it is technically true. Then he resorts to the “government-taxation-is-fraud!” argument (falling back on ethical objections rather than strict economic or national accounting objections), an issue that is dependent on dubious ethical theories and, anyway, begs the question, for Murphy never explains what moral theory he uses. His attempt to dispute the MMT accounting view of saving by using Google as an example is utterly unconvincing, for Google is nothing like a government. The whole point is precisely that the government is a unique entity, unlike any private sector agent.

(4) On social security, Murphy’s contention is that the program is insolvent under the standard rules of private sector accounting. That is vacuous, precisely because the standard rules of private sector accounting do not apply to government programs like this (despite the fiction created in the 1930s that they do). Furthermore, government obligations under social security are not due all at the same time, but over many decades.

On the issue of demographic change, I think we have increasing evidence that in the course of this century we will see some rather spectacular productivity growth, owing to automation, robotics and artificial intelligence. The imbalance between retired people and workers will not be a problem if huge productivity and output growth happens. I suspect that even if merely moderate productivity and output growth occur, it still will not be a problem.

(5) On the trade deficit, Murphy in essence agrees with Warren Mosler! There is no refutation of MMT here.

(6) On the issue that investment adds to savings, this is not even a new argument. It is essentially standard Keynesianism, and it is true. I do not see any real refutation of it by Murphy. Investment does bring forth savings.

Furthermore, with fractional reserve banking and negotiable credit instruments it is obvious that any economy not at full employment (that is, with idle resources) can engage in investment without prior monetary saving. Loanable funds theory is a misleading model of the modern financial system anyway.

(7) At the end, I am surprised how Murphy seems to not really even understand the core of MMT. As far as I can see, MMT has always said that there are real constraints to government spending, but that the conventional financial constraints (deficits are funded by borrowing from the private sector) are a myth.


  1. Oh, this is the classic "Oh, we knew all this before... blablabla...". Watch Murphy carefully in the coming weeks and months. I'll bet that the tone of his articles will sound a little different than they did before he engaged, however superficially, with MMT. This happens to all of them. It hits their unconscious, I think, rather than their conscious mind. Still effective though.

  2. He says government debt impoverishes future generations when the government taxes them to pay interest on the bonds and when the...

    Hang on. Taxes them to pay interest on the bonds?

  3. The general MMT argument is that we have enough real restrictions on the economy to deal with as it is without introducing unnecessary and artificial nominal ones.

    MMT's central message is simple - Get Real.

  4. This Robert Murphy,i learned from reading this very interesting blog,seem to have a habit to get things wrong on a regulary basis.Is he a big name in that Austrian school cliqué?If so it´s really sad.

    1. Getting things wrong on a regular basis seems to be the primary qualification you need if you want to call yourself an economist.

    2. Anon:

      I call foul! Murphy is one of the least dogmatic, most open-minded of the Austrians out there. He defends Sraffa's side in the Hayek/Sraffa kerfuffle, for instance. Keep on him, and he will eventually admit you have a point.

  5. Lord Keynes,

    What are the differences between Neo-Chartalism and Modern Circuit Theory? Because I have been trying to find a sensible and straight-forward answer to this question for months, yet no-one seems forthcoming with anything remotely resembling an answer.

    1. Probably because the labels are arbitrary. What is 'neo-chartalism' for example.

      There is less a rigid classification and more a range of ideas afiact.

    2. mojo.rhythm,

      (1) Monetary Circuit Theory (proponents of it are called "circuitists") was developed by various Continental European economists. It is a non-neoclassical, heterodox school (a related heterodox movement is the "French Regulation school"). It originated in post-WWII France, with the work of Jacques Le Bourva, Bernard Schmitt, Alain Parguez (who is affiliated more explicitly with Post Keyensianism), and Frederic Poulon. It influences are the banking school, Marxism, Keynes, Schumpeter, Wicksell, and Robertson.

      It is fundamentally a development of the "monetary theory of production" idea (already in Keynes).

      Monetary Circuit Theory also spread to Belgium, Italy and Switzerland.

      Some Italian circuitists: Augusto Graziani, Riccardo Bellofiore, Marcello Messori, Riccardo Realfonzo, Biagio Bossone, Emiliano Brancaccio, Giuseppe Fontana, Guglielmo Forges Davanzati, and Alberto Zazzaro.

      Some other circuitists: Cartelier, De Vroey, and Cencini.

      I believe Augusto Graziani is a leading figure as he was first to publish Monetary Circuit Theory idea in English. The English speaking world first really came into contact with Circuit Theory in the early 1990s.

      The central idea is that money is endogenous, and their simplest models model an economy without a government sector.

      I think Lavoie (in Canada) is sometimes regarded as Monetary Circuit Theorist.

      See Steve Keen, “Keynes's 'Revolving fund of finance' and transactions in the Circuit”, in L. Randall Wray and Mathew Forstater (eds.), Keynes and Macroeconomics After 70 Years: Critical Assessments of the General Theory. Edward Elgar, Cheltenham, UK and Northampton, MA, 2008.

      In this chapter Keen tries to correct what he sees as the errors of Monetary Circuit Theory and reconciles their theory with Keynes's theory of investment (another charge Keen makes is that circuitists confuse stocks with flows).


      The Elgar Companion to Post Keynesian Economics 2003, pp. 60-65.

      J. E. King, A History of Post Keynesian Economics Since 1936, p. 152ff.

      Philip Arestis and Malcolm C. Sawyer,
      Handbook of Alternative Monetary Economics, pp. 87-120.

      (2) Neo-Chartalism is really just Modern Monetary Theory (MMT).

      MMT emerged from "broad tent" Post Keynesianism, but in the English-speaking world.

      MMT has broader influences:

    3. MMT & MCT are indeed reconcilable.

      Here is a link to a Joint MMT-MCT Seminar held at the Fields Institute featuring Stephanie Kelton, Scott Fullwiler, Michael Hudson, Steve Keen, Matheus Grasselli and Nathan Cedric Tankus

      Also is a lecture by Keen at the UMKC Post Keynesian conference in 2012 "Reconciling MMT and MCT"

  6. LK, why do you consider MMT a more radical version of Post Keynesianism and not just simply Post Keynesian?

    Also, what problems do you see in MMT? I know that you mostly agree with Casaratto here:

    But would you go a step further and be as critical of MMT as other Post Keynesians, such as this blogger:

    1. "LK, why do you consider MMT a more radical version of Post Keynesianism and not just simply Post Keynesian? "

      MMT has developed in new ways beyond traditional Post Keynesianism. Perhaps it even concentrates too much on the US, puts even greater emphasis on fiscal policy and neglects balance of payments constraints that other nations face.

      Ramanan over at "The Case For Concerted Action" seems to be pointing to precisely these balance of payments problems and capital flight issues too.
      I think that is perfectly reasonable criticism of MMT.

      To be fair, Bill Mitchell has some responses to these criticisms:

      "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 account 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. ...."

      So his responses is: these nations need support from the IMF to run external deficits if they can't attract the necessary capital account surpluses.

      For developing nations, if this involved public investment in the basic infrastructure and social services needed as the foundation of any advanced economy, no doubt that would be a good thing.

  7. Lk,

    I have another question about MMT.

    Is it an MMT position to be whole heartedly against all tax increases during downturns? This comment is what brought about my question:

    But if this truly was the MMT position, then it is in conflict with Keynesian economics, especially when one introduces the paradox of thrift problem.

    1. There are many reasons to tax, but 'raising funds' isn't one of them.

      The MMT approach is essentially Lerner's Functional Finance approach.

      The paradox of thrift causes an excess of savings over investment that end up, in the first instance, stuck at the central bank. Fiscal policy runs an overdraft at the central bank and spends/lowers taxes sufficiently to maintain the circulation of funds and eliminate involuntary unemployment.

      That overdraft offsets the excess nominal savings endogenous money naturally produces.

    2. I am unaware of any MMTer who argues for anything but tax cuts in a recession.

      But Keynesians, by and large, also favour tax cuts in recessions.

      How does this conflict?

    3. LK,

      Did you read the comments over at Naked Keynesianism?

    4. Isaac,

      I did read it, but I don't quite see how it conflicts with basic Keynesian theory.

      Perhaps you can elaborate, please?

  8. For starters, I am not really talking about 'depression' period per se, but a downturn, which I assume Vernengo (V) and MMTers see a downturn to mean below full employment.

    V is basically implying that it is consistent for Keynesians to ask for tax increases on the rich and may provide benefits, while the MMTer is basically saying that is bad policy because 1) increasing taxes = lowering AD and 2) asking for better income distribution is a value statement.

    Dealing with point 2 is simple in that Keynesians already acknowledge that economics is not value free, Keynes directly responds to this by saying that economics is a moral science in which value judgment is necessary. To me though, this MMTer cuts himself short in that if he considers 'a better income distribution' a value statement not proven via economics, then I think the same can be said of the JG program he advocates.

    On point 1, generally speaking Keynesians agree with MMTers that in a downturn we must decrease taxes and/or increase spending. But this is generally speaking, and I think it is better said to claim to advocate tax cuts/increased spending if it increases AD. For example, if we look at the paradox of thrift, in which it states that high AS may be bad because it gives the incentive to hoard in a time when we need increased consumption because this increases AD. So maybe it isnt right in this case to lower the taxes of those who are going to save their income, ie the rich. This is also to say, if we tax cut these 'savers' then this is not going to increase AD, which defeats the whole purpose of the tax cut. So it really is not as simple as “lower taxes results in increased AD”.

    And this is V's point (though he uses a different example), there are cases where tax cuts during downturns does not increase AD. And V's example is even a 'Keynesian' point too, where he is concerned about income inequality leading to instability because Keynes had a similar position as this and was always skeptical of a high inequality rate in an economy. And if one is a regular reader at Naked Keynesianism, they should note that there are several posts that illustrate this skepticism of high inequality and makes the point that high inequality leads to instability. Thus, even in a downturn, it may prove to be beneficial to increase taxes on the rich.

  9. "nd 2) asking for better income distribution is a value statement."

    I'm not sure that you've understood the MMT position on taxation at all.

    There are lots of reason to tax, but funding isn't one of them.

    The distributional reasons for taxation are entirely a political issue.

    You can just leave the excess savings alone - increasing the feelings of security.

    You can reduce the ability to generate the savings in the first place - replace trickle down with 'bubble up', with Job Guarantee stopping the slide in the wage share. Stop financialisation profits.

    Or you can confiscate the excess savings after they have happened.

    None of that affects the aggregate demand maintenance function you use, because tax has nothing to do with funding.

    If tax cuts don't help AD, then that tax wasn't needed in the first place or your cut is badly targeted. So you can cut them some more.

    Or alternatively increase government spending - knowing that Job Guarantee will enhance the counter cyclical response for you.

    But all that is part of the political debate.

    Anybody who reads Bill Mitchell's blog would know that he is very aware indeed of income inequality and how fiscal policy is superior at sorting that out:

    "But within that antagonism for fiscal policy, it is clear that the redistributive characteristics of fiscal policy – which were designed to reduce inequalities – have been undermined and various policy changes have seen a new fiscal approach in favour of the rich. A total perversion of what should be happening."

  10. Even if I didn't have quibbles on what you stated (which I do), my essential point is the same: Keynesians may view increased taxes on the rich and how this affects AD differently than MMTers. Case in point is the comments on Naked Keynesianism where Vernengo is saying tax increases on the rich may provide benefits, while the MMTer is denying this and claiming this as bad policy.

  11. Tax increases on the rich remove money from the rich and destroy it.

    That's it.

    Whether you do that or not depends upon the view on how to solve the income and wealth inequality issues and whether you need to do that/not do that for political reasons.

    MMT is not denying that has a social distribution function. What it is saying is that has absolutely no connection with the ability of government to inject at the other end.

    You can create a Job Guarantee whether or not you tax the rich.
    You can build roads whether or not you tax the rich.
    You can raise low end personal allowance whether or not you tax the rich.

    MMT policy prescriptions tend to be pragmatic - designed to tag onto existing political structures without the least amount of change possible.

    So the view on 'tax the rich' is largely agnostic and the policy suggestions are mostly about getting the bottom nearer the top.

    And politically that is a easier, and more optimistic, sell - "We'll help you get wealthy - like they are".

    1. I would read Vernengo's comments to the MMT reply again because I do not think you get what he is saying. He understands the MMT position on state spending and funding, this is not the issue.

  12. Just watched a YouTube video of Peter Schiff explaining in wonderful detail the coming crisis. Years before the crisis exploded on us, Schiff gave a masterly demonstration of what was wrong and how it would come to haunt us. Yes, that Peter Schiff, the Austrian crackpot.

    On the other side of the argument, prominent exponent of MMT Mike Norman mocked and laughed at Schiff's eminently reasonable explanations. Almost the exact arguments that one would think MMT or an economic theory based on the real world would have made!


    Can anyone explain this bewildering state of affairs? it can't possibly be that the Austrian School simply has got a better understanding of credit and business cycles than MMT.

    How can Norman get it so wrong and Schiff get it so right?

    1. I guess Mr. Norman wasn't listening to Michael Hudson, who, in his 2006 Harper's article "The new road to serfdom: An illustrated guide to the coming real estate collapse" predicted the coming crash in precise chart form.

  13. Regarding your various Schiff interviews:

    Note how the interviewer says that an imminent recession was a "minority view." That is correct. Schiff was not alone in predicting recession and a coming crisis. A number of heterodox Keynesians also predicted the crisis:

    Schiff says the recession would last for years: he was wrong. It ended in 2009.

    As for Arthur Laffer (Schiff's opponent in the interview): he is a neoclassical supply sider, not a Keynesian. Laffer's silly predictions have nothing to do with contradict heterodox Keynesianism.

    December 2006
    Yes, Schiff was right that there was a housing bubble. However, that was clear to many economists not subscribing to the efficient markets hypothesis by 2006, even Marxists called it.

    As I have shown before a number of heterdox economists and Keynesians predicted the housing bubble and financial crisis. Dean Baker did so in 2002:

    August 2007
    Schiff again points to what was then a crashing housing bubble. But note how Schiff tells us that America can no longer afford to buy foreign goods (i.e., afford trade deficits). But that is absurd: the US still has no difficulty running trade deficits years later.

    next interview (undated)
    Schiff correctly warns people that stocks of financials might go lower, but nothing much else.

    December 2007
    Schiff calls for large government spending cuts. If that had been done it would have made the economy much weaker.

    Schiff correctly called a housing bubble and drew attention to excessive private debt. Apart from that, a lot of his Austrian analysis was, and remains, questionable. His underlying theories - the Austrian economics in general and the Austrian business cycle theory - remain false.