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.