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Sandpit

November 22nd, 2011

A new sandpit for long side discussions, idees fixes and so on. I’m going to add MMT to nuclear power as a topic that should be confined to sandpits from now on. I’ve had my say on the subject, and the argument in the comment thread doesn’t seem to make anything any clearer.

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  1. jrbarch
    November 30th, 2011 at 07:59 | #1

    @Ernestine Gross
    Dear Ernestine,

    1) The references were for people interested in MMT – so you have read these and compared them to Adam’s points?

    2) Have already said sorry for not quoting you verbatim …

    3) I am not aware of any problem I have discriminating between monetary objects and theory?

    4) The charitable activities you suggest don’t strike at the root of the ‘human’ problem and I couldn’t see my logic getting involved.

    5) Smiley – are you smiling at my perceived stupidity?

    It took young fresh minds to get rid of the White Aus. Policy. When it became obvious …. similarly, when it becomes obvious that the door to the cage is open, and that little fiat bird can fly free. That is to say all of the constraints are in the real world.

    Let us leave it to time Ernestine and follow the arguements of history?

    Cheers …
    jrbarch

  2. Dan
    November 30th, 2011 at 09:03 | #2

    @BilB

    Re: those exports of bullets and bombs – MMT doesn’t need to come into it; they could take a leaf out of Chinese firing squads’ book and invoice the countries in question.

    If the countries are unable or unwilling to pay in cash, the occupying powers could take receipt of payment in oil or oil rights, or in the capacity of a permanent strategic presence in those countries.

    …wait.

  3. Adam (ak)
    December 1st, 2011 at 07:04 | #3

    @Ernestine Gross

    So it looks that so-called MMT has been put not only in the sandpit but flushed down the drain on this forum… I am willing to put my hand there again.

    If we are looking for logical inconsistencies, we do not need to look very far – but I interpret them in a different way, as an opportunity to learn something about the system rather than have an easy go at the opponent.

    I am convinced that the analytical approach leading to describing money as tokens is perfectly sound and yields valid and relevant results. (I am referring to “Modelling Money as Tokens” MGSM WP 2003-24 A. Furche, E. Gross, G. Wrightson [1])

    If we look at the following statements:

    “A Money Token is a representation of the contractual agreement that underlies any instance of money. It is built based on the formalisation of an elementary contract in Radner (1972), which is extended to represent a number of additional properties. An elementary contract, as defined by Radner, is a contract between two economic agents, made at time t, with regard to the supply of objects at a future time u. We call the economic agent, who is to supply the objects in the future, the Issuer (I), and the economic agent, who accepts the contract at time t, the Owner (O). The contract obliging I to deliver a set of objects at time u is uniquely represented as a Money Token, T, which cannot be altered or copied. This Money Token specifies that I will supply objects in exchange for T. That is, I will supply the objects upon receipt of the Money Token T. We note that a delivery contract represented by T does not need to specify the economic agent receiving the objects, while it does need to specify the economic agent obliged to supply the objects, namely the Issuer I.”

    and

    “Cash in today’s form is in most countries fiat money. That is, it does not represent a contractual obligation by the Issuer (usually a central bank) to provide any objects in return for cash, other than the same amount of the same form of cash. In the Token Model of Money, we model cash as a contract of exactly this form. ”

    we can ask why would anyone use a central bank/treasury liability which can only be redeemed by providing another central bank/treasury of the same king for anything.

    Fiat money is not a contract between the government and an individual to deliver any real goods. It is a recursive liability (it references itself – I can only get $10 for $10 from the government, nothing else). If one has to deliver something it is not the government. Government is not bound by any real contract when it spends except for the promise that it will enforce the currency as legal tender (how? David Graeber’s Debt: “The First 5,000 Years” [2] gives a few good examples) and that it will extinguish tax liabilities when the money is paid back.
    A contract would require consent. What is the contract between me and the government I give my consent when I accept a payment in cash? That I will get $10 for $10? This is an absurdity. The implicit contract between me and the government is that I accept that payment on the condition that someone else will accept my payment for an equivalent amount of goods and services or that the government will accept my payment to extinguish my tax liability.

    From the functional point of view fiat money is not “I Owe You” of the government. It is “Someone Has To Deliver You Goods If You Pay Him This” token. If we fail to observe this fundamental feature of any kind of government money this is an error in our analysis.

    For further discussion on this point I can only refer to David Graeber’s book [2] . We can obviously reject the facts he mentioned because they do not fit into our axiomatic system but ignoring the evidence will only make us ignorants.

    A MMT description of “money things” can be found in “Money in Finance” Levy Economics Institute of Bard College, Working Paper No. 656 , L. Randall Wray [3]

    As long as during the period of time an agent holds a monetary token the real value of the token (the amount of goods and services which can be bought doesn’t change), money can serve as a storage of value. If the inflation rate is moderate, money no longer can serve as a storage of value but it is still perfectly good as a unit of value (predictably changing in time if that time period is short) and a medium of exchange as long as it holds its value during the period of time required to buy the goods and services after receiving a revenue. If the inflation rate accelerates then further issues arise with estimating of the future nominal value of goods and services. That’s why accelerating inflation is not good for the economy. But this phenomenon has nothing to do with violating any contractual agreements made between the government and the citizens related to the money. The government has not made any binding promises in regards to the stability of prices of any particular type of goods or services. This is even impossible except for very special cases as only in the command system (a so-called communism) the government can set all the prices.

    Therefore I disagree that the following is an issue in regards to fiat money interpreted as contracts.

    “The idea that the determination of the ‘trustworthiness’ of economic agents is important and costly is reflected in the activities of individuals, business enterprises, and institutions concerned with ‘credit risk’, ‘debt rating‘, financial reporting, ‘country risk’ and, at times, liquidation and litigation.” [1]

    The government is trustworthy by definition in the narrow sense when it issues fiat money as fiat money is recursive as a liability.

    Going further, the life cycle of government issued liabilities (monetary tokens) is captured by the following statement [3]

    “Even government spending is financed by debt—in the case of a government that issues its own currency, spending always takes place through high-powered money issue. While it is not generally recognized, government spends by issuing debt and taxes by redeeming it—taxpayers pay their taxes by delivering back to government the debt issued when government spent. In other words, taxes cancel government’s debt—they do not really “finance” government spending, which is actually financed by issuing liabilities.”

    So this is the context in which the most controversial statement “taxes do not finance government spending” needs to be put into. It is not a “chicken or egg” problem. We are describing flow processes and we need to identify where the flow comes from, what (or who) determines its volume and where it is terminated.

    We can define bank money (deposits, cheques ) as tokens whose value is based on the reference to the value of fiat money (the obligation of the bank to pay money). Since the central bank guarantees the liquidity under normal circumstances bank money is as good as fiat money.

    We can also define government securities as tokens whose value is based on the reference to the value of fiat money.

    So far so good. I didn’t mention commodity money and I didn’t mention balance sheets as the environment in which the majority of these tokens exist. Monetary tokens can be described as a relation between 2 balance sheets in the database sense. One day I may write a blog post with an entity relationship diagram, linking the monetary tokens with the balance sheets stock-flow consistent approach proposed by W. Godley. In the systems based on commodity money the value of money is not based on the government enforcing money as legal tender and spending capabilities are constrained by sourcing the commodity (usually gold or silver).

    So what is the actual difference between what I want to say and what is in the paper [1] or has been said so far by the opponents of Functional Finance on this thread?

    The main difference – except for the redefinition of the main features of the fiat money monetary tokens – is that I reject the assumption that the sovereign government in the modern era is bound by anything else than real constraints and the voluntary constraints implied by the setup of the system (like fixed interest rates). A sovereign government can keep creating and using to purchase goods and services its very special IOUs as long as they serve their purpose. It is not bound by the trust that it will redeem its liabilities with other liabilities. (The same applies to riskless assets – bonds). It can always do that. It is bound by the behaviour of the system where prices may start rising when excessive spending takes place or where people may be tricked to believe in certain myths and start behaving in a way leading to an instability of the prices. It is limited by the political constrains as described by Michal Kalecki in “Political Aspects of Full Employment” but let’s call a spade a spade. It may be limited by the behaviour of the speculators. But it is not limited by the inter-temporal budget constraint.

    These are the claims we should be debating in the context of the observable behaviour of the system. We should be debating the limitations of the current economic paradigm rather than the perceived logical inconsistencies in the blog comments caused by the fact that somebody has a slightly different educational background.

    NB I personally think that excessive ratios of private sector savings and net savings to GDP highlight serious wealth distributional issues in the society but the last thing can help in solving these problems is austerity.

    I am convinced that first making a genuine attempt to understand the MMT position and then debating the statements made by Randall Wray, Bill Mitchell, Warren Mosler etc. in relation to the real world (e.g. the Chinese development model vs Western austerity, ways to finance employment programs, functioning of the bond markets) rather than taking cheap shots at the opponents (“money for nothing”) is a matter intellectual honesty for you and for prof Quiggin.

    I cringe every time I hear that our children must repay the public debt and suffer for us or that the government has run out of money so people have to lose jobs. It is difficult to repeal this logic in the context of “Hard Keynesianism” but the absurdity of that statement is self-evident in the context of MMT. I appreciate all the effort prof Quiggin puts in opposing the suicidal austerity policies but the strongest arguments against the austerity may actually come from the Functional Finance theory.

  4. BilB
    December 1st, 2011 at 09:08 | #4

    Adam,

    I think that your problem is that you think that economics drives economies. Not my observation. It is “stuff happens” and economists attempt to develop theories to explain it. Instances of economists actually getting ahead of the game are rare. Disruption to the best laid economic plan is only ever one election away, then it is back to the whiteboard.

    I had a bit of a read of the Modern Monetry Theory, and there seemed to be some stuff that there that might work…if….people were not involved. IMO

  5. Chris Warren
    December 1st, 2011 at 11:14 | #5

    @BilB

    I generally agree with BilB here. Whatever forms of money or value are present, preople will always use ‘power’ to manipulate them be it, political or from a degree of monopoly.

    Expecting any solution to the long-run crisis to be based on a new economic theory is like waiting for Godot.

    As far as I am concerned, Smith, Ricardo, Marshall and Marx pretty much provided all the underlying theory, with little misunderstandings deliberately constructed by Jevons, Keynes, and of course Samuelson.

    MMT and Functional Finance Theory only concern the phenomena that arises AFTER wealth has been expropriated from workers and thereby the contradiction is already running.

    The GFC indicates the real problem exists at the point of today’s political arrangement of production, not today’s (subsequent) distribution and financing apparatus.

  6. Adam (ak)
    December 1st, 2011 at 12:01 | #6

    @BilB

    I actually fully agree that “stuff happens”, that we are dealing with some social, political and economic processes but I think that there is a feedback effect.

    Just imagine who would have been elected in the UK if the majority of people had understood that austerity is a road to nowhere (we don’t even need MMT to know this). In the end they cannot even close the budget deficit gap – but they keep trying.

    My current activity on various blogs is related to my conviction that at some point of time social ideas and economic theories may actually have some impact on the reality. Internet allows for easy dissemination of ideas. Why shouldn’t we give it a go?

  7. Dan
    December 1st, 2011 at 12:35 | #7

    Adam (ak) :@BilB
    austerity is a road to nowhere (we don’t even need MMT to know this).

    I think that’s the key point. You don’t need to be Bill Mitchell to see that clamping down on the velocity of money is (just like all previous instances) going to have a contractionary, not expansionary effect; fewer transactions ≡ lower GDP; lower GDP ≡ crisis (at least as generally understood). It’s not one-to-one, of course, but it sure is a durable trend effect.

  8. Dan
    December 1st, 2011 at 12:39 | #8

    The problem, on the conventional interpretation, is convincing governments to be more stringent with their fiscal policy in the good times (if, for instance, two wars in the Middle East and a housing bubble can be said to be ‘good’). But once you’re doling something out, it’s very difficult to stop, and moreover to take it back.

  9. Freelander
    December 1st, 2011 at 13:31 | #9

    Ways of boosting the economy:

    1. Spending money on the poor. BAD

    2. Spending money on war. GOOD

    Ways of boosting productivity:

    1. Paying the 99% more. BAD

    2. Paying the 1% more. GOOD

    Thus endith the neoliberal lesson.

  10. gerard
    December 1st, 2011 at 16:08 | #10

    Adam thanks this has been a very worthwhile thread, are there any particular forums where this subject has been debated that you’d recommend?

  11. Ernestine Gross
    December 1st, 2011 at 19:42 | #11

    @Adam (ak)

    Thank you for you very long post @3, p2.

    There is a distinction between the description of monetary objects, their creation and their destruction, suitable for theoretical and empirical research (content of [1])and theories about monetary systems (eg Knapp, G. F (1905) Staatliche Theorie des Geldes, Dunker and Humbold, Munich. Engl. Translation, “The State Theory of Money, Macmillan, London, 1924 re pure fiat money, the gold standard monetary system, the Bretton Wood system, ….down to stones having served as a store of value.)

    I am not saying I disagree with you on everything you say. I am saying I still have to find plausible distinguishing characteristics of MMT. (A formal model would assist.)

  12. Adam (ak)
    December 1st, 2011 at 20:40 | #12

    @Ernestine Gross
    Thank you for your response. I am sometimes reluctant to use the label “MMT” knowing that the majority of the ideas are not entirely new and they have been borrowed from Knapp, Keynes, Kalecki, Lerner and Minsky. They have been reapplied to the current context leading to interesting conclusions. I fully agree that formalising models so that they can be communicated more easily and validated / falsified would strengthen their academic appeal. To me not all the questions have been answered (what may also mean that I am reluctant to believe in anything).

  13. Adam (ak)
    December 1st, 2011 at 20:47 | #13

    @gerard
    I would recommend Bill Mitchell’s blog (reading it may sometimes require some effort) and the New Economic Perspectives blog (UMKC). Academic-grade papers often appear on the Levy Economics Institute of Bard College website.

  14. James Haughton
    December 6th, 2011 at 11:53 | #14

    Ernestine,
    The answer to your paradox is that Bill Mitchell is not saying “Taxes are not required”. He is saying “Taxes are not required to raise revenue”. Taxes are required (as Knapp and co point out) to give value to currency in a qualitative sense; but there is no requirement that the amount of currency created = the amount of tax collected for currency to have value (though the two can’t get too far out of sync or inflation/deflation results).

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