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May 6th, 2013

A new sandpit for long side discussions, idees fixes and so on.

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  1. Ikonoclast
    May 6th, 2013 at 13:27 | #1

    The following paper is well worth reading.

    “The monetary and fiscal nexus of neo-chartalism: A friendly critical look” by Marc Lavoie.


    I won’t try to precis it. It should be read in the original. It raises points associated with comparisons of MMT, neo-chartalism, post-Keynesianism, Horizontalism and functional fianance. It does not examine all claims of MMT / chartalism but simply one aspect namely that of the clearing / settlement system in modern economies.

    Lavoie takes a point of view that is perhaps a sympthetic synthesis or more accurately a pointing out of certain essential congruences in the above points of view. At the same time, he is not an MMT proponent nor a slavish presenter of any part of the MMT case. He makes friendly criticisms of the substance of MMT in certain respects and also of the style of advocacy that MMT’s major proponents adopt. On this blog for example, Ernestine Gross has referred to the blogs of certain strident advocates of MMT as “rants”.

    I guess whenever political economy advocacy is involved, strident rhetoric for a case (backed or unbacked by empirical evidence and a good theoretical base) will sound like a rant to those who are predisposed against the message by prejudice, previous education, self-interest or self-protection against the discomfit of cognitive dissonance or the discovery of the invalidity of one’s own research project.

    To me, for example, any claim that macroeconomics is not a valid research project sounds very much like doctrinaire ranting. Such a proposition would fully imply that both Keynes and Marx wrote total nonsense. Such a proposition would posit that government as such or at least any effective government is an impossible exercise since government economic policy, as the funtional instrument for all policy, is applied macroeconomics. Such a presumed impossibility of government would conflict with the empirical fact that it actually exists with an observeable functional effectiveness of “not zero” at achieving some ends. This is so even if the end is acheiving taxes and outlays which libertarians whinge incessantly about and claim are negative, i.e. not zero, outcomes.

    What MMT proponents are arguing for in particular, IMO, is that arbitrary and formal institutional fiscal and monetary arrangements are precisely that, arbitrary and formal. As such they have observable formal characteristics. In addition, they are not “set in stone” and unchangeable as are for example the laws of thermodynamics in the known universe.

    Unfortunately, the average person often tends to think money is real outside the formal reality our institutions and customs give it. Orthodox economics trades on this crude mis-understanding of money and mystifies money by subtly suggesting money has intrinsic qualities and an intrinsic nature or essence which we will violate if we do not maintain exactly the current institutions and exactly the current monetary settings. Of course, history shows this view is wrong and that the way we construct money has evolved and continues to evolve over time. In some cases, it regresses as in the regression of money in the EMU (from state controlled to private interest controlled).

    MMT seeks to de-mystify money and fiscal and monetary operations and is perhaps the most successful attempt so far. MMT is not above criticism and some of Lavoie’s criticisms hold water IMO.

    At the same time, it is false to claim that MMT implies that fixing fiscal and monetary policies according to MMT principles will fix everything. No such claim is made by good MMT proponents. MMT proponents realise there is a real economy was well as a financial economy. In fact, they realise this much better than does orthodox economics which regularly conflates the two and ignores the fact that one is real and one is notional (book-keeping or account-keeping). MMT still recognises all real constraints including supply problems, bottlenecks and ultimate real resource limits.

    MMT points out that in addition to real material problems we should not pile on ideologically generated illusionary problems like the shortage of notional quantities ie. the shortage of fiat currency to fund government policy via deficits if need be. This is a subtle point and it does not equate to saying a government can print as much money as it likes. That is a straw man argument put out by MMT opponents. The MMT argument is that “printing money” is not limited by taxation or fiscal/monetary operations per se, it is limited operationally by currency inflation dangers and the availability of real resources.

    In my view, the current institutional arrangements have been put in place ostensibly to limit inflation / deflation dangers and do indeed partially operate to achieve these goals. However, they do so in an imperfect and partisan manner attached to certain sectional interests. They are tied to other mechanisms, particularly the deliberate maintenance of an unemployed pool and a deliberate excessive charter to private banks to issue private debt and to gain what amounts to a kind of seinorage income from said issue and from other fiscal and monetary arrangements.

    MMT is radical in that it questions these arrangements and proposes alternative arrangements to reduce unemployment, redistribute partially from the profits share to the wages share of the economy and to regulate the economy according to real constraints rather than according to arbitrary constraints set up to artificially advantage the class of owners and rentiers.

    MMT appears to be less than radical in that it does not seem to question the actual “right” and existence of oligarchic capital ownership as such nor to propose programmatically more just and equitable alternatives such as worker cooperative ownership.

  2. Ernestine Gross
    May 7th, 2013 at 13:38 | #2

    Ikonoclast, I had prepared a lengthy reply, including some data analysis, to your posts starting with ““The EU’s collapse continues. Unemployment is 12.1 percent across the zone, up from 11.4 percent in 2012” on a previous thread. I won’t bother now. If all the MMT talks are doing you good in one way or another, then this is fine with me. I won’t read or comment any more on your posts.

  3. Ikonoclast
    May 7th, 2013 at 17:12 | #3

    Fair enough. I hope the work and data is useful to you in another context. I will try to remember not to directly address you or refer to you on this blog or directly agree or disagree with you in any manner. By your own rules you could not rebut me no matter how specious my points were and that would not be cricket.

  4. Ernestine Gross
    May 7th, 2013 at 17:44 | #4

    I say fair enough, too, Ikon. Nevermind the bit of work and whether or not I can use it. It doesn’t matter. My ‘rule’ applies to MMT material. I should have said so right away. For your information, a long time ago I tried to get a few elementary questions answered on the now ‘at Darwin’ blog. The reply was, lets say, extraordinarily defensive in an almost political correctness sense. I don’t want to raise the same issues on Prof Q’s blog. These questions do not lend themselves for debating. Overall, I agree with Prof Q on the MMT matter.

  5. Ikonoclast
    May 10th, 2013 at 05:12 | #5

    When I try to argue a little MMT type thinking on standard economic blog sites, the general tenor of replies from (orthodox) “economists”, professional and lay alike, is that MMT is over-simplistic. This is when they don’t say, “It’s just wrong.”

    These same critics who say MMT is over-simplistic then intone. “The budget must be in surplus or balanced or when things are really bad it can be maybe be just a teensy bit in deficit.” Or words to that effect. The message never varies. The real economy is never considered. The plight of the unemployed is totally ignored as is the issue of capacity under-utilisation and the productivity gap.

    I ask in all seriousness, which is the more simplistic approach?

  6. Ikonoclast
    May 10th, 2013 at 05:59 | #6

    On another, issue Prof. John Quiggin states in “Zombie Economics” that Keynes was the first macroecomist; that macroeconomics started with Keynes. This is incorrect. Marx also developed a macroeconomics.

    “We now move on to macroeconomics specifically. Although J.M. Keynes and his followers most influentially set out principles of macroeconomics, macroeconomics originates independently in Marx’s Capital. Apart from a theory of money and a general critique of Say’s Law early on in Capital I, this work contains three main macroeconomic building blocks. First, a model of the Circuit of Capital (Marx 1885, Part One). This model emphasises capital’s continuous movement through four manifestations, or shapes, together constituting the macroeconomic circuit of capital.” – Geert Reuten (University of Amsterdam, Department of Economics) in Brian Snowdon & Howard Vane (eds), Encyclopedia of Macroeconomics, Aldershot: Edward Elgar, 2002, 464-69.

  7. Gaz
    May 13th, 2013 at 16:40 | #7

    Don’t know if this is the right place to ask, but here goes.

    Does anyone know where I can find a theoretical basis for nominal GDP targeting as a basis for monetary policy?

    I’m assuming that there is one.

  8. John Quiggin
    May 13th, 2013 at 17:23 | #8


    The argument for a choice of target is mostly pragmatic rather than being based in theory (at least as academic economists would understand this term, with theorems, proofs etc). Google produces Jeffrey Frankel making the case, among many others


  9. May 14th, 2013 at 20:57 | #9

    Jack Strocchi @isteve 5/10/13, 4:34 PM remarked on the purging Jason Richwine::

    This is shocking, even to me, someone hardened to the self delusion and out right deception that goes with organised political correctness. It’s very much a “message hit”, if you speak truthfully to power you will lose your job and be drummed out of polite society. They may have well as stuffed a sock on his mouth, a the Sopranos.

    I wonder what the reaction of the liberal academy will be to this blatant attack on intellectual freedom. I’m tipping deathly silence. But I would not be surprised if a few piled on to the side of the authorities.

    The rest will get the message.

    … the key fact about an argument relevant to any political debate is not its intellectual validity but its social acceptability. This is the debating ethics of teenage schoolgirls, complete with bullying, catty remarks & social exclusion.

    Mill & Voltaire are turning in their graves.

    Well its been a week since Richwine was purged from Heritage and it looks like my “deathly silence” tip is on the money. Which makes sense as “piling on with the authorities” risks being called on answering the substance of Richwines argument, obviously not a risk which our not-very-brave academic class is willing to run.

    In particular the non-appearance of Crooked Timber on the free speech barricades is saddening. Plenty of posts on esoteric literature and the economics of interstellar travel. But just awkward coughs and the sound of crickets chirpping on the subject of free speech and realism in social science.

    A few lessons to be learned from this discreditable episode:

    1. The Lefts war on social science continues unabated,

    2. The Lefts claim to support freedom of speech is now thoroughly discredited.


    The liberal academy is neither liberal nor truthful when it comes to speaking to power.

  10. Gaz
    May 15th, 2013 at 15:31 | #10

    Hi Prof.

    Thanks for the reply.

    My reading of what Frankel has to say is that it’s just inflation targeting in disguise: faster inflation -> restrictive monetary policy to slow real growth. Slower real growth -> more (inflationary) stimulus. But we’ve got that already, albeit with CPI rather than GDP price as the inflation objective.

    It also seems to be framed from the perspective of an industrialised, commodity-importing economy, eg the euro area in his example.

    Oil import prices go up, that’s OK because imports aren’t in the euro area’s GDP. So a nominal GDP target would “look through” such an exogenous shock. But we’ve got that already too. It’s what the RBA does routinely with price shocks (eg bananas, $A, GST etc).

    But what about a commodity exporting country like Australia? If that RBA had been targeting nominal GDP growth in Australia, a commodity price boom would mean we’d have to have some pretty ordinary real growth to hit the nominal GDP growth target.

    Let’s say the RBA had been targeting 5.75% nominal GDP growth – say 3.25% GDP (around the long run trend and consistent with likely labour force and productivity growth trends) plus 2.5% inflation. Sounds reasonable?

    But in the past 10 years, the commodity boom decade, nominal GDP’s grown by an average of 6.5%. Would we have been better off with 5.75% nominal growth?

    Real GDP growth was only 3.0% on average over that 10 years. Would 2.25% have been better, if the adjustment’s made on the real growth side?

    Or would it have been better to have some policy (big rate hikes?) to get domestic wages and prices to grow so slowly that they offset the export price rises?

    And what about now that commodity prices are falling. Should the RBA try to boost real GDP growth to make up for it? Or try to push the $A down just so we can have some import price rises to boost the CPI?

    It seems to me that there’s actually not much pragmatism involved in the NGDP targeting idea – just another attempt to take judgment out of the hands of central bankers by imposing a decision rule on them.

    Maybe these guys need to have a bit more of a think about this idea. Perhaps some theory would help their thought processes.

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