MMT and the scope for seigniorage

The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation. In this context, the value of the net increase in money issue is referred to as seigniorage. To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.

A crucial question is: what is the scope for seigniorage? In particular (expressing things in MMT terms), is the scope for seigniorage sufficient to permit the introduction of ambitious programs like a Green New Deal without the need for higher taxes to prevent inflation.

The recent episode of Quantitative Expansion in the US provides some evidence here. Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.

How much is “substantial”?

According to the St Louis Fed, the monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money. Expressed in terms of GDP, though, it doesn’t seem quite as large. Over eight years, $3.2 trillion is $400 billion a year or around 2 per cent of US GDP ($20 trillion).

Assuming that this is an upper bound for the scope of seigniorage, it’s much smaller than the amount needed to finance, say, a Green New Deal.

What qualifications need to be made here? First, it might be argued that QE should have been more aggressive than it was. Certainly, looking at things with a focus on the real economy, as traditional Keynesians do, the stance of fiscal and monetary policy overall was too restrictive. But, if you assess things on the MMT criterion of low and stable inflation, the Fed got it pretty much right. Deflation was avoided, and the inflation rate was restored to the target level of 2 per cent in a reasonably short time. That’s continued as QE has been partially reversed in recent years.

A second point is that QE wasn’t (directly) an expansionary fiscal policy of the kind Keynesians favour. Rather, the budget deficit (smaller than it should have beeb) was financed with bonds. The sale of these bonds to the public would have depressed demand, but instead the Fed bought them (and also some high-grade corporate bonds). That’s not the best way to stimulate the economy, but from an MMT viewpoint it’s not obvious that it matters (interested to get comments on this).

Overall, the evidence of QE suggests to me that the basic idea of MMT is sound, at least in the context of a llquidity trap. On the other hand, the same episode shows that a widespread interpretation of MMT, that we can greatly expand public expenditure with no corresponding increase in taxation, is both wrong and inconsistent with the core idea of MMT.

88 thoughts on “MMT and the scope for seigniorage

  1. My short, ironic take on this thread.

    1. We cannot resolve economic arguments until we resolve philosophical arguments.
    2. We cannot resolve philosophical arguments.
    3. Therefore, we cannot resolve economic arguments.

    This, unless I am mistaken, is a syllogism of the type so beloved by the medieval Scholastics and trenchantly criticized by Francis Bacon. The first two propositions are asserted or assumed to be true. If these be so, it seems clear that the third is a logical deduction. Yet, is there any way we can meaningfully assume that 1. and 2. are true?

    Assume all the words in the three propositions have absolutely clear meanings (referents) except for the verbs. What does “resolve” mean? “Resolve” could mean “resolve arguments by logic”, “resolve arguments by vote”, “resolve arguments by decree”, “resolve arguments by violence” and so on. In turn, the term “argument” can be seen to become unclear. Ambiguity creeps in.

    A pragmatist would say we do resolve economic arguments in action, meaning in extant political and economic action. While never resolved in theory, the arguments are resolved in praxis but certainly not to everyone’s satisfaction.

    I would argue that the syllogism above has a kind of validity but it does “suffer” from the problems and outcomes sketched out in the three paragraphs below it. Economics is always predicated on an assumed ontology, of basic economic objects and their interactions, which assumed ontology then purportedly explains, by development into a dynamic model, how our economic system works. Economics is always predicated on an assumed moral philosophy position which asserts some things are right (property rights for example) and that these rights lead to beneficial and morally justifiable outcomes for all or most persons. (That’s just the “capitalist” assertion as an example.)

    Because the ontological and moral philosophy assumptions of all participants in this argument are different, sometimes radically, sometimes in detailed elaboration, we can never resolve arguments about our economic hypotheses. We have not power over each other (one way of resolving arguments) nor any way of subjecting our various hypotheses to controlled empirical tests.

    Thus the arguments are endless and go around in circles. This is just my view of course.

  2. All the answers you seek are in the MMT academic literature. Seek and ye shall find.
    On liquidity trap just search Bill Mitchell’s blog, it is not difficult.
    Keynes works are mostly words not mathematical models or as I think of mathematical models – a way to baffle you. Words are sufficient.
    Perhaps the national accounting framework which brings us back into the sectoral balances work of Godley and others is considered tautological by Ernestine Gross. If this is the case then I respond with (MMT – an accounting-consistent, operationally-sound theoretical approach)

    Also you never see any current mainstream economists promote that way of thinking; of putting the private sector into surplus.

    To me MMT is Macroeconomics explained correctly and (if not correct) very clearly to the general public. No other strand of economics has ever been explained as clearly to such broad audiences. That is my opinion. Thank you for your time.

  3. Harry,
    thanks for your post. I can’t remember whether I ever came across the Orr and Orr model. It is yet another example of macro equilibrium models (equilibrium conditions or accounting identities) which does not include the largely private financial system. These macro models in the right hands were reasonable IMHO in the 1960 and 1970s because the banking and related ‘financial services’ sector was pretty much constrained. This is not to say there were no share market booms and busts, credit squeezes or above average company bankruptcies. However, the only time when ‘the system’ (unambiguously Western at the time) came to a temporary halt was when the US government was unable to comply with its then international obligations to convert US$ held by foreigners into gold (on the request of the then French President, Charles DeGaulle). But the so-called financial deregulation, exemplified by Margaret Thatcher’s Big Bang in the 1980s, changed the institutional environment so fundamentally that these macro-models are, IMO, not applicable now.

    I’ve read your first post, too. I was pleased to note that you also found MMT confusing.

    After having visited and commented on Mitchell’s blog site and given the couple of MMT topics on JQ’s post, I have gained the impression that tying to have a clarifying argument with these people is like trying to get water out of a bucket with your hands.

  4. My light ironic take on this thread (at March 9, 2019 at 10:13 am) had a serious purpose. It was a genuine attempt to give us all some perspective. There certainly is an ontological problem in economics as there is in all of the social sciences. If we can’t agree on an ontology, then the entire debate (any entire debate) will be fruitless.

    Here are some abbreviated definitions:

    Ontology: The study of existence, and emergence, in terms of categories and relations.
    Emergence: The condition of an entity (as a complex system) developing properties its parts do not have individually or separately, due to interactions among the parts.

    Note that not only, and perhaps not even, static existence is implied but rather that time and process (change over time) are referenced along with emergence itself. Emergence implies the arising of “radical novelty” or the genuinely new.

    Ernestine Gross has indicated, quite correctly, that there is a basic ontological problem with the definition of money. Then there are the issues I have alluded to several times above which relate to the ontological problems surrounding the question of how money (a notional quantity) interacts with (both ways);

    (a) people (each person is a living real physiological system with an advanced ability to process notional quantities and qualities in formal systems, among many other attributes); and
    (b) real systems meaning both the real economy and the real environment.

    There are serious questions (in my opinion) surrounding the issue of whether the basic ontological objects in orthodox or heterodox economics are prescriptions for basic objects, descriptions of basic objects or (as seems most plausible to me) taken together as a system model they are an amalgam of prescriptions and descriptions.

    “… the quick and easy answer is that an economic object is a product of beliefs and physical things.” – Gloria L. Zuniga, “An Ontology Of Economic Objects”.

    If this is the case, one wonders how we could ever have an objective discussion about economics.

    Strictly, an economist needs to be able to answer these two questions in an extensive and well-elaborated manner before proceeding with any exposition of economics.

    (1) What is your ontology of all existence? Why?
    (2) What is your ontology of economic objects (including systems)? Why?

    Do any economists address these issues? Do any economists who write here have links to works of their own or of others which comprehensively address these issues and which thence provide ontological and epistemological, that is to say epistemic justification for their economic school?

    I do wonder – and I am fairly sceptical up front – that these exist in any extensive and compelling “truth warrant” form. But I’ve been known to be wrong, often. So prove me wrong. In other words, show me that economics, of any school, is more than a faith. All it should take is a few good links.

    Theoretically, the above is a difficult challenge. Pragmatically, it is a trivial challenge. You can show me an extant economic system (say Australia’s) and say, “It exists. It works.” That argument is what I call “extantism”. (Unfortunately, the word has been appropriated by the discipline of International Law for another purpose.)

    By my “extantism” I mean that the existence of something proves it is possible. What this “extantism” doesn’t tell us is why it exists and how it exists. It also does not tell us what else is possible nor how to deliberately and directedly modify, reform or replace what is extant. Once we want to do that we are thrown back on the need to develop ontological and epistemological theories, to hypothesise and to experiment.

    How to run economic experiments? That’s a question for another post.

    by Ikonoclast

    Nobody can agree on MMT,
    They cannot settle ontology.
    Money creation and dispersal
    Surely that’s uncontroversial,
    At least in terms of fiat notes
    On paper and ‘lectronic totes.
    These quantities notational
    Giv’n physical flotation all,
    Their circuits should be measurable.

    Creation ex damn nihilo,
    Count the stock, count the flow;
    Destruction ab damn nihilo,
    WTF! Where’d it go?
    Money, a creature of the state,
    Strange it’s tendence to ablate,
    It shimmers and transmogrifies
    And whispers subtle, fluid lies;
    Philosophy it doth despise.

    But wait, a thinker in the wings,
    Prates of process and of things;
    In metaphyics thick and rank,
    Quite unaware that he’s a crank.
    “The problem’s not just money’s state,
    But how it doth complex relate
    To social mores, psychology,
    Processed institutionally,
    WithIn the globe’s ecology.”

    Hume did warn ‘gainst being abstruse,
    Common cant decides most truth.
    Consumption’s sufficient to the day,
    Do not ponder “Where? Which way?”
    Markets are like magical detergent,
    Scarcity expunged, substitution emergent.
    China, US, Europia,
    Globalism, Cornucopia,
    Infinite growth! Utopia!

  6. As usual Ernestine makes it so clear that anything from me is superfluous. But to answer Ikonoclast’s challenge to come clean on my own school of economics let me own up to being a Keynesian. Not a Neo=Keynesian or even a New age Keynesian but a boring old fashioned Keynesian. I have studied all the schools of economics up until abut the 1990s. None impressed me as much as the original school set up around the pivotal work by John Maynard Keynes. Yes I did read all of Das Kapital when I was at university plus The Communist Manifesto and about evey critique every written on Marxism. I read Ricardo, Marshall, Freidman and a lot of other originators. I also read the copyists like Adam Smith, Vladimir Illich Lenin and John Stuart Mills. Only Joan Robinson really impressed me of all the copyists I have read .Keynes was a student of Marshall so could not shake off some of Marshall’s mistaken concepts. Still he comes across as the most insightful of all the originators. Mind you Keynes himself never favored the idea of a Keynesian school. In 1946 he was famously quoted as saying:
    “I AM NOT a Keynesian.”

  7. Rogoff on MMT:

    “Unfortunately, the Fed itself is responsible for a good deal of the confusion surrounding the use of its balance sheet. In the years following the 2008 financial crisis, the Fed engaged in massive “quantitative easing” (QE), whereby it bought up very long-term government debt in exchange for bank reserves, and tried to convince the American public that this magically stimulated the economy. QE, when it consists simply of buying government bonds, is smoke and mirrors. The Fed’s parent company, the US Treasury Department, could have accomplished much the same thing by issuing one-week debt, and the Fed would not have needed to intervene.

    Perhaps all the nonsense about MMT will fade. But that’s what people said about extreme versions of supply-side economics during Ronald Reagan’s 1980 US presidential campaign. Misguided ideas may yet drag the issue of US central-bank independence to center stage, with unpredictable and potentially serious consequences. For those bored with the steady employment growth and low inflation of the past decade, things could soon become more exciting.”

  8. Gregory J. McKenzie,

    1. Self-justification

    You still haven’t explicated your ontology, at least not your ontology of economic objects. Unstated ontological assumptions are the bane of economics and any other intellectual discipline we care to name, especially the less scientific or less objective, from philosophy and theology to the entirety of the social sciences. Ontology is important and I will get back to it.

    First, to situate and explain myself. I am not nearly as well read as you in economics. That’s not uncommon for a non-economist of course. However, I reserve the right as a citizen and freethinker to contest all ideas outside those of hard science and mathematics and which can be expressed in the English language. I am not a scientist nor am I a mathematician. [1] I’m educated in the humanities with a mere B.A. pass, no honors, in media and communication: a degree I took 40 years ago and which I never used in my entire working life. I place economics in the social sciences, hence I reserve the right to critique it.

    I read Das Kapital Vol 1 about 40 years ago. It wasn’t on my course list. I tended to spend most of my time reading and thinking about stuff which wasn’t on my course. I have never read Das Kapital Vols 2 & 3 but have read some portions of the Grundrisse. I’ve read John Smith’s “Wealth of Nations”. I’ve read some recent books on economics. To me “recent” is anything written in the last two decades. These tend to be “popularisations” for the intelligent layperson written by academics. Examples are say John Quiggin’s “Zombie Economics” and Foster & Chesney’s “The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China”. I’ve read a wide smattering of academic essays on economics, orthodox and heterodox. I tend to read a lot of the non-paywalled material on websites like The Monthly Review and CasP (Capitalism as Power).

    In summary, I take the position, as a citizen and freethinker, that I am justified in critiquing, if I wish, any or all the justificatory (ideological) materials and that portion of explanatory or exposition materials, in economics and political economy, couched in English, which I have read or heard. I don’t intend to sound pontifical. I am just trying to be precise about my self-justifications. Thus, when it comes to living or dead philosophers, theologians, priests, economists, political economists etc. I feel well within my rights to contest their ideas intellectually, socially and politically.

    I’ve changed my mind several times. I was bit radical and Marxist in my youth, became more classical Keynesian in middle age, but in old age, having seen the results of the extended onslaught of neoliberalism, I am becoming re-radicalised and trenchantly opposed to both neoclassical economics and to all reformist thinking about capitalism. My position now is that capitalism is both unreformable and undefeatable but that biosphere limits will destroy it. It’s a kind of Dark Green Eco-socialist Quietist philosophy as I do not hold with sabotage or violence in any form. It means “Wait for the day and then see what we can do with it.” But while waiting we reduce personal consumption, think and make plans for a more cooperative society. To clarify, I am not a doomsday prepper in any form. Cooperative communities are going to survive, if anyone, not people whose philosophy is “machine-gun” or be “machine-gunned”.

    2. Ontology

    This is a huge subject of course and deals with something very difficult to grapple with, as “The study of existence, and emergence, in terms of categories and relations.” That’s one short definition. At the base of any person’s ontology (for all of existence but also for a subject like economics or political economy), there is a basic a priori assumption (or set of assumptions). This assumption is not provable but can have various sorts of epistemic justification; or as I like to expand it, various sorts of doctrinal, dogmatic or empirical justifications. Even an empirical justification for an a priori assumption in ontology will be incomplete and can never have a full proof. It is an induction (hypothesis) with at best an Occam’s razor (simplest possible) empirical justification. I cannot emphasize that enough. It’s a justification, not a proof.

    I eventually became dissatisfied with economic and political economy arguments per se. It became clear to me that all schools and persons, including me, operated with their own implicit ontological assumptions. Most of them never made their assumptions explicit, often not even to themselves. In an axiomatic or even praxeological way (and these philosophical errors [2] are not limited to Austrian Economics which appeals to praxeology directly) they deduced “irrefutable” axioms and/or “unchallengeable” ontological economic objects from reality in some manner. To enter a school (of economics or political economy) one must accept, essentially without question, the ontology of economic objects of the school.

    It’s impossible to summarize, let alone fully explicate these ideas in a blog. The best that can be done is to give a short example. The main theories of value in existing economic schools suffer from serious, or one should say theoretically fatal, shortcomings. Ontologically they cannot be justified, at least if they are being held up as described real objects. It’s clear they can be justified as formally prescribed objects. I am sure you know what I mean here from the perspective of normative (prescriptive) versus descriptive economics. The problem becomes acute at the ontological level. There is a pretence to be talking about real objects when actually talking about prescribed objects.

    Both classical and/or neoclassical “utils” are not real objects. Neither are Marxist SNALTs (Socially Necessary Abstract Labor Times). I owe this precise formulation and insight to CasP (Capitalism as Power). I did not derive it myself, though I was long skeptical of classical and Marxist value theory. My philosophical (ontological) and scientific instincts, investigations and analyses were all telling me these were both simply justificatory (normative) hogwash but I could not nail it down. You can check CasP’s theorizing for their rather compelling resolution of this issue. Their ontological principles look sound to me. I have not come to a decision about what I think overall of CasP theory. I am sympathetic to much, but not all of it, on a first consideration. I feel the need to continue my own strict investigations of ontology, from a philosophical perspective, both generally and in relation to economics. I still feel that I do know not where my ontological investigations are leading, at least not precisely in terms of relating them to political economy.

    Finally, the market can be regarded as a pragmatic, rather than a theoretic, structure for deriving “utils”. Thus “utils” are derived in practice, or in praxis if one is trying to be clever. That is how orthodox economics works in part, as there is much to it than just the market, even for deriving “utils”. Instantiations of “market economics” or “mixed economies” derived (in part) from orthodox economic theory (importantly even the prescriptive part) exist and work as real, extant systems; take the Australian economy as an example. I do not attempt to deny that obvious fact. Part of crude orthodox economic justification amounts to what I call “extantism” [3]. Extantism, in my definition means that set of arguments which justify the manifestly existent because (a) it is real (clearly a tautology); (b) the real proves the possible (a truism) and (c) the real is the best possible (which clearly does not follow, even on evolutionary grounds, but that is a longer argument). The idea that something is extant and working begs the question. Working for whom? Extantism also precludes the idea of process. For example, what was extant before it, how did it come into being, is it sustainable, what is likely to follow it?


    1. As Ernestine Gross has correctly deduced from my posts, I can do arithmetic but not mathematics.
    I can do simple algebra. I could brush up on quadratics. If I really tried I could probably get back into basic calculus. Even that would not make me a mathematician anywhere near to a first year uni maths under-grad.

    2. It’s a philosophical error when applied to real systems. It’s quite okay for constructing formal systems alone. The key issue is that economic systems exhibit the character of being an amalgam of formal systems and real systems. The real economy and the biosphere which contains the real economy are real systems, in the physics physicalist sense, which implies the consistency and operancy of universal physics laws like those of Thermodynamics and Electromagnetism. The reality that the real economy, and thus economics eventually, must obey real system laws becomes operatively obvious when considering issues like scarcity and sustainability, albeit from a science perspective not from an economic perspective. Clearly, a formal system / real system hybrid cannot be explained by axioms or axiom induced (hypothesised) ontological categories alone. Real categories from empiricism (science) must also be considered. Thence we must consider how the formal interacts with the real and vice versa though humans as thinking,calculating and goal-seeking agents. “Calculating” here means both heuristic and algorithmic calculation or estimation. We must remember humans are also not just thinking,calculating and goal-seeking agents. They have many other attributes, being real physiological systems with real neurological systems, not least.

    3. Unfortunately, the term “extantism” has already been coined or appropriated for a pricniple in International Law. It means, colloquially, letting micro nations exist. How generous of the great powers! In practice this means only micro nations that have no resources worth taking or quite possibly that on occasion they make nifty little tax havens.

  9. Economics as we know it was invented by the ancient Greeks. They used it to run their estates and their city states. This is why economics is wedded to politics. But economics in the private sector means doing things at the least possible cost. This is a first grasp of the term efficiency. As the world changed so did economics. The free market economics of the Ancient Roman Republic became the command market economics of the principate. Emperor Diocletian used his tax policy to change that system. Suddenly feudalism took over and spread across Europe. This was re0laced in Italy by the Princes who brought back mercantilism. Only when the Physiocrats of France began rejecting the monopoly policies of the Kings of France did a new system emerge. Francoise Quznay and his fellow Physiocrats came up with the Circular Flow of Income Theory. This impressed a visiting scientist called Adam Smith. As France fell into chaos and anarchy, Smith went back to his university at Edinburgh to write a book that would change the world. THE WEALTH OF NATIONS was the birth vehicle Of a system that banned monopolies and government interventions. Karl Marx was to label this system CAPITALISM. many people forget that Adam Smith was a moral philosopher not an economist, as was Marx.
    I believe that economics is a study in moral philosophy. Though I studied the econometrics of economic system for three years at university, I still insist that MONEY ONLY MATTERS in times of economic change. John Maynard Keynes accepted Alfred Marshall’s point that when an economy was in equilibrium then MONET DOES NOT MATTER. Not wanting to open old theoretical wounds I will just remind everyone that in 1936 England was in the middle of the Great Depression. Keynes wrote for his own times. He also was not an economist. In fact he was a Professor of Mathematics.
    My own slant on economics has changed over the last forty-eight years is that economics is closer to moral philosophy than it is to sciences like physics. Politicians often make economic decisions from past economic realities. They seem incapable of adjusting their macroeconomic policy to modern economic realities. As Keynes once retorted to a journalist who accused him of always changing his mind:
    “As an intelligent person I change my opinions when circumstances change….”
    He was not impressed with journalists who wanted to make him an originator of a new school of economics.
    Milton Friedman came along in the 1950s to totally debunk Keynesian economics. Rather unfairly he is credit with creating Monetarism. He did set up the Chicago School but this was an American version of Marshaling economics.
    The “MONEY DOES NOT MATTER” versus “MONEY MATTERS” debate raged for decades after that time.
    In the Twenty-First century long periods of deflation have convinced me that monetarist policy is of little value at the moment. I see a new global economic run by a warped view of Capitalism not backed up with detailed empirical evidence. Thomas Piketty best covered this in his great book Capitalism in the Twenty-First Century.
    By clinging stubbornly to Keynesian ideology I am as much to blame as other economist.
    The old joke that if you push three economists into a debate they will express five different points of view is pretty much true today.
    Like everyone else I have no idea what the future holds for economic theory.

  10. Gregory J. McKenzie,

    You still haven’t made explicit your ontology of economic objects.

    “Show me your ontology of economic objects,” is now my standard challenge to orthodox economists in blogs and none have yet risen to the challenge. They’ve not even given me links to papers on the topic. Methinks they don’t have a defensible ontology. The people writing on CasP do have a defensible ontology (in my assessment). I’ll come back to that again with an example link when J.Q. gives us the next pristine Sandpit. This doesn’t mean I instantly agree with everything in CasP. I’m still burned and self-excoriating with the memory of my early, immoderate enthusiasm for MMT.

    I’ve found challenging orthodox economists is a bit like challenging priests. In each case, there’s an elaborated system built on metaphysical assumptions which it is impermissible to challenge. One has to accept certain premises on faith in order to enter the “church” or the debate. When one attempts to question the basic epistemic justification(s) for the elaborated system, one is usually ignored.

    We could probably agree that the capital controversy, the “money controversy” (if it’s not the same thing) and the value controversy are unresolved problems in economics and political economy, so this affects Marxism too. If these controversies are unresolved, then the ontology of economics is unresolved. I think it follows. The basic foundations of economics are unstated or unsound, hence economics as a discipline, in total, is in a mess. There might be small bits of it that make sense but that’s about all.

    J.Q. as much admitted that economics, or at least macroeconomics, was a mess when he wrote “The (failed) state of macroeconomics (crosspost from Crooked Timber)”. The proximate answer for this lies in politics and the ascendant (im)moral philosophy of neoliberalism. If we want a full theoretical answer, we have to go back and re-start with ontology. Then we must rebuild economics from scratch. Of course, we are creatures of our time and cannot wholly imagine the next “radical novelties” which will be presented to us by emergence in our own complex systems, heavily influenced as they are by complex real systems and their feed-backs from outside the financial and real economy systems.

  11. A person does not even have to be an adherent of MMT to know that the way that deficits get reported in the USA and Europe, and by extension I presume Australia is slanted and designed to confuse the public. When government deficits are reported only the debit side of the balance sheet is reported the asset side of the balance sheet is ignored entirely

  12. I would say that my ontology depends on your definition of that term. It is my understanding that it can have two definitions. Namely:

    1. the metaphysics dealing with the nature of things:

    2. the set of concepts and categories peculiar to a subject area that show their properties and the relations between them.

    On the first definition I would say that my ontology is strongly rooted in moral philosophy. The central abstraction of economics is money scarcity. This leads into the dilemma of choice. There is a optimum allocation of economic resources that makes individuals better off without making any individual worse off in money terms. To move away from that optimum will involve moral issues.

    On the second definition my ontology is the practical application of scarcity to the reality of limited resources meeting the requirements of unlimited wants. This requires decisions like
    What to produce?
    When to produce them?
    How to produce them?
    To whom, these produced items are allocated?
    Why any changes are made to these fundamentals?
    Following on from these concepts is the main economic categories of the Household sector which holds all wealth, the Firms sector which provides goods and services for profit, the government sector which imposes taxes but also pays out welfare and the overseas sector which accepts exports but exchanges them for imports. This last part is based on the early work of the French Physiocrats. It was utilized by Adam Smith to “create” capitalism then fine tuned by David Ricardo (free trade) and Alfred Marshall (Utility theory). This is the basis of or orthodox economics. Marxian economics comes from a Hegelian dialect. I lie somewhere in between by rejecting the concept of free trade but at the same time accepting the interdependency of economic sectors. With Marxian economics my quibble is more historic. Karl Marx wrote for the nineteenth century. He named pure capitalism as an ‘evil’ exploitation. For the mid nineteenth century he was right. But we live in the Twentieth-First Century. I agree with Keynes that when times change I change my economic ideas and acceptable solutions.

  13. Gregory J. McKenzie said “As usual Ernestine makes it so clear that anything from me is superfluous. ” and your fundamental questions Ernestine cut like a hot knife.

    I would still appreciate the fundamental and context specific definition of Freedom.

    And Ernestine (and Harry c) – I am not so aure you actually need any of this due to your ability to ask the best questions. Wolf in sheep clothing maybe?  One of my prior references compared is/lm models etc to mmt. But if you’re still interested…

    “”Here is the standard explanation from“Understanding The Modern Monetary System”by Cullen Roche, which is a go-to MMT resource:

    GDP = C + I + G + (X – M)
    C = consumption
    I = investment
    G = government spending
    X = exports
    M = imports

    Or stated differently;
    GDP = C + S + T
    C = consumption
    S = savings
    T = taxes

    From there we can conclude:
    C + S + T = GDP = C+ I + G + (X – M)

    “If rearranged we can see that these sectors must net to zero:
    (I – S) + (G – T) + (X – M) = 0
    (I – S) = private sector balance
    (G – T) = public sector balance
    (X – M) = foreign sector balance

    “Notice first that all dollar-denominated accounts are partitioned into three sectors: the public (domestic governmental), the private (domestic nongovernmental), and the foreign (everyone else).
    “That leaves a lot of questions, e.g., where do you …”

    And here is the originator…
    “To briefly summarize, at New Economic Perspectives, we prefer to use the Godley sectoral balance approach, where he defined private sector saving as “net accumulation of financial assets” (NAFA), using the flow of funds data.” – LR Wray”…

    …”There’s no way to parse this nicely. This. Is. Extremely. Wrong. Private sector saving is S. S is equal to I. (S-I) is the private domestic balance. Net financial assets is equal to (G-T). Saving (S) does NOT equal (G-T). It’s rather flabbergasting that Wray makes this mistake.”

    Cullen Roche bio says Krugman has referenced him…

  14. Gregory J. McKenzie,

    I accept your basic definitions, albeit with an added aspect which links them.


    1. The metaphysics dealing with the nature of things.
    2. The set of concepts and categories peculiar to a subject area that show their properties and the relations between them.

    You clearly propose that an ontology is, or can be, one or the other. I argue that the above is a compound and connected definition. The process of setting up the second depends on a priori justification(s) taken from the first. Before one derives a “set of concepts and categories peculiar to a subject area” one must adopt (explicitly or implicitly) a “metaphysics dealing with the nature of things”.

    In terms of your stated economic ontology, your moral philosophy apparently constitutes the entirety of Proposition 1. Then, as I see it, you derive your moral categories of economics (eg. “makes individuals better off without making any individual worse”) from your overall moral philosophy. I have no problem with this step, on its own and in principle, particularly as your statement clearly implies your moral philosophy stance. I even agree with that particular moral standard, with elaborations and caveats. Better yet, it’s a moral claim which openly and honestly shows that it is a moral claim.

    The objections I have to “orthodox economics”, as I call it, are twofold:

    Objection A – The claimed objective objects and categories of orthodox economics are not, in the main, objective. They contain hidden moral philosophy assumptions. Moral rights are first asserted in order to set up many of the standard ontological objects of orthodox economics. Often these moral rights and moral assumptions are dishonestly hidden by claims that they are objective realities about the world and humans.

    Brief Discussion of Objection A.

    Property rights, of the Lockean variety, are a case in point. Setting up property rights in a Lockean, capitalistic, neoliberal or American libertarian manner (these overlap) immediately conditions the entirety of economics. Such property rights are a moral philosophy position. Hat tip to Prof. J.Q. for unfolding this subject in various writings.

    As another example, “unlimited wants” is not a complete and objective description of humans. Rather, it’s a moral philosophy permission. Under this permission, humans are given licence to have unlimited wants. If this licence is taken literally and extensively, it is seen as justification for the individual to garner as much as he wishes to himself and for humans to take as much as they wish from nature. Thus, what orthodox economics claims is an objective ontological object (saying something objectively real and complete about humans) is really a moral philosophy a priori. Further, it is clearly one which is not a complete description of humans. Humans are capable of moderating and delaying wants. All that takes is encouragement in arenas from early child-rearing to adult personal and social ethics.

    Morals or ethics may well be situation relative. At an early stage of economic development, and well before environmental limits are reached, the encouragement of “unlimited wants” might assist economic development. Though even here, one suspects, that fully developing the satisfaction of genuine needs, like full health, and positive wants, like education, plus the technologies for the same, would provide ample encouragement for economic development. Once environmental limits are approached, the encouragement and licence of “unlimited wants” becomes not a possible development spur (dubious and maybe unnecessary anyway as shown above) but a real danger to real systems (climate system, ecological systems) and the real economic system (as it depends on real biosphere systems) and to humans themselves.

    If “when times change I change my economic ideas and acceptable solutions”, then you would at least have to jettison “unlimited wants” as a valid ontological object for your economics. In my opinion, properly jettisoning this alone would scuttle orthodox economics in its entirety, in theory and in practice. One would have to radically reform economics on this basis alone.

    Objection B – Orthodox economics fails to resolve its inconsistent treatment of formal objects and real objects, or formal systems and real systems.

    Brief Discussion of Objection B.

    First we need some definitions, including a slightly amended definition of your point 1 definition (of ontology) plus a few more definitions which might come in useful:

    Ontology – The study of existence, and emergence, in terms of categories and relations.
    Real System – Any system which obeys the discovered Laws of hard science.
    Formal System – Any system of signs based on or forming a language, including mathematics.
    Monism: Attribution of oneness or singleness to a concept or system, e.g. existence.
    Process: A set of transformations over a period of time.
    Model: A simplified representation of a more complex original.

    I gave the example above of the treatment of “unlimited wants” in economics. Orthodox economics (OE) may either treat “unlimited wants” as an objective statement about humans or treat it as a moral philosophy prescription for humans and economics. It would depend on the particular school of orthodox economics. However, I don’t recall a school of OE which honestly names the second treatment and explicitly labels it a moral philosophy prescription.

    The mistake being made is as follows. A property is ascribed to humans, by abstraction, when humans cannot possibly have that property as their sole proper and complete description in their full relational context with their own nature and the world. This is a kind of category mistake. Humans, taken in isolation, instead of in context in social and environmental systems are characterised uni-dimensionally as being black holes of unlimited wants. It is this uni-dimensional imputation which is at the heart of the problem. As I noted earlier, the imputation becomes a prescription; a prescription for individual behaviour and a prescription for economic theory and practice which by its own system reinforcement (complex system feed-backs of the prescriptions) becomes a self-fulfilling prophecy in practice – and thus a circular proof of the theory. We are told we have unlimited wants. We are told to indulge them. We then act that out. We act is if neither ourselves nor the world will be damaged by our indulging our wants to the utmost. Indeed, we are told that unlimited wanting is virtuous, personally and economically.

    The matter of abstraction of primary attributes is where OE attempts to copy hard science, especially physics, and fails dismally. Hence, I suppose, it is called the dismal science. 😉 It is common in physics to abstract primary attributes (called “primary qualities” in some philosophy) and quantify them. Mass may be regarded as a primary attribute of all objects possessing mass. The objects may be very diverse but all possess the attributes of mass. Comparison and aggregation imply “making the incommensurable commensurable in some fashion. We begin with incommensurable items – ‘apples’ and ‘oranges’ – and then use a common dimension (primary attribute) to make them commensurable. The dimension (primary attribute) converts qualities into quantities that can then be universally compared.”

    I owe some of the insights and all the quoted words in the above paragraph to Blair Fix from his paper – “The Aggregation Problem: Implications for Ecological and Biophysical Economics.”

    Blair Fix also notes that “dimensional choices affect aggregation”. I refer the reader here to Fix’s paper for a full explanation of his ideas in his specific subject and context setting. I am making a wider claim here but it is wholly suggested to me by Fix’s concepts and exposition. My wider claim is that dimensional (primary attribute) choices seriously affect our modelling of a complex system. It’s another kind of aggregation problem in broad terms, especially when a complex agent or agents (a human or humans) is/are grotesquely one-dimensionalised to enable aggregation, or rather conjunction, with other elements in a complex system model which claims to model something real if it claims to be descriptive economics. My point, in broad terms here, is that such a model can only be prescriptive at best. It never can and never should pretend to be descriptive, though I do believe OE pretends to be descriptive.

    That’s enough for one post. I’d need to post a lot more to bear out my claim that “Orthodox economics fails to resolve its inconsistent treatment of formal objects and real objects, or formal systems and real systems.” Part of it relates to value theory and also the neutrality of money or non-neutrality of it. Part of it also relates to one of the implications of my development of ontology, as a form of complex system monism or priority monism, which strongly suggests Cartesian dualism is a flawed ontology. It does so by demonstrating that a monistic conception of existence and phenomena (as complex system phenomena) is more consistent with the discoveries of modern science (and vice versa). From this it follows that OE makes fundamental mistakes due to its implicit acceptance and extensive use of Cartesian categories. Thence, it fails to properly treat, categorise and understand real systems, formal systems, and especially their interrelations.

  15. WoooW Iconoklast. Your effort is worthy of awe from me. You keep trying to teach mainstream economists that their enclosed, encrusted concepts of economics have a flaw and where it comes from. Your insight of the flaw that is coming from basic assumptions that build up onto much larger mistakes producing moral decisions within them can be understood only if an economist fully grasped two different schools of economics, believed in both of them and tried to understand why they differ and where such collision comes from.
    You will not find economists that did this. Most economists will try to proof one school with concepts and models from other school. It will never work to comprehend the impact of ontology on any of the schools of econ.
    For an economist to learn what you try to tech them it is necessary to know two different schools and believe in both of them and then to honestly try to comprehend their differences.

    To J.Q., Ernestine and Gregory: Believe in two econ schools and see why they differ but come to the right answers consistent with their own ontology prescriptions. You need to trust both schools in order to find ontological mistakes. I know this sounds condescending.

  16. “The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels”
    The central idea is that rather then worrying about budget balances (which is just a post fact outcome, it can not be predicted) governments should worry about employment (and standard of living (my addition)).
    It is true that taxation and deficit levels are prescription to battle high inflation only if it appears. Only when it shows, not when predicted. High inflation, not moderate inflation. But the most recent prescription is to carefully target spending levels in order to attack the source of inflation.

    There is no model that can predict seigniorage level that could cause inflation since inflation will depend largely on private sector decisions to save or to indebt. That can not be predicted, so the question is out of value to be discussed.

    “To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.”
    Ontology is very important in this sentence. For J:Q.the word resources means all available labor AND materials AND industrial capital.
    Ontological meaning for MMT of the word ‘resources’ considers only available labor, other scarcity is inconsistent with MMT that describes only sovereign monetary systems. Sovereign monetary system to MMT is only those countries that have floating fx and debts only in their own currency. There are only 6-7 countries in the world that satisfy MMT description of currency sovereign: UK, AUS, Canada, USA, Japan and Switzerland.
    Other resources that MMT deny as scarce are simply bought by these countries for their own currencies thus not incurring debts in foreign currencies. That is the imperialistic outcome of the “former” empires imposing their will on the rest of the world. All Dollars, Yen and Francs are accepted by other countries as what economists call “reserve currency of the world”. Yes, all dollars, Yen and francs are reserve currencies, not only $US as standard opinion goes.
    Hence the formula MV=YP where Y (quantity) is the supply of the whole world for those currencies. So, the MMT discards such scarcities. All those are variables that endogenously come out from the system as needed and per private sector decisions.

    I hope that this answers part of Iconoklast’s question on ontological differences.
    Another part, a large one.

    MMT studies only monetary system, not real sector (how much is produced and why, what lead to that…) Only MMT and Austrian school studies pure monetary systems and believe that “money turns the world around” not other way around as most economists believe and follow to get to the models. Only these schools can keep monetary system out of the real sector throughout the synthesis. Orthodox and Keynesian economists will jump back and forth between monetary and real sectors throughout the models and switch the use in the result as needed.

    J.Q., Ernestine, Gregory. Your terminology jumps between real and monetary sectors throughout your model when you try to evaluate MMT. MMT carefully keeps those systems separated and finds dynamics in monetary system while barely ventures into the real sector.
    When you get the answer to Iconoklast’s question on your economics ontology (if you ever try) you would be able to comprehend what is MMT all about. I said here why MMT seems like “whack-a-mole” idea to you; you keep jumping between real and monetary sectors in your models.
    Sure, there are some definitions that differ in descriptions, (like the term “resources”) but not many. Term Government is another big one but only when it comes to money….

    To MMT it is “consolidated government” that consists of Congressional Budget spending, FED, Treasury and private banks (but only the part that is about reserves at the FED)
    Private sector balances created by private banks that is used in economy is separate part and it is the Private sector separated from “Consolidated Government” sector. Mistake that leads to confusion is not using the term Consolidated Government when Government term is used. Tha should be always used for understanding. Why?
    CG have a circular flow of money that is selfsustaining and possibly unlimited and so is the private sector money circulation, but they are separated and barely have feedbacks between them. This is barely understood.
    Steve Keen adds a lot that MMT is unclear about that i, myself, subscribe to about private banking sector and foreign sector.

  17. Jordan from Croatia,

    My attempt is neither original nor grandiose. There are many strands of political economy thinking from Marx and Veblen to CasP (Capitalism as Power) which indicate a general heterodox consensus that orthodox economics is fundamentally flawed. I draw on these traditions albeit in my own fashion. There is also much to learn from Ecological and Biophysical Economics, monist philosophy, science and complex systems science. Practitioners of orthodox economics seem to ignore these issues and disciplines in the main, except classical mechanical science and mathematico-deductive theory.

    Orthodox economics merely represents another orthodoxy which has (almost) had its day. Just as the geocentric model fell to the heliocentric model, as the Creationist Model fell to the Evolutionary model, as the Classical Physics model was expanded by the theories of Relativity and Quantum Mechanics, so too is orthodox economics due to be comprehensively refuted or at least radically revised by new knowledge. It is not grandiose to suggest that a human orthodoxy may be wrong. Indeed, human history has been a process of successive discoveries which have overturned orthodoxy after orthodoxy.

    As for comparing two disciplinary ontologies without going back to basic metaphysical assumptions (a prioris) and examining same… well, that’s an incomplete approach at best. MMT (if you are thinking of it) rests on shaky ground as it essentially accepts a basic underpinning of orthodox macroeconomics. I mean its assumption that any and all of macroeconomic measures in the denomination of money actually mean anything or much about the real economy. Measures of real physical things mean something if you can accurately measure them; even of persons, for example persons in occupations and not in any occupations at all (unemployment) or persons with malnutrition or with a mdedically defined opiates addiction or dental health below a given defined standard. But taking macroeconomic money amounts as proxies for real products or real achievements is fraught with unacceptable levels of measurement error.

  18. Jordan from Croatia,

    My apologies, two of our replies crossed simultaneously on the net.

    J.Q. does attack a somewhat straw-man view of MMT. You are right when you correct J.Q. as follows.

    “The central idea (of MMT) is that rather than worrying about budget balances (which is just a post fact outcome, it cannot be predicted) governments should worry about employment and standard of living (in real measures).”

    There a significant element of truth in what you say about MMT. It is indeed trying to separate the real and the monetary sectors and to analyse how they operate separately and then in conjunction. However, I am not convinced that MMT proponents have got this inter-relationship fully clear. It’s very difficult to anlayse the interactions of dynamic formal and dynamic real systems. I am struggling with it myself, even at the most general English language level of analysis which is all I can manage. Even harder than analysing it is expressing it clearly; although one could argue that analysing it clearly is only completed when the expression of the analysis is clear. There is a sense in which these are in identity.

    Whether it’s an analytical error or a rhetorical presentation error I am not sure, but MMT tends to overemphasize the power of money to be used to correctly order real quantities efficiently, with a view to both real resource scarcity issues and human needs and wants. There are two kinds of scarcity too, economic scarcity and real world quantities scarcity. The two are linked in various ways but not identical. MMT seems to downplay real scarcity and over-emphasize substitution, (as does orthodox economics) and also overplay its hand, namely in that fixing macroeconomics via national accounts, according to MMT principles will fix almost everything. I am not all certain that that will prove to be the case.

  19. SCARCITY – (I did not deal with this in my last long post which mentioned it)

    If Orthodox Economics (OE) claims to deal with scarcity then why does it deal with it so badly? This proposition is developed out and supported below in a “notes toward a theory” sketch. I don’t claim to have to worked this out properly or clearly.

    There are two aspects to scarcity in this context, namely economic scarcity and natural scarcity. They are not the same thing. OE deals expressly with economic scarcity and only tangentially and indirectly with natural scarcity. Yet OE claims to deal also with natural scarcity and to do it through its means of dealing with economic scarcity and the generation of substitution effects. This OE claim ignores its inadequate theory of pricing (value theory) and its inadequate method for treating or incorporating “bads”, meaning negative externalities, into economics. OE fails to comprehensively deal with scarcity not just because its actual price signals are not and never can be objective but because price signals per se are inadequate for dealing with natural scarcity.

    Price signals are never objective with respect to the entire range of real system existents, be they resources, bio-services, ecologies or even real economy existents. This might be termed “The Comprehensive Failure of Value Theory.” This is a big topic and I cannot deal with it adequately here. Following CasP (Capital as Power) theory, I will quote from a CasP writer, Blair Fix.

    “Monetary Value: The Changing Meter Stick

    I move now to a dimension problem that is unique to economics. A defining feature of economics is its use of monetary value as a dimension of analysis. I will first discuss when this is unproblematic. If our interest is in prices themselves, then monetary value is a valid dimension of analysis. However, economists often use prices as a means to measure ‘real’ quantities of production. When used this way, we run into a sea of epistemological problems. The result is irreducible measurement uncertainty.” – “The Aggregation Problem: Implications for Ecological and Biophysical Economics” – Blair Fix.

    This ought to be enough to suggest the problem to trained economists. If it is not, and for non-economists, I suggest reading subsequent sections, namely “Prices for their Own Sake? Or Prices for ‘Real’ Quantities?” and “The Purpose of a Unit” which latter heading I think could also be titled “The Purpose of a Scientific Unit”. Indeed, I would suggest reading the whole paper to get a much better feel for the ontological and epistemological problems assailing orthodox macroeconomics. This paper has certainly aided my quest to critique the ontology of economics.

    In addition to the “changing measuring stick problem”, price signals are inadequate for dealing with natural scarcity issues because price signals operate in a different manner in relation to valuing “bads” versus “goods”. I argue that price signals are “market-immanent” for goods but not “market-immanent” for “bads”. As stated above, economic scarcity is different from natural scarcity. It is in the conjunction and interaction of this problem with the “bads” versus “goods” problem that we will identify the peculiar inability of OE to deal with scarcity, in its two manifestations, properly; along with the “changing measuring stick problem” of course.

    An economic good is a good or service that has a benefit (utility) to persons and which has been drawn into the economy or is made in the economy. Economic goods have a degree of scarcity which entails an opportunity cost. If one person consumes it, another cannot. With standard economic goods, the relative scarcity of supply in relation to the relative strength of demand, determines the price in praxis at a given time and place, meaning in the market and in the standard or common unit of exchange. A free good is a good with zero opportunity cost. This means theoretically it can be consumed in as much quantity as needed without reducing its availability to others. In practice, many free goods have limits as free goods. Pushed beyond these limits they become contested goods.

    All economic goods are defined in praxis as “economic” by being buyable and sellable; by being drawn into market economics and valued in standard units of exchange. Given a market at all, one can say goods are natural objects in the market. Economic goods are operatively valued in the market; they are valued by operations intrinsic to the market system itself. That is to say, the positive need or want for a good, guarantees the desire to pay for it or steal it. In addition, goods are, as it were, parcelled and discrete, and offered in set lots by an obvious seller. Thus, it is clear, because the goods have a clear owner, who if observant and diligent will insist on payment rather than theft, that the market has an extensive multiple-agent, self-regulating nature to its system.

    In relation to “bads”, there is no natural market. That is to say there is no natural demand for economic “bads”, for extremely bad apples for example. This is trivial and obvious. In contrast to this, there is not a market, of course, but a natural dump for “free bads” (considered as the opposite of “free goods”). “Free bads”, more commonly called negative externalities, have a natural dumping ground, meaning all of nature itself outside the economy and even all parts of the economy outside the ownership bounds of the dumper. Nature, where it is not enclosed, divided or owned via economics and its physical and logical enclosure systems (fences, walls, fire-walls, title deeds, money accounts), and even when it is, often enough, tends to be comprised of complex real systems with extensive and complicated flows between real sub-systems without regard, outside the laws of physics, chemistry and biology, to nominal or real economic system flows.

    So far as nature is concerned, it does not have its own agents who react back through the human market and political systems. This is true except where humans are these agents and react back to dumping by taking action in the market, political and legal systems. But this is a very partial guardianship at best, in both senses of the term partial (incomplete and subject to bias). This guardianship is not nearly so extensive and comprehensive as the ramifications of the negative externalities through the natural systems. While economic goods have their intrinsic and zealous guardians in the economic system, the owners of the goods themselves, free goods and free nature have not these intrinsic guardians within the economic system. Intrinsic guardianship of free goods and free nature cannot arise from within orthodox economics, nor even from within market economics.

    “Free bads” are relatively free to act out the essence of their fugitive and dispersive nature and to scatter widely beyond human observation and control. They are hard to control and not at all controllable by the market unless an artificial trade in “bads” is introduced by regulation. This is the crucial difference. A market for a good or perceived good does not have to be legislated for. It arises naturally by demand. (There are exceptions where elite tastes are legislated for, say ballet. We also seem to legislate against some very base tastes but not against monster trucks, strangely enough!) A market for permissions to “emit free bads” has to be legislated for, as a kind of unnatural market. With goods, all is free to trade except what is proscribed. With “free bads” (negative externalities) all is free to emit except that which is proscribed or given a cost. The effects are very different. Many goods naturally arise on the market but relatively few “free bads” are proscribed or given costs. On the one hand, the natural and legal limits on proscribing are beneficial in the main for market economics. On the other hand, the natural and legal limits on proscribing are deleterious in the main (for biosphere systems first and afterwards for humans). In this sense, markets have an in-built and seemingly unavoidable systemic bias to favour their own systems over natural systems.

    Growth economics loves itself. It self-reinforces exponentially through at least two mechanisms. The first is the exponential of quantitative growth itself. Another, which depends on the first, is an exponential introduced by the reduction of free goods. The very process of growth crowds out free goods. What was a free good ceases to be a free good. Where one person could use a free good to satisfice without reducing the ability of one more to satisfice on that free good (meaning no opportunity cost), the activities of many persons function to introduce an opportunity cost where there was none before. The nth person can no longer satisfice on the remainder of the free good. Few free goods, except those in super-abundance and super-ubiquity, like oxygen in the atmosphere or the navigable high seas, escape this rule in a crowded, industrialised world. The formerly free good now becomes subject to opportunity cost and thus the object of direct competition. This direct competition will be solved by physical aggression (violence, exclusion), or rationing or price. The third option arises by drawing the former free good into the economic system and essentially rationing it by price with the state’s monopoly on violence ultimately underwriting the stability of the ownership and pricing system (rights in property and rights in contract). Thence we see that rationing and violence are never fully done away with by market price but they are overlayed, and transformed in expression, by market prices.

    Insofar as having markets suits our tastes, abilities and proclivities, and are a creative solution for conflicts over contested goods, having markets is a much better condition for society than using brute and internecine violence to solve conflicts over scarcity. This point would be fair enough in itself if we did not notice the tendency of certain nations to use international violence (offensive expansion, imperialism and wars) to solve regional and global conflicts over scarcity in favour of their own nation. In addition, we need to understand where a more or less total market society is leading us. Free market fundamentalism is a totalising system subject to rapid runaway in the manner outlined above. It has a first order growth dynamic (gross growth), a second order growth dynamic (technological growth) which I omitted above, and a third order growth dynamic which is a destruction and/or a crowding out of free goods from nature. It either destroys natural good, forcing one to purchase a substitute from within the economy, or its crowds out the natural good and makes it too scarce to satisfice, hence once again drawing it into the economic system. All of this is a self-reinforcing, runaway process. Orthodox economics has no adequate theory to deal with any of this so far as I can tell. It places no systemic bar on the playing out of these processes to the point of extensive collapse.

  20. Ikonoclast
    I did not find the time to properly comprehend your response since it is a very detailed and thoughtful writing, until now.
    “MMT (if you are thinking of it) rests on shaky ground as it essentially accepts a basic underpinning of orthodox macroeconomics.”
    MMT does accept basic underpinning of orthodox economics but only when it comes the real sector activity, yet it assumes that “money turns the world around” so it dabs only into the monetary system as a superior sector that not only influences but leads real sector in its decisions and operations/ behavior. There is not much need to reanalyze the real sector which is already very well analyzed and modeled but that only follows the movement of money which is a superior sector. Austrian economists were only one analysing it but they got stuck in 200 year old monetary reality that has nothing to do with present monetary system. So MMT put toghether present and real monetary operations but only for 6 countries in the world that are currency sovereign. I have used it to analyze non-sovereign currency country operations and i think i have it now. It took a while.

    “MMT. It is indeed trying to separate the real and the monetary sectors and to analyse how they operate separately and then in conjunction. However, I am not convinced that MMT proponents have got this inter-relationship fully clear.”
    It is simple, Money leads the real sector in their decisions. A government is a social construct created and improved over the eons to serve as organizational body to organize any society larger then 3 families. As such it can lead any society to desired goals, and money management as the most powerful motivation for any society serves that controlling mechanism. Money is a creation of a state (initially by priests that did governing) and as such controls the real sector. By deciding on the budget issues it solves issues in economics. The control is not 100% powerful but sufficient to manage as desired over time.
    That is, in my view, sufficient for interaction operations between sectors.
    MMT recently began to emphasize the need for vigilant observation of the private sector conditions and react swiftly in budgetary means just as it happens in natural disaster events.

    Regarding the money values representing the real values i find it as the best way to do it and i can not think of alternatives nor have you provided any alternative.

    For scarcity problem and goods and bads problem i would consider that a political problem not economical and it is solvable using budgetary means and organizational power of state. First it is a philosophical problem and then political. Btw, i agree with the existance of such problem.
    It is solvable by using the organizational, monetary and marketing power of a government that is vigilant and in good will.

  21. To J.Q.
    “what is the scope for seigniorage”
    I said that it is not knowable to calculate the scope of seigniorage before it creates inflation due to private sector decisions that can not be predicted.
    There are three sources of money creation and destruction:
    – public sector creates money semi-permanently as deficit and total is summarized in total public debt
    – private sector banks create money when issuing the loans and destroy it as loans are repaid. The private money is temporary since almost all loans have to be repaid (except in bankruptcies when money is not destroyed but the record of it is) The net new debt is the new money liquidity in the system. Willingness of private sector to indebt counteracts the liquidity from public sector, so and it is expressed in Private sector ballances.
    -foreign transactions add or deduct to liquidity. MMT and Steve Keen disagree only on this issue and im with SK.

    MMT does not pay a lot of attention to private sector decisions to go into debt since those decisions are private. but suggests to control private banks’ limits on lending by allocation since it is unlimited othervise. Such private sector ballance is expressed in the basic MMT model and it provides the insight into the needed spending by public sector. If we discard foreign sector for the purpose of the simplicity and which is almost uncontrolable, Private sector deficit is = public surplus and
    Private surplus is = public deficit.

  22. Proff. Q.
    “Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.”
    That is not MMT view. MMT view was that there will be no inflation from QE, but not for the reason mentioned by you. That was Keynesian view, only.
    MMT is aware of destruction as well as creation of money processes, unlike economists.
    FED suspended the rules that dictate the closure of banks and would force FED to close all the banks in the USA if it did not suspended them. First rule suspended was “Mark to Market” rule in defining the solvency of a bank. That was not enough to keep the banks from destroying much more values of assets that could not be sold at the time.
    QE was only preventing further destruction of money in the system by swapping temporarilly unsellable assets for money providing the banks with funds to avoid bankruptcies due to previous rules from FED. QE was no additional money in the system so no inflation.
    Base money does not circulate in economy so it was not additional money from that side either.

    “According to the St Louis Fed, the monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money.”

    Again, that is monetary base or base money or M0 that does not circulate in economy but is only used for interbanking and FED processes to create money in the system. Base money is part of Consolidated government sector, it does not enter real private sector (it does in the form of cash but state is prevented from printing cash by rules) and we are not talking here about cash. It affects it but not in the way it is predictable especially not in the times of ZLBound.

    “Rather, the budget deficit (smaller than it should have beeb) was financed with bonds. The sale of these bonds to the public would have depressed demand, but instead the Fed bought them (and also some high-grade corporate bonds). That’s not the best way to stimulate the economy, but from an MMT viewpoint it’s not obvious that it matters (interested to get comments on this).”

    This is Loanable funds theory producing such thinking as above.
    Lonabale funds theory is completely bogus. Private and public sectors borrow different money so they never compete for funds.
    Public sector borrows (95% of the time) base money that does not enter the circulation.
    Private sector borrows newly created money from banks that have to be destroyed as loan is payed back.
    Totally different sources of funds for private and public sectors are used.

    When Government sells bonds to Primary dealers (public barely gets to it or foreign sector gets it when primary dealers sell them out as much as anyone wants only later so there is no pressure to sell as LFTheory says), Primary dealers can use only base money -Reserves already at the FED- to buy those bonds. MMT calls that Reserve drain.
    Now Treasury has money to finance spending and as it writes checks to private sectors it refills back those reserves in banking system (drained out by bond sale) and fills accounts of private actors that have accounts in private banks.
    again, when Treasury sends checks out, the private accounts are filled AND Reserve accounts of corresponding banks at the FED. When it sells bonds, only reserve accounts of Primary dealers get drained.
    This is the process by which Consolidated Government has unlimited money to produce by circulating process without ever printing cash. It does not need funds from public to spend. So “taxes do not fund public spending” MMT mantra that you have heard of, now explained. (i actually tried to explain this multiple times, but were you ready to hear it?)

    Base money does not enter the economy except as cash but that is much less significant today. There is only about $7T of cash in the World.

  23. “On the other hand, the same episode shows that a widespread interpretation of MMT, that we can greatly expand public expenditure with no corresponding increase in taxation, is both wrong and inconsistent with the core idea of MMT.”

    That is from Loanable funds theory which i explained why is a bogus theory in above comment.
    Private and public borrows different funds that barely interact with each other. Public borrowing is from Reserves at the FED that as it spends refills back those reserves.
    Private borrowing is from banks that create those money and then destroy it later.
    But it is very important to note that MMT is a description of monetary system for only 6 countries in the world. Two conditions have to be met in order to be a country that MMT describes:
    have debts in your own currency only and
    float your currency exchange
    Those 6 countries with sovereign currency are UK, AUS, USA, Canada, Japan and Switzerland.
    All “former” empires that force other countries to trade in their currencies so they would not have debts in foreign currencies. Those are six countries that enjoy what is commonly understood as Reserve currency of the world. Yes, $AUS is a reserve currency in the world because USA says so and every other country will readily accept $AUS for their products allowing AUS to be sovereign currency (reserve currency) country and not incur debts in foreign currency so the MMT is applicable to Australia.
    Because the whole world will accept dollars for their products the formula MV=YP makes Y the whole world supply, not only Australian (or USA) available supply. Also P is affected by world P, more then any other country.
    The world’s supply explains the lack of inflation in sovereign countries, lack of inflation of imported stuff, while the stuff that can not be imported like Healthcare, housing, legal and other services inflated greatly. Credit boom inflates assets, or stuff that can not be imported only. Credit repayment (money destruction) deflates assets that can not be imported. Hence, Steve Keen with credit acceleration and employment correlation/ causation.

    MMT states that only constraint to public expenditure is resource constraint which will cause inflation, but only resource constrain is labor resource. Goods can be imported without limit at the same price, what can not be imported will inflate if the labor availability is met.
    Consolidated government is set up so it has unlimited funds as Federal budget says so.
    FED controls the rate at which government borrows (everybody should have learned that from last 10 years) And spending itself can cause inflation not the way it funds it’s spending.
    If it prints new money and spends, or sells bonds to get bank Reserves that are not circulating in the economy and spends (the same amount decided by budget) completely makes no difference. It is the Federal budget that solely decides how much money is spent by government, nothing else. Nothing else (except automatic stabilisers that are also decided on by previous administration) decides or impacts government spending in sovereign currencies.
    So if the Congress decides so, public expenditure is unlimited until full employment.

  24. “This is the process by which Consolidated Government has unlimited money to produce by circulating process without ever printing cash.”

    This is complete nonsense, as is

    “Totally different sources of funds for private and public sectors are used.”

    You only need to consider the real side of the economy to understand that this has to be wrong. The total resources of the economy are finite, and the public and private sectors draw on the same resources. Lots of governments have tried to avoid this logic. The result has invariably been inflation, and, within a couple of years, hyperinflation.

  25. John Quiggin,
    Your answer to John from Croatia is a terrible answer. Where is the hyperinflation for Japan, the USA or Germany?
    Let me try to answer that question for you. It is in Venezuela, Zimbawue, and Iran. We live in a global economy and imports allow the core capitalist countries to avoid hyperinflation by importing real resources. The rate of inflation is based on accounting. Accounting is based on market value which is based on an illusion. An illusion which counts a hector of Brazilian Rainforest being converted to cropland as a gain rather than a loss.
    None the less the reaction of economists in core capitalist countries to inflation is also an illusion. It is based on the illusion that money should store the value of our labor and entrepranurial risk for the future. Can you figure out why that is an illusion or will I need to explain that once I get back home?

  26. @Curt As the OP shows, money creation in the US has been very modest. amounting to a few per cent of GDP each year. The same is true in Japan and the eurozone. Countries that have tried unlimited money creation, as suggested by John from Croatia, have experienced hyperinflation. MMT does not distinguish between “core” capitalist countries and others. So, the many instances of hyperinflation in countries with sovereign currency are relevant to the nonsense version of MMT put forward by JfC and apparently endorsed by you. To restate, the whole point of (correctly defined) MMT is that monetary expansion should be determined by the need to avoid inflation.

  27. John,
    I have been reading MMT web sites for a couple of years now. No where I have seen any MMT economists talking about creating unlimited amounts of money. The goal as I understand it is to have enough money in cicultation to assist in achieving full employment.

    As a sociologist, a lay economist, and a human being. if I had a choice between living in a country with no unemployment and workers recieving a decent wage but suffering from 100% inflation per year, or a country with no inflation but 10% long term unemployment and many more underemployed. or employed at subsistence level I would easily chose the country with the high inflation.

    The costs that unemployment impose on people who are unemployeed for long periods of time is much worse than the costs that 100% inflation impose on everyone else. Inflation is a flat tax on bank accounts. Rich people love flat tax rates. Therefore if they had any sense they should love inflation.
    Now even though I support a full employment policy I do NOT support an MMT full employment policy.

    Just between me, you and your reqular readers:
    I reccomend a path towards achieving full employment by convincing lots of people to committ suicide…………..starting with the highest ranking officers of the US military. Then I reccomend working out from there. Of course I recognize that they all might be harder nuts to crack than Admiral Stearney. At some point I I suspect that there will be a need to have to try to figure out a way to get those obsticals to an ethical society murdered. After all most psycopaths do not have a lot of enthusiasim for dousing themselves in Napalm and setting themselves on fire. These people have no respect for Buddhism let alone Humanism.

    I have an additional problem with Bill Mitchell’s MMT full employment job creation program. It only pays one wage reguardless of what type of work on does. Bill Mitchell claims that one wage is needed to prevent inflation. As a sociologist I do not really care about that concern. If there is only one wage then there will clearly be at least the preception that some workers are being exploited. That is totally unacceptable. If a geovernment could reduce the working population by executing or imprisioning all of the people who have been committing mass murder for decades anyways, which includes not only members of the US military, but the military members of the close allies of the USA, such as Austrialia, then a government will not have to deal with the preception that it is exploiting some of its unemployed citizens,
    No I am not guilty of encouraging tyranny. Of course those members of the miltary who are young and inexpirienced in the ways of the world, or those who are actually working for an alien power would be spared the prison sentences that would remove them from the work force.
    Of course I doubt if my reccomendations would ever be fully implemented. But they have as much chance of being fully implemented as any other plan that would actually benifit the general welfare of humanity.

  28. OOOOh,
    I forgot to mention it, yes of course we live in a global economy, and a global society (of complete anarchy), So of course the economies of Venezuela, Iran, Zimbawue, and Russia are relevent to the discussion of MMT and currencies.

  29. “You only need to consider the real side of the economy to understand that this has to be wrong. The total resources of the economy are finite, and the public and private sectors draw on the same resources.”
    This is a clear mixing of the topic at discussion with additional topic. MMT clearly stays within monetary description while you here introduce real economy. My description is clearly only monetary side description. You are right that inflation limits the usable amount available, but we were not talking about that, we were talking only about financial side of government spending.
    MMT accepts real sector constraint, but it is not about that.

    “different sources of funds” and
    “public and private sectors draw on the same resources” use two different subjects. Me talking about funds, you talk about resources, real resources.
    I separate money as abstract value and goods and services as real values. Do you?
    Your response did not touch the subject you claim to discredit.

  30. “money creation in the US has been very modest. amounting to a few per cent of GDP each year.”
    Budget deficit is new money creation and it is permanent since no country reduce its nominal debts. I explained how circular accounting allows for new money creation by deficit spending. Primary dealers by gov bonds with bank reserves already at the FED, it only changes ownership, not with money that circulates in economy.
    US Private banks money creation runs about 10% of GDP annually. That is net new credit growth. Private banks money creation is temporary money while public deficit spending is permanent new money unless government runs surplus which is a rarity. When there is a budget surplus then the old money gets destroyed.

    ” MMT does not distinguish between “core” capitalist countries and others”
    true, MMT does not name it “core” capitalist countries but it calls it sovereign currency countries and it always says that it talks only about sovereign currency countries which have to be on floating exchange and no debt in foreign currencies.
    They never mention what countries are those, only i do. And only countries with sovereign currency are those 6 “former” empires. MMT leaders do not want to talk about that, they would like to preserve the secrecy of the power source their countries poses.
    But, me, i live in one of those countries that do not have sovereign currency. Those 6 empires forced us to peg our currency by refusing to trade in our money. Thanks to MMT i can understand how such financial colonization works on my government. Countries with pegged currencies have to use Mundell-Fleming model for government spending not to get into problems with raising interest rates while economy is tanking.
    Countries with no debt in foreign currencies can follow Taylor rule and lower interest rates while other countries have to raise interest rates while going into recession shooting themselves in the head just as Greece did. Greek Central Banker raised interest rates as economy was tanking. Do you wonder why they had to default on their debts? Because their CB raised their interest rates, not bond vigilantee.
    Japan on the other hand can lower interest rates and keep them there as long as it needs no matter the level of debt since it is in their own currency.

    MMT explicitly always mention that it is description only for sovereign currencies. Only 6 countries in the world have sovereign currencies, say i. And they are “former” empires.

    BTW i’m Jordan

  31. Apologies for getting your name wrong, Jordan. I thought “John” was wrong, checked and somehow convinced myself it was right. My only excuse is that it was late at night.

  32. no problemo on getting the name wrong.
    “To restate, the whole point of (correctly defined) MMT is that monetary expansion should be determined by the need to avoid inflation.”
    the whole point of MMT is that TARGETED monetary expansion should be determined by the need for full employment and better living standard. Inflation is to be watched for, not predicted (as is suggested in the quote) and not to be worried if it is a temporary event. Only accelerating inflation is dangerous.
    My US econ professor taught me that the only cost of high inflation is “thinner soles” by people running to spend their money immediately after receiving it. I did not understand it then but i tried to believe it. Now i know it is truth. I know that inflation up to 20% is a benefit since debt burden gets lessened, and pretty much everyone is in debt while others are protected from inflation. Only mattress staffers loose.

    So, inflation can not be predicted so it should not be in mind while calculating expenditure needed.
    Good wages arriving after longer full employment period would allow for higher credit issuance which would cause inflation. That should be controlled by issuing quotas to banks and for sectors not by lowering employment as is the case last decades. Public expenditure would be reduced by automatic stabilizers as wages go up.
    So it is not the public expenditure that would cause inflation but with more credit issued by banks. (Banks issue new money when issuing credits and destroy it as credit is payed back)

  33. The differences between MMT and Keynesian economics net out to the narcissism of small differences. “The narcissism of small differences is the thesis that it is precisely communities with adjoining territories and close relationships that engage in constant feuds and mutual ridicule because of hypersensitivity to details of differentiation.”

    MMT and Keynesian economics belong to that general orthodox economics paradigm which sees economic growth as the solution to current economic and social ills. They are both wrong. Endless growth is impossible and we are now entering the zone where further growth will do more damage than good. MMT-ers and Keynesians (of all types) are fighting the ideological and academic battles of the last real dilemma not the next real dilemma.

    Orthodox economics operates as if the real economy is a standalone system. No proper attention is paid to the fact that it is a sub-system of the biosphere. The real economy is of course a dissipative system: a thermodynamically open system operating far from thermodynamic equilibrium in the environment with which it exchanges energy and matter. The order and complexity of the natural environment are plundered and broken down to increase order and complexity in the economy. Anthropogenically driven climate change and the 6th mass extinction are proofs of the proposition that the current form of economics, especially but not only as growth economics, is unsustainable.

    MMT and Keynesian economics, in all their variants, are both orthodox and both wrong.

  34. I agree with everything posted by Ikonoclast. My only helpful suggestion is that he remembers that as a body of knowledge Economics may have had its birth in Europe, its upraising in France (no pun on the French Revolution intended) but it was a “stolen generation” (apologies to our first nation people) subject. The Scottish moral philosopher Adam Smith stole all his theory from the French Physiocrats. He was called the father of modern economics but really was the step father only. This gave early economics a sort of straight jacket of Presbyterianism in that it was infused with values from the Protestant church but administered by so-called elders of equal rank in a regional/nationalistic and legalistic framework. When Smith writes about the DIVISION of LABOUR he means division by a class system prevalent in his day. When he extols the virtues of a “pin factory” productivity gains he forgets to mention that the workers are all fourteen year old boys. By explaining specialization using a framer’s supposedly lost productivity as the farmer switches from one task to the next; Smith exhibits his own farming ancestry.
    By the time the very rich David Ricardo comes along the focus is on industrialization. Then John Stuart Mills and Alfred Marshall entrench classical economics in a web of Englishness. Marx calls this out as capitalistic imperialism. His Hegelian dialect rejects such a monocultural approach.
    Orthodox economics came out of the neoclassical school that Milton Friedman sponsored. It had now a decidedly American flavor. Suddenly the would “free” was attached to everything as the ideal. Like
    FREE TRADE (instead of the comparative advantage term from Ricardo). FREE MARKETS instead of simply a place where “buyers and sellers meet and there is a exchange” it becomes a place of rampant exploitation where market power is abused.
    The assumptions of orthodox economics include the unreasonably simplistic ones of “perfect knowledge” and “totally free choice”. This is the Achilles heel of orthodox economics. But its proponents answer all challenges with statement of faith rather than logic. They will rant about “red tape”, “government intrusions into private decision making” and rage against the big SIN of government monopolies.
    Keynesian economics carries some of this baggage. That is why John Maynard Keynes ( a non-economist) stated forcibly in 1946 that he “WAS NOT A KEYNESIAN supporter”. Even neo-Keynesianism failed to overcome this attached baggage preventing lift off into the Twenty-First Century. With many cultures, many religions now immersed in capitalist economic systems the past theories are less relevant.
    For example sustainable economic development has arisen to replace Rostow’s stages approach.
    But much more needs to be jettisoned before economics recovers its moral philosophy origins.

  35. Ikonoclast says: March 20, 2019 at 9:21 am
    Orthodox economics .. biosphere .. The real economy is of course a dissipative system: a thermodynamically open system operating far from thermodynamic equilibrium in the environment with which it exchanges energy and matter. The order and complexity of the natural environment are plundered and broken down to increase order and complexity in the economy. .. Anthropogenically driven climate change and the 6th mass extinction are proofs .. current form of economics .. is unsustainable.

    Exponential Economist Meets Finite Physicist

    I believe I’d seen it before, but still it is a good reminder.

    That was spotted it in a comment thread below an article backing big biz and the one-trick treasury crap of the usual sort that frequently is now issued with its fallacious appeals to authority to flood across the msm from various hopelessly compromised ANU departments (read propaganda, pure and simple):
    https ://

    Also from there, worth exploring, an interesting trail blazed by an old Professor of Petroleum and Chemical Engineering re-energised by a new grandchild. Well referenced/resourced by numerous links in articles and comments:

    http ://
    http ://
    http ://
    http ://

  36. When discussing MMT, in comparison to what is a usual Neokeynesian assault on monetarism. it is well to remember that the US currency is a reserve currency. This means that it is a special case. So even after almost a decade of ‘quantitative easing” there is no observable hyperinflation in the US economy. In fact, apart from a few notable exceptions, there is no discernible hyperinflation anywhere in the world toady. Of course Argentina was the last big economy to experience hyperinflation. But then Israel, Brazil and Zimbabwe were big economies that felt the cold grip of hyperinflation in the last fifty years.

    John Maynard Keynes wrote about what he called “The money illusion”. By this he meant that the real economy could become divorced from the money economy. Of course in his days he was struggling to explain deflation but he also observed the impacts of hyperinflation in Germany in the early 1930s. So the Neokeynesian argument rests on this insight from Keynes. The use of money as a store of value and standard for deferred payments can lead to hoarding. This is the curse of all capitalist economies. Keynes wrote that the Paradox of Thrift suggests that private wealth owners may simply refuse to spend money above that needed to maintain a certain standard of living. They then hoard their money surplus. Keynes wrote that this reduces the velocity of circulation of money towards zero. He wrote that deflation is symptom of those aberrant behaviors by individual economic units. Keynes’s point was that, if this was occurring you could print as much money as you like but have an almost negligible effect on the real economy. Keynes explained that means that if there is structural and cyclical unemployment is above the natural rate of unemployment then printing money will not be a solution to that problem. Keynes warned Also it is unlikely that, in these circumstances of rampant hoarding, that investment will increase. Of course inflation will also be largely unaffected.

    Of course globalization has complicated the behaviors of all dependent variables beyond the pure Neokeynesian analytical framework. For example China can affect the global money economy AND the global real economy. They affect the global money economy by loosening credit controls inside China and relaxing the transfer of money out of China. As a command capitalist economy the central planners in China have wide powers of intervention. They can also directly affect the global real economy by influencing the volume of the flow of goods and services (the real economy outputs) into and out of China. As the second largest economy in the world, China can impact a lot of other smaller economies. Australia is now linked into the Chinese economy. For example the current use of technical specifications to delay coal imports from Australia can have a big effect on Australia’s future coal export receipts.

    So MMT has a lot of complications not easily resolved. Globalization has made this worse not better.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s