August 1, 2017

What is MMT?

Comment on Nick Johnson on ‘Michael Hudson on Modern Monetary Theory’

Blog-Reference and Blog-Reference

The soundbites of MMT go roughly as follows:
  • Money is a legal creation, not a commodity like gold or silver. It is a special form of an IOU. A currency-issuing government’s IOU is the currency.
  • Creating money costs the central bank virtually nothing (likewise for banks creating their own electronic credit).
  • It is ‘the state’ that defines a unit of account (e.g. dollar)
  • Ultimately, ‘the state’ ensures the acceptance of money by imposing taxes that can only be paid in that unit of account.
  • It is ‘the state’ that spends or lends the currency into existence. This is sometimes summarized as ‘taxes drive money’.
These arguments are either half-true or false.

(i) An IOU economy can ― as a matter of principle ― be established by the business sector. This includes the definition of the unit of account.

(ii) A money economy is different from an IOU economy in that the general acceptance of the means of transaction is established and enforced by law. This is the crucial point where ‘the state’ participates in the creation of the monetary order.

(iii) Only a central bank is needed for the ongoing creation and destruction of money which takes the elementary form of deposits/overdrafts on the central bank’s balance sheet. Money comes into the economy by the autonomous transactions between the business and the household sector. It is ‘the economy’ that determines the quantity of money.

(iv) As a matter of principle, ‘the economy’ never runs out of money because the central bank can create it out of nothing. The crucial point is whether new money comes into the economy as (a) additional wage income, or (b), as additional nominal demand. Option (a) is the neutral way, option (b) affects the overall profit of the business sector and by consequence the income distribution.

(v) ‘Taxes drive money’ is just a silly slogan because it does NOT matter whether taxes T come first and government expenditures G come later or vice versa. As long as G = T in a given period, there are only short run fluctuations of the quantity of money during that period. It is only deficits, i.e. G greater T, or surpluses, i.e. G less than T, that drive money.

(vi) There is NO difference at all between the household sector and the government sector: it is deficits/surpluses = dissaving/saving = CHANGE OF DEBT that drives money.

(vii) By defining the institution central bank ‘the state’ can determine that the financing of the government deficit is unlimited and interest-free. This has NOTHING to do with the origin or the nature of money.

(viii) Credit and money is produced like any other product. Roughly speaking, the ‘price’ (average interest rate on the asset side minus average interest rate on the liability side) times the average amount of the central bank’s balance sheet must cover the costs (wages, depreciation of hard- and software, and so on) of producing transaction money and credit. It is a myth that the production of money or loans costs virtually nothing. The interest rate difference must be positive otherwise the banking system (central bank plus commercial banks) cannot break even.

(ix) The assertion: “The government’s budget deficit is (by definition) the private sector’s surplus” is false. The government’s budget deficit is the household sector’s surplus (= saving) or the business sector’s surplus (= profit) or a combination of the two. In the case of a balanced budget of the household sector the government’s budget deficit is equal to the business sector’s profit.

(x) The MMT narrative has no scientific content whatsoever.* Ultimately, MMT is a free-lunch program for the one-percenters.

Egmont Kakarot-Handtke

* For the comprehensive overview and the point-by-point refutation see cross-references MMT

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REPLY to Calgacus on Jul 3

The question is, What is MMT? And the answer is, it is proto-scientific rubbish.

To recall. Scientific knowledge is embodied in the true theory. The true theory is the humanly best mental representation of reality. Truth is well-defined by material and formal consistency: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

MMT does NOT satisfy the criteria of material/formal consistency. In fact, most of it is brain-dead political blather. People like this storytelling stuff but it is rubbish nonetheless.

You try to refute me with this argument: “Seriously wrong. Factually and logically wrong. A money economy is a type of ‘IOU’ (credit) economy. Money is credit and nothing but credit. Always and everywhere.” Yes, so what? This is exactly what I said about the logical origin of money: “In the next step, the firm pays the monthly wages with a standardized IOU and declares that this conveniently denominated title will be unconditionally accepted at the firm’s store. The employees accept that the IOUs discharge their wage claim against the firm.”#1

How money was introduced historically is a question for historians NOT for economists. The question for economists is to explain how the monetary economy works. The theory of money is a building block of the overarching ‘monetary theory of production’ (Keynes). MMT has NO theory of how the monetary economy works, i.e. MMTers have no idea how the price- and profit mechanism works.

You say: “The MMT meaning of that slogan is that taxation drives the demand for money. So deficits, money-creation could not drive (the demand for) money in this meaning.” The demand for money originates from the necessity of the business sector to pay the workers in an accepted means of transaction and from the necessity of the household sector to have an accepted means of transaction to buy stuff.#2 The general acceptance is established by law and not by the necessity to pay taxes.

You say: “Fully developed mathematical theories tend to have no scientific content ― it is all form, all in the definitions, all trivialities.” Obviously, you do not understand the role of mathematics in science: “But it was a second and more important quality that struck readers of the Principia. At the head of Book I stand the famous Axioms, or the Laws of motion: … For readers of that day, it was this deductive, mathematical aspect that was the great achievement.” (Truesdell). Only a moron can say that Newton’s theory had no scientific content and that his axioms were trivialities. It is the Walrasian axioms (maximization-and-equilibrium) and MMT storytelling that has no scientific content.

MMT is dead as a scientific theory#3. It has no truth value, only some political use value among mentally retarded Young Turks.

Egmont Kakarot-Handtke

#1 The ultimate ― analytical ― origin of money
#2 Exchange in the Monetary Economy
#3 For the comprehensive overview and the point-by-point refutation see cross-references MMT