I have a lot of respect for Steve Keen. His book Debunking Economics is pretty much essential reading for anyone who wants to know the flaws in neoclassical economic thinking.
Like me, Steve buys most of MMT, not because it's a dogma (in contrast to the neoclassical view) but simply because it describes how things really are.
Like me Steve also has some reservations. Mine have been focussed on its attitude to tax (on which I may do more this weekend: it depends on the weather). Steve has focussed on MMT and the current account balance, where he thinks many's indifference is due to a US centric view.
This critically supportive podcast is worth listening to
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Clear and *balanced* views from SW-L.
Has he produced a blog where I can read further about this critique of MMT on current account balances? Have any of the other MMT’ers, in turn, critiqued the SW-L approach? If so I’d be grateful for any links you could provide.
I will be….give me time
George, Bill Mitchell recently took a critical look at SWL’s ‘New Keynsiansism’ in a series of 3 articles, under the heading of ‘The New Keynesian Fiscal Rules that mislead British Labour’.
They are available here:
http://bilbo.economicoutlook.net/blog/?p=38776
here:
http://bilbo.economicoutlook.net/blog/?p=38779
and here:
http://bilbo.economicoutlook.net/blog/?p=38796
And boy was it tedious….
And rude
Bill does MMT few favours in that way
Yes Jim, I’ve already looked through parts 1 & 2. Thanks for passing on the link to part 3.
I guess Richard is correct to say that Bill Mitchell is rude in his blog – in fact I sense fury.
Ignoring his “style”, he did seem to be making some valid points (insofar as I can tell).
Since I’m concerned about how little Labour seems to understand about economics, I’d like to hear an expert view on the substance of the blogs from Mitchell.
I will try to work through them
I find Bill hard going
I think the feeling is mutual….
By the way, I apologise for the reference to SW-L in my first post here – I meant Steve Keen of course (brain fade).
I would like to draw attention to Keen’s trenchant explanation of the creation of money. It is not constrained by resources, and you do not require to mine it; all you need is – double-entry book-keeping. Werner provides a lengthy and devastating deconstruction of Samuelson’s simple, but flawed double-entry explanation of Modern Fractional-Reserve Banking” (especially Ch.16., pp.280-289, in Samuelson’s canonical textbook ‘Economics’, 8th student edition, 1970 – which I think ran to 19 editions).
Perhaps the most important progenitor of modern monetary theory (or rather, as Keen has it; descriptions of monetary reality) is HD MacLeod, ‘The Theory and Practice of Banking’ (1856). Before him the key thinkers, stretching back almost to the 17th century, were probably Law, Boisguilbert and Steuart (i.e. this is not new; it seems that post-war 20th century economics has quite a lot to answer for ………).
Spot on
And double entry is right
Dr Loan account in the bank’s books
Cr Current account in the bank’s books
That’s all it takes
Literally
Add zeroes to fulfil demand (I mean that, literally)
John,
I would also recommend:
Wicksell, K 1907. ‘The Influence of the Rate of Interest on Prices’:
“The banks in their lending business are ..not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required, or, what is the same thing, they accelerate ad libitum the rapidity of the circulation of money. The sum borrowed today in order to buy commodities is placed by the seller of the goods on his account at the same bank or some other bank, and can be lent the very next day to some other person with the same effect.”
“in our days demand and supply of money have become about the same thing, the demand to a large extent creating its own supply. ”
http://www.econlib.org/library/Essays/wcksInt1.html (w8)
Staggering that this is still not known
I’m a bit confused, Keen refers to the US dollar being the reserve currency and, because of this, they can be more relaxed about foreign trade deficits. I thought the reserve currency status of the US$ ended 1971 when the USA ended the gold standard and the Bretton Woods agreement ended.
I have to add that the workings of MMT and foreign trade balance oof payments alludes me as I can’t get my head around the fact that an exporter sells real assets in exchange for the importer’s fiat currency. I get most of MMT (at a descriptive level) but really can’t see what the exporter gets out of foreign trade!
Maybe someone could enllighten me.
Sorry if this is off topic for thus thread.
On topic
The dollar is the de facto reserve currency for the world still – the ultimately always @cceptable currency
1971 ended gold, not the dollar
“I have to add that the workings of MMT and foreign trade balance oof payments alludes me as I can’t get my head around the fact that an exporter sells real assets in exchange for the importer’s fiat currency. I get most of MMT (at a descriptive level) but really can’t see what the exporter gets out of foreign trade!”
(eh, “eludes”?)
I am not sure if I quite understand you; but here goes. I shall assume here only that your proposed “importer’s fiat currency” is a stable, widely used international currency (as it will be in most cases). Given that assumption, it seems to me that (with all due respect) you are simply presupposing that transactions must operate in a barter economy, rather than the monetary economy as proposed variously by MMT, Keen, Werner etc.
Keen, for example follows Graziani in proposing that in neoclassical economics (a pure abstraction with no purchase on the world), “transactions are two-sided, two-commodity barter exhanges” (money is ‘neutral’, or a mere intermediary); but in a monetary economy (the real world), transactions are “three-sided, single commodity, financial exchanges” (triangular, with three agents: the payer, payee and the bank). The rest follows.
John,
Sorry about the ‘alludes me’ it should be ‘eludes me’ as you point out – a touch of brain fade on my part. Anyway, my difficulty with foreign trade is that the UK has been running a deficit since the mid 1990’s and has been paying for this with our free floating, fiat currency. What do the exporters get out of this, apart from UK£’s that only have value in the UK?
I’m pretty sure I’m missing something but can’t see what it is. Is tgere anywhere I can find a simple explanation. I’ve tried Warren Mosler, Randell Wray and Bill Mitchell blogs but it all goes over my head. As an engineer, I probably look at things economic rather simplistically.
Overseas investors want UK assets
And they buy them with the pounds pumped into the system by running a trade deficit
That’s how the system balances, for now. There is a strong market for sterling overseas, as yet
Robin,
I will not repeat the points well made by Richard or Marco. I would however add that a British exporter will (in most cases) be spending in the UK, and paying UK taxes; so they receive quite a lot. In addition, the UK trade deficit is not something an exporter has much control over. If sterling is weak this gives the individual exporter a potential price advantage, and a profit advantage at home when the currency is converted. Of course this is more complicated in a modern globalised world if the UK product produced relies on imported goods or commodities.
On a more general point, I think “MMT” has come to stand for a general paradigm shift in economics; a dividing line if you will, principally over the creation of money. Different schools or individual economists will take different views on specific issues, and divergence will grow. It is unlikely that the differences, and detailed division will undermine the key principles. It is helped by the acronym, and the distinctiveness of ‘Modern Monetary Theory’. It would help if we remembered that it should not really be a “theory” – but rather description of the real world. The problem is that there are no applied, or experimental economists; it is a discipline filled solely, and bizarrely, with theorists.
See my next blog, when I manage to get it out today
That may not be until after I have got to visit my rather old father, who has bronchitis and is having a rough time
Sorry to hear about your father, Richard. Best wishes to you both; I trust he recovers soon.
At 91 not everything gets better
But he can do without bronchitis!
Thanks
Robin,
As you may still be wondering, this may enlighten you a little more. It is what happened after Nixon abandoned the Gold Standard in 1971:
“In exchange for (military) protection, Saudi Arabia agreed to price all of its future oil sales in U.S. dollars and no other currency. If any country wanted to buy oil from Saudi Arabia, they would first have to buy U.S. dollars in order to make the transaction.
When Nixon took the dollar off the gold standard, it meant that its value would now be determined by supply and demand.
By agreeing to price its oil only in dollars, the Saudis ensured that there would forever be an enormous amount of growing demand for U.S. dollars.
The petrodollar was born.
With the biggest (oil) exporter nation agreeing to price its oil in U.S. dollars, everyone else followed in line.
Iran, Iraq, Kuwait and Venezuela all came on board. Qatar, Indonesia, Libya and the rest of what is now OPEC did too. Once the entirety of OPEC was transacting in U.S. dollars, it became how oil is priced everywhere.”
http://dailyreckoning.com/u-s-saudi-relations-cracking-petrodollar/
That factor might also help to explain the size and determination of the fossil-fuel lobby. It will be interesting to see what happens over time as the electric vehicle slowly takes over and brings the petrodollar closer to extinction.
there was this alternative to Bretton Woods and reserve role of the dollar. One of the Chinese bankers (?) mentioned it in favourable terms a few years ago.
Varoufakis has also written how after 1971 the US re-cycled German and Japanese surpluses. The dollar still accounts for most international trade but it is a declining percentage.
https://www.theguardian.com/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund
You might like this:
http://oxonia.org/WE%20articles/WE_skidelsky.pdf
I’ve been a keen (pardon the pun!) follower of Steve on Patreon. I do share his reservation wrt to the current account.
This is worth a few minutes of folks time talking about the folly (Certainly in the UK’s case) of pursuing government surpluses – very much in agreement with MMT..
https://youtu.be/287Cu5me0Og
I still think MMT has a point on imports and exports. Export means “here is some stuff I made, please give me bits of paper or entries in a spreadsheet for it”. This is obviously a loss of something real in return for something unreal. In that sense exports represent a loss.
And it wouldn’t be unsustainable if someone else did not do the same for us – send us some stuff we don’t have and perhaps can’t make ourselves in return for entries in spreadsheets. In exporting goods we trust that the bookkeeping entries from the country we buy from can be used to import goods of equal value from somewhere – otherwise trade doesn’t work.
So we want, on the whole, to have balanced current accounts in the long run. After all, for every country that runs a current account surplus there must be some other country or group of countries that run an equal deficit.
This doesn’t mean that trade is bad and I don’t think MMT holds trade to be bad. But an export is still a real loss and an import is still a real gain, at least in the short term.
National income accounting says so
I won’t go on about this but MMT’s largely quantitative, arguably hydraulic (plumbing) approach to to trade and investment still leaves a bit to be desired. Namely a qualitative understanding.
It does not, for example, assist in understanding something like ‘Dutch disease’ where the presence of a large, foreign-owned minerals (oil and mining) based export sector can drive up the value of a currency and undermine competitiveness (employment) in other export and import-competing industries.
Not all exports or import trades are equally desirable or beneficial. Some industries are well-integrated and underpin communities others can be quite colonial in nature. There is more to them than monetary inflows and outflows.
A one-size-fits-all overview isn’t always appropriate.
I agree
And I think I agree with Steve
The trade problem with MMT is remarkably similar to the foreign borrowing problem to which MMT has an answer
MMT says a government should not borrow in a currency other than their own. And if they think they need to they should fund their own government operations, which is possible
But re trade? That depends on the supplier. If they say pay me in dollars and nothing else it is dollar time. Which as Steve says is fine when you are the US. And fine for the U.K. when there has been land to sell in London
But elsewhere? I think that’s a real constraint. The current account balance can be an issue and I am not sure MMT can wish it away entirely, although it can overcome much of the borrowing issue unless the borrowing is to pay for imports.
As someone with absolutely no background or education in economics or finance I read your blog with great interest. It’s a means of attempting to educate myself in these issues which after all matter to all of us but which often sound so technically complicated that rather than engage with them many are inclined to switch off and leave it to the experts. The technical discussions that take place in this comments section of your blog are sometimes completely over my head but it’s worth the effort of trying to understand because you have many knowledgeable contributors.
However, today I was completely taken aback to read this deeply technical discussion about Steve Keen’s thoughts about MMT having just heard him refer to the damage we are doing to the planet as “an engineering problem”. He had just dismissed the idea of the purpose of economics being about the allocation of scarce resources as “complete bullshit”.
MMT does seem to be a useful tool for explaining how the economy works and technical discussion of MMT must be immensely interesting to those with cleverer brains than me. Howver, surely economics and finance are not ends in themselves but a means to understanding how to benefit people and planet. Far be it for me to dismiss this learned and revered economist as a bit of a smartarse but that is how he comes across in this podcast.
I think it fair to say that at a technical level you are quite right that Steve Keen is a smart arse: he is an incredibly intelligent man.
When he makes the observation he does he is not, however, saying that economics is just a technical issue. I don’t know Steve well, but I know well enough to be aware that what happens to the people and planet the matter to him, a great deal. Indeed, I’d say that motivates his work. What he’s dismissing is the idea, written as he notes in the 1930s, that economics is all about meeting unlimited wants with scarce resources. As he points out, at the time there were vast quantities of unused resources available but economics was apparently quite able to dismiss this fact, with indifference. I would argue that there are still large quantities of unutilised resources: there are unemployed people and vast numbers of people who are doing jobs which could be much better done technically by capital, with their personal endeavours better engaged elsewhere, including for their own personal advancement.
So what Steve is saying ‘bullshit’ to is the idea that we are constrained by the ideas of conventional economics. We are not. There are very real constraints in the real world, including environmental ones. But most of the limitations that neoclassical economics supposes exist are actually fabrications designed to make sure that wealth is preserved. That is something that Steve does definitely not buy into in and of itself.
Thank you for your response Richard, I feel duly chastened!
Don’t!
I really don’t think Steve would mind
Barbara,
Richard says: “you are quite right that Steve Keen is a smart arse: he is an incredibly intelligent man”
To give you some idea of that, the Sydney Morning Herald’s finance section (called ‘Business Day’) runs an annual survey of 25 economists to have them predict outcomes for the following year across a wide range of economic indicators from wage growth and interest rates to terms of trade and so on. The economist with the most accuruate predictions overall is named “Forecaster of the Year”
Steve Keen has won that title at least 3 times (including 2015). As far as I am aware no one else has won it more than once.
https://www.smh.com.au/business/the-economy/businessday-economic-survey-arise-steve-keen-forecaster-of-the-year-20150630-gi127k.html
It is also worth noting that Bill Mitchell also tends to do quite well in this annual contest, eg:
https://www.smh.com.au/business/scope-stephen-anthony-bill-mitchell-and-renee-frymckibbin-tie-for-forecaster-of-the-year-20170131-gu2jk0.html
I’ve listened to this podcast several times now because Steve makes some fundamental points about money and its place in a capitalist economy and so in order to better understand what precisely he is saying I have transcribed ( as accurately as I can ) one section as follows :
Fundamentally we do not live in a barter economy.. Everybody except economists realise that. Economists model the world as if it’s a barter system. They leave money out of their thinking entirely. No banks whatsoever. No money is necessary . Everything’s barter. And then they start giving guidance about how much money you should create . In their theory the only thing money creation can cause is inflation. They completely ignore the actual process of creating money. If you live in the real world…let’s make a concession to the real world . It uses money. Money has to exist for commerce to take place and if you had only one source of money and you want your economy to grow over time there are only two ways that can happen. One is the price level falls which is fine in a world with no debt, but if you have a falling price level and debts denominated in nominal terms – as they are – then your debt burden rises with every increase in output and bang your increase in output’s not going to go very far . Consequently the only economies which have sustained growth over the long term in terms of increases in real output have also had an increase in the money supply. Therefore you have to have a rising money supply to have a rising output. So to some extent there’s an imperative on whoever creates the money supply to create it.
Now when you look at what the mainstream economists are doing, they’re arguing , they’re basically in favour of the government running a balanced budget and all the time, or if you look at the Ricardian equivalent mob, a surplus, until such time as the government disappears up its own abscissa. Now that’s actually saying ‘ let’s grow the economy while we destroy the money supply ‘ . Now only people who didn’t realise money was necessary for capitalism could actually say that . So MMT is a counter to the insanity of the mainstream which believes you can operate a world without money.
I think he nails it there , better even than in his books which for a layman like me can be somewhat dense because he uses a lot of mathematics which is beyond me. In case you’re wondering, yes I did have to look up ‘ abscissa ‘ .
Steve is spot on there
John,
In relation to your point (and that which was made by Steve Keen) it is worth remembering that deflation, and very low inflation, disadvantage debtors and favour creditors. From that perspective, simplistic as it is, it is easy to see where interests lie.
I agree Marco, it’s not just creditors per se, although your point is well taken, but people of my baby boomer generation who benefited from the high inflation era of the seventies and eighties and have by now paid off their mortgages and have other substantial assets and do not want to see any erosion of those assets . So any potential threat to their wealth , namely Corbyn, is not going to get their vote . Is that what you were alluding to ?
No John,
The point that I was alluding to is that deflation actually increases the real value of debts. When prices fall you can buy more with a dollar or a pound and that increases the ‘real’ (inflation/deflation adjusted) value of money. In doing so it also increases the real value of debts as well as real interest payments. Steve Keen briefly mentioned this in passing.
Interest payments offer an interesting case in point. If you were paying say, 5% p.a. interest on your debt and inflation was 3% p.a. your real rate of interest would be 2%. So inflation then favours the debtor.
If you were paying 5% interest and inflation was minus 3%, then your real interest rate would be 8% – on top the fact that the real value of your debt (principal amount) had risen. That could be catastrophic.
Conversely, deflation favours the creditor for the exact same reasons. The same logic suggests that a very-low inflation regime also suits them well.
The current situation with some baby-boomer (and senior) rentiers is a little more vexed. For the seniors , many of them live off interest-rate based investments. So, on the face of it, low inflation would bring them better real returns – but, in the current phase of neo-liberalism, a low inflation regime is also very low interest rate regime – so , really bad nominal returns for those guys.
For the baby-boomers with 6 rental properties and big fat share portfolios, asset-price inflation is the main game and it is not the same as consumer price inflation. In fact, it is so far ahead of it that a modest rise in CPI may not bother them at all, it could even help them by lowering their real interest payments.
Just finally, the creditors (banks especially) are class apart. Very low interest rates will not trouble them too much. Loan demand swells exponentially as interest fates fall. So a much higher loan volume more than compensates for low rates. However the effect that higher CPI inflation has on real interest rates, and the real value of loans, can undermine their fortunes somewhat.
Um, anyhow, that was longer than I expected. I hope it explains the point well
Actually, come to think of it.
The original point that I was trying to make relates to Steve Keen’s observation about inflation and how it is so incredibly low by normal (historic) standards yet, ironically, so many people are currently hysterical about the thought of higher inflation.
The hysterical people affected are:
1. Banks and lenders generally, as historically low interest rates are extraordinarily vulnerable to becoming extremely low (or negative) real rates with the slightest bump in CPI.
2. Highly leveraged (over-leveraged) borrowers and investors who know that central banks’ may raise interest rates if inflation rises above the 2% target level. That would also affect the lenders’ loan volumes and bad debts.
So all-in-all the hysterical folk are tenuously relying on unsustainably low interest and inflation rates. Given that periods of higher per-capita growth and broad prosperity tend to be associated with modestly high rates of inflation and interest, it would appear that the hysterical people are relying on stagnation, and that puts their interests at odds with everyone else’s (for the most part). To that extent the current situation is unprecedented.
I think Keen is right to ensure that when we talk about MMT, it is seen in the context of both the Sovereign State AND the private sector and not just the former.
I still think that Keen’s book ‘Debunking Economics’ is the best critique (in one book) of neo-liberal economics that I have read. It is not an easy read but it is worth it.
And Richard’s book ‘The Courageous State’ is the best book I’ve read in terms of what can actually be gained by changing the way we think currently about economics.
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