It wasn't my intention to create quite the fuss I have when commenting on James Meadway's own comment on modern monetary theory on Carol Wilcox's Facebook page. As it is, the comment has been picked up widely in the UK, including by Meadway and others in the Labour team, as well as in Australia and the USA. And Simon Wren-Lewis seemed to spend much of his day yesterday addressing follow on comments on Twitter.
Jo Michell, an economist who might be considered to be in the same camp as Jonathan Portes and Simon Wren-Lewis commented for that camp in a blog post written yesterday. He said:
Labour's economic policy is not neoliberal
Politely, who cares about the semantics? The answer is that these people do.
He continued:
I think the fiscal rule has enough flexibility to allow a Labour government to maintain sensible levels of aggregate demand. In any recession in the foreseeable medium-term future it is hard to imagine that interest rates will not be cut to near zero. In this case the rule will be suspended and fiscal policy can be used “with all means necessary”. Second, the rule doesn't preclude significant increases in government investment spending — a central part of the Labour policy programme. Government investment spending is likely to have strong multiplier effects and should help to rebalance demand in the UK's consumption-driven economy. Finally, the rolling five year window allows for adapting the pace of current spending to negative economic shocks.
In other words, the rule is just a sham because everyone really knows it will not be used. He admits it:
I can also see good political reasons for the rule. It provides an immediate rebuttal to those who try to perpetuate the deeply dishonest but highly successful Tory strategy of depicting Labour as the party of fiscal irresponsibility.
And adds:
As I understand it, the rule was formulated by Simon Wren-Lewis and Jonathan Portes, two highly credible progressive economists. Simon has been one of the most consistent and articulate critics of Tory austerity. To accuse them, as Richard is doing, of “delivering neoliberal thinking” is ludicrous.
And I disagree: to promote standard neoclassical, monetary based, indepdent central bank thinking at this moment as if it is what Labour would do is absurd. Not only is that thinking bankrupt for reasons I have already explained, it is contextually irrelevant, as Michell has agreed. So it is doubly wrong.
And it is also wrong to dismiss what I have said because, Michell argues, Labour will also deliver an as yet unspecified ‘supply side reform' of the economy that, he adds, will ‘not [be] of the sort pushed by the IMF'. Please tell me how that will work Jo, and how it will be financed? I guess it will require suspension of the fiscal rule?
But what will that imply? Jo says:
I have more sympathy with MMT than James. I see it essentially as a US-focused political campaign based around a single policy: the job guarantee.
At this point I did not know whether to laugh or cry. Personally, I think the JG a logical policy consequence of MMT, and not core to it. MMT is about how the money / tax cycle and so the fiscal balance works in the economy, in my opinion. And he must know that. As he says:
Stephanie Kelton has done an excellent job of debunking simple deficit scaremongering. But to claim, as Richard is doing, that rejecting MMT means accepting wholesale neoliberal orthodoxy is silly — as are several of the views that Richard attributes, without justification, to James.
He concludes
The left deserves a better standard of economics debate.
It does. Jo Michell needs to do some reading then. And learn what MMT is. And he and those he thinks are his allies need to stop doing three things.
One is to pretend that there is any future for monetary policy in the timescale Labour now need to be concerned about. There isn't. Carney says he can see three interest rate rises in the next three years. I would call that optimistic. But at best that means rates will reach 1.5% before, inevitably, crashing to zero again. In other words, any policy (including putting the central bank at the core of economic policy) based on neoclassical thinking which, as Michell confirms, puts monetary concerns at its core is simply irrelevant.
The second is to stop pretending we will ‘normalise'. There are enormous political reasons for stopping doing so. That's because this assumes that the Tory policy will work. And it assumes that austerity does deliver. It then assumes that Labour should perpetuate it (as I say the so-called fiscal rule does). But worst of all, it then provides no reason to vote Labour because it says that, after all, the Tories are the party of economic competence when it is glaringly obviously true that they are not.
And third, because no one (Jo Michell very obviously included) thinks the fiscal poliucy will be used it is very obviously bad economics and bad politics to promote it. Making bad assumptions is one thing, and the fiscal rule does that. Acting on them is worse.
It's true that we do need a better quality of economic debate. But to spend time discussing something that is as hopelessly inappropriate as the so-called fiscal rule is not the place to start.
And, for the record, it's not stupid to say so.
Nor is it inappropriate to point out the folly of Labour's ways.
And come to that, to suggest that Jo Michell and James Meadway need to stop falsely rerpresenting what MMT is, or at least have the decency to learn what they're talking about, is also appropriate, and very far from stupid.
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When I studied economics just after Thatcher was elected, the talk of the town was monetarism v keynesianism (not as if Keynesianism was ever practised, as I later understood). The young thrusting top lecturers were on the money side. Monetarism already held sway here before Thatcher, but whilst the rest of her policies have been rejected the belief in bleeding monetarism has never been shaken off.
Carol Wilcox says: as an aside
” (not as if Keynesianism was ever practised, as I later understood).”
A bit like getting a diet plan for weight loss and complaining it didn’t work, because we carried on eating exactly as we had and ate the ‘diet’ between meals.
It’s a tortured mess. One of the essences of neoliberalism is to avoid rules based systems, and let markets determine as much of economic life as possible as long as they are not restricting the rights of others do what they want too. So a set of fiscal rules is technically anti-neoliberal and Wren-Lewis and Portes have designed the best set of rules that they can. Did Li Kwan worry about such things when he set out to make Singapore an investment beacon for the far east though? Obviously not, he just got on with it.
With respect, that is nonsense
@Jang Sung Taek
For goodness sake what else is a belief (backed up by ceaseless propaganda) a sovereign government can’t create money from nothing but a “fiscal rule”???
[…] have already suggested this morning that the Left needs a better quality of economic debate. Something that moves us on […]
John McDonnell’s economic advisers bad-mouth MMT desite having little understanding of the explanations under-lying its theory. This latter point is obvious from two of Jo Mitchells statements in his article “Labour’s economic policy is not neoliberal”:-
“This commits a Labour government to balancing the books on current spending with a rolling five year target, subject to a “knockout” when interest rates are close to zero.”
“The two dangers that must be balanced when setting fiscal policy are insufficient demand and private sector unwillingness to finance public deficits.”
Firstly, MMT economists have gone to great lengths to explain how a sovereign government via its central bank can determine the National Bank or Base Rate. Scott Fullwiler and Eric Tymoigne are two economists in particular who’ve explained why this can be done. So a Labour government is in control of this fundamental rate. That McDonnell’s economic advisers don’t understand the mechanism is appalling!
Secondly, MMT has also gone to great lengths to explain how a sovereign government like the UK is not dependent upon the private sector to fund its spending. There must be thousands of pages out there on the internet and in books explaining the logic of this so why is Jo Mitchell even writing this Neo-Classical or Neoliberal economic theory derived sentence? Strewth even the Economic Secretary to the Treasury, John Glen, recently very reluctantly admitted government could create its own spending money:-
http://www.taxresearch.org.uk/Blog/2018/07/25/the-treasury-admit-that-tax-does-not-fund-government-spending-as-modern-monetary-theory-suggests/
As far as I can figure Labour’s political strategy as determined by Labour’s economic advisers it’s to be a matter of telling the people they will halt the austerity cuts and reverse them but they will be doing this by trying to balance the books as soon as the National Bank Rate is above 0% private sector determination permitting. Reversal of the austerity cuts and capital spending on infrastructure will be achieved by substantially raising taxes on the wealthy. This hardly seems a winning formula given the right-wing media’s grip on news in this country. It along with Tory politician’s will simply spew out endless propaganda saying Labour has its figures wrong and taxes will be increased on the majority of “hard-working” British people, a classic Tory frightener based on knowing the majority of the electorate are severely under-educated on matters to do with economics and the operation of their nation’s monetary system.
I despair of the Labour Party being suckered into taking up the flawed advice of these lazy and arrogant economic advisers who can’t even be bothered to properly research MMT economic theory let alone make an effort to respond to criticisms that they don’t understand MMT. Sure Labour might get into power once the negative effects of a No Deal Brexit are experienced by the electorate but to what purpose more of the same Neoliberal economic shambles that’s been inflicted on the country after the early years of the Attlee government!
Thanks
@ Schofield: Excellent
On a previous blog I mentioned how Stephanie Kelton referenced Beardsley Ruml (Chair NY Fed Res Bank) who argued in 1945 (published ’46) that “taxes for revenue are obsolete”. He also said: “Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.” In other words a sovereign state can create its own money as required and he then explains his views on the purposes of taxation. http://home.hiwaay.net/~becraft/RUMLTAXES.html
In 70 years the message still hasn’t penetrated the minds of politicians (and some of their helpers).
The message has been refined since then
In essence he was right
I presume they are trained Economists so not sure why on Dog’s Earth we would expect them to understand anything whatsoever about real world Economics. Probably went to Oxbridge as well which will make it even more difficult. No wonder the country is in such a mess. Why can’t the Labour Party follow the Chinese and recruit Michael Hudson? Seems to have had a beneficial effect there!
In terms of the economic policy debate in the UK I think there are, at least, three audiences that need to be considered. The first consists of those who practise economics and are directly or indirectly involved in public policy formulation and implementation – and it extends to the various national and multinational institutions. The second is largely the “court of public opinion” (and, perhaps more importantly, the politicians who assess how competing policies are registering with the public and who are brow-beaten by a right-wing media). Finally we come to those who have the power to move equity, bond and currency markets and the legions of flunkies and functionaries they retain – the corporate capitalists, high net worth individuals and the disaster capitalists (these last generate market turbulence from which they can profit).
Proponents of MMT claim it captures the actual functioning of modern economies much better than the current “conventional wisdom” and, as a result, provides superior policy recommendations. So the questions are: can this asserted superiority be demonstrated? can a democratic plurality be secured to implement the resulting policies? and can the policies be implemented?
On the first question, I seriously doubt that elected politicians would be prepared to legislate to increase taxes in a sufficiently timely and accurate manner to contain inflation that the application of any automatic stabilisers had failed to dampen. As Ted Heath famously put it the use of the interest rate by central banks is a one club policy but apart from when the zero lower bound is being approached central banks do have a range of mechanisms for steering the economy. In addition, all advanced economies have been captured to a considerable extent by rent capturing interest groups and any fiscal stimuli are filtered through this net before they impact on the intended recepients. This is not an argument for doing nothing, but it suggests that more effort should be made to curtail these interest groups through the use of competition policy and economic regulation. On the second question, it is clear that it is only the Labour party that is in a position to secure a mandate to implement any policies of this nature. But it is highly unlikely that it could secure it if it were to advance specific MMT recommendations. And on the third question, those who move markets would do their damnedst to ensure a Labour government would be prevented from doing so.
In this context the caution of the Shadow Chancellor, however much MMT proponents might excoriate it, is justified. But there is a broad range of beneficial supply-side policies that could be implemented incremenatlly which over time would bear fruit. But I fear the current Labour hierarchy has neither interest in nor understanding of what they involve.
I disagree
The one club won’t and can’t work
Vat can be changed quickly
And re Labour – read what I wrote please
It can only win when the paradigm needs to change. You assume that will not happen.
@ Paul Hunt
The main legacy of Karl Marx’s thinking is the idea that under free market capitalism capital will always vie with labour over the distribution of income. I don’t happen to think this has to be an eternal condition. But it ill behoves a political organisation (which in its very choice of name would suggests it exists to help labour secure well-being) to adopt a slave mentality. By this I mean using the belief systems created by capital in regard to money creation and its regulation that help to deny labour firstly, the ability to help determine the size of a country’s economic pie and secondly, an equitable share of that pie.
Take, for example, a simple matter of the hyper-inflation of house prices in the UK starting in the early 1970’s and the progressive destruction of an adequate housing provision programme during that same period. A political party properly working on behalf of labour would have simply taken over the issuance of house mortgage loan creation and maintained an adequate housing provision programme and all because it knew a sovereign government could create money in its own right from nothing. Not only would this have ensured cheaper mortgages and an adequate housing provision programme it would have helped avoid being tangled up in the Great Financial Crash of 2007/8 caused by mortgage loan fraud.
It is a slave mentality for the Labour Party to announce that it will be playing by capital’s rules and money creation beliefs when you don’t have to do so. You can simply say that austerity is having adverse effects on the nation’s well-being and this indicates a state of confusion in the nation’s thinking about money creation (It can quote the Economic Secretary to the Treasury admitting the government can create its own money for spending from nothing and the governor of the Bank of England admitting it can create the money from nothing for a People’s QE scheme.) accordingly Labour should say that if voted into office will set up a Commission to establish exactly how the nation creates its money and no report will be issued until a clear-cut consensus is achieved based on the best logic backed up by evidence. Labour will also state that part of that Commission’s remit will be to continue where the Radcliffe Commission Report of the late 1950’s left off and consider the best ways of containing abnormal inflation using fiscal tools.
So the leadership of the Labour Party, and you Paul Hunt, need to make up your minds whether you are actually best serving the needs of the people you purport to serve by slavishly adopting the advice of your economic advisers and openly stating you’ll agree to operate capital’s monetary system “rules” or you can side-step having to do so by the simple expedient of setting up a focussed debate to establish exactly what monetary system rules will best serve all of the nation.
I would further add that there is plenty of evidence to support the argument that the Brexit Leave vote happened because Austerity Cuts pushed labour which had been affected by globalisation in the form of outsourcing and insourcing, but received off-setting compensation, had that compensation slashed:-
https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/381-2018_fetzer.pdf
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2870313
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2904105
https://www.peri.umass.edu/component/k2/item/1096-globalization-checkmated-political-and-geopolitical-contradictions-coming-home-to-roost
Paul Hunt says:
“…Proponents of MMT claim it captures the actual functioning of modern economies much better than the current “conventional wisdom”……”
Yes. That is so.
“……. and, as a result, provides superior policy recommendations. …”
Not quite, I think. It would be more accurate, I believe to say that understanding allows more policy options. We’ve seen with the aftermath of 2008 GFC that the MMT interpretation of how money works is verifiably true. Had it not been it would not have prevented the financial system collapsing into total chaos.
However the policies that followed were entirely optional. Particularly the austerity prescription was wrong-headed from the off, completely negating the purpose of saving the banks which are there to serve the real economy.
Half a job if ever I saw one. (Unless the resulting sclerotic economy was generated deliberately.)
I’m not sure that there is any such thing as “monetarism” any longer. I remember the term as explained to a collection of young students by Sir Keith Joseph. It was a simple enough concept. The general price level was defined by the supply of money in the economy. So just control the money supply and hey presto! No more inflation.
It didn’t work out too well.
https://www.libdemvoice.org/51656-51656.html
Absolutely spot on Richard – the level of debate does need to improved – and it certainly needs to go further than the few posts that SWL and Michell have produced so far. I’d suggest that they also need to more seriously address and engage with the numerous excellent comments thet they receive to these posts.
Michell’s post has already received a few and SWL’s most recent post on MMT which was linked to by Jonathan Portes in the tweet you posted yesterday) most certainly had a number of considered comments that warranted a response from him.
FWIW that’s one of the main reassons I find your blog to be so essential – it’s clear how much work your relatively quick responses require, but that’s what sets it apart from the rest, which seems like a good time to thank you again for your work.
I failed today but only because big new ideas are being developed, I hope…
What a tease you are sometimes, Professor Murphy. 🙂
A question for you, Richard. Do you think there are any economists who properly understand MMT but still disagree with it? If so, it would be helpful to understand their reasoning.
Would others like to answer?
Partly because I have just finished a twelve hour discussion….
Well I have great respect for the economist Thomas Palley who I find to have a very analytical mind. He’s had several bouts with MMT economists disagreeing with various aspects of MMT. Google “Thomas Palley MMT” to start to drill down into this material. Additionally you can throw in the names of some of MMT’s “big cats” to the above search term, like Randall Wray, Bill Mitchell, Scott Fullwiler, Stephanie Kelton, Eric Tymoigne, Warren Mosler, Brian Romanchuk, Neil Wilson, and see what you come up with in relation to Thomas Palley’s arguments. It’s hard to keep up with MMT based literature there’s so much out there on the web these days. Hope this helps as a starter.
Palley is a neo/post Keynesian, isn’t he? Some people just don’t keep up;o)
Well said Mohammed. I would push it a little further and suggest that rather than simply claiming it wouldn’t work and as they are trained economists, perhaps they should provide us with their workings and figures so that we can replicate their claims.
By no means everything in economics can be ‘proved’ mathematically
Much of such proof depends on accounting
And a great deal of accounting is of limited quality
“And a great deal of accounting is of limited quality”
Interesting choice of words…. 🙂
Never mind the quality, look at the intention. Numbers dancing on pin heads fit to bamboozle the most assiduous economic Thomas Aquinas.
Spot on.
People vote Tory because the left are stupid enough to play away from home in ‘their’ (household budget) game.
Headline after headline in The Guardian laments that the left has no alternative economic narrative.
Well it has. And its MMT.
Thinking aloud, and wondering if I’m right (please comment/correct if not):
There is an optimal level of activity for the economy, if it is actually below that (which it currently is), then there is a need for more money in the economy; if more (over performing economy => internally driven inflation) then a need for less.
MMT says if we need more, then government spend > tax will provide, and can be done; if we need less, then spend < tax is needed.
And if (big if) the economy is performing optimally (whatever this means) then government expenditure should equal tax. What that figure should be is essentially a matter of legitimate political debate – each party can come up with its own 'correct' figure.
But if we say – as I think we should – say that a (the?) primary function of government is to manage the economy so it does run optimally, then having a policy starting point that specifies the relationship between expenditure and tax is to set the cart before the horse.
Broadly right
The role of government should be to ensure an optimal life for each of it’s citizens not just a few at the top of town. It certainly shouldn’t be there to ensure that the under-class, working class and middle class become gradually poorer over the course of forty years just so their wealthy pals can become wealthier and control the political process. As far as I can see the last forty years have more than proved that markets are a FAILURE and that they require substantial reorganization and control.
Another thought of mine is that the function of the economy is to to provide us (all of us) with a (hopefully good – certainly best possible) living. If it isn’t, it’s failing.
Chris R says:
“The role of government ……….. markets are a FAILURE and that they require substantial reorganization and control.”
What mystifies me is that there is no collective scream of anger and rage. When are we going to hear the swell ?
What FFS does it take for people to to notice they are being shafted ?
I totally agree with having the debate but the problem that needs to be addressed is finding the room for such a debate.
I mean look at what is taking up the time:
BREXIT (standing like the Collossus of Rhodes over all issues)
Labour’s issues with Jews
Labours’ issues with Blairites versus Corbynites
Boris’ latest indiscretions and the Tory party having already collapsed but no one is willing to admit it
The hot weather (climate change getting a grip).
Also looking back at the 70’s there is no doubt that both Tory and Labour parties thought that they could manage the economy but somehow failed. This perception of Government failure is the most enduring of the myths from the 1970’s.
Even Dennis Healey said that the IMF bailout was a panic measure that in retrospect should not have happened. The oil shock effects – caused by Western backing for Israel because it made Islamic oil producing nations reappraise the cheap oil negotiated with the West after WWII – also seems to be ignored. Everything seems to have been blamed on social security and the unions instead.
Has there been any really good examinations of how the British Government came to the conclusion that it should/could not do much to manage the economy? Why during this period did Governments not challenge the rampant asset stripping done by the Tiny Rowlands and Jim Slaters of the time which did nothing to help Government (or the people) at all.
Tom Brown ‘s book ‘Tragedy & Challenge’ (2017) is the best and most fair/balanced account yet I have read of the 1970’s economy (from an engineering pov). Any progressive Government to be should be reading that book and basing their industrial policy (a major part also of a healthy economic policy) on this reading.
The blue print is there Labour. Use it. Please!
Thanks PVSR
Can I second PVSR’s recommendation of Tom Brown’s book. He has spent his life in industry and seems to have some very sensible and even progressive views, not least recognising the malign role of the City. Unfortunately as a ‘captain of industry’ I fear he would not get a hearing from Corbyn’s team.
I can’t help but agree with you but I also recognise the power of the mainstream media in trashing anything Labour propose. I would like to think that McDonnell & Co know about MMT but also know that it might be a step too far to expect to persuade the electorate in the short period they have available. Maybe I’m being too optimistic but the household budget mentality is so deeply embedded that Labour need to act stealthily. Like you, I would prefer a bolder approach but it’s quite clear our politicians are scared to death of the media. There might be no progress here until the next financial crash occurs and the downsides of Brexit are experienced.
We’re f**ked then for lack of courage
After long being in denial about this, I believe Richard is right. Knowing McDonnell’s history I couldn’t believe that this was so.
I think most ppl know that there is something terribly wrong with the way things are going – they just think that their politicians should know how to make it better and if it doesn’t get better then the problems must be so big that it will take a long time to recover. When in reality the politicians and their advisors are the problem either by deliberate action or by ignorance or a mixture of the two.
Politicians need some time on benefits for life experience and to give them time for study. Not that most benefit recipients have time for study due to the harassment of the DWP!
“We’re f**ked then for lack of courage”
Looks rather like it doesn’t it.
And Carol Wilcox, I feel for you. It is painful to discover one’s faith was misplaced. But it is looking increasingly as if it might have been. 🙁
Momentum have posted this video on their Facebook page asking the question “If we (the USA) can pay for wars and a tax cut for billionaires why can’t we pay for the morally right things to do” https://www.facebook.com/PeoplesMomentum/videos/699863277025729/
The comment on this post by Rod White says…..”So why are the Stupid Labour Party taking advice from neoliberals like Simon Wren Lewis and Jonathon Portes rather the MMT proponents like Richard Murphy, Stephanie Kelton, Bill Mitchell and Steve Keen. Now, if you don’t understand my question I suggest you go away and learn about macroeconomics because McDonnell and company have about as much chance of succeeding as a snowball in the Sahara. Tory lite seems to be all the Labour Party can do.”
Another comment, this time by Steve Tomo posts a link to https://modernmoney.wordpress.com/index/
Is this message going to get through to Momentum and therefore to Jeremy Corbyn? I do hope so.
Hmm … I remember commenting in 1997 that if I’d wanted 5 more years of Tory government I’d have voted Conservative…
Jeremy says:
“Hmm … I remember commenting in 1997 that if I’d wanted 5 more years of Tory government I’d have voted Conservative…”
Or as was asked in the Monty Python sketch so long ago…’Do you ever get that peculiar sensation of deja vu ?’
Paul, I think the message is getting through to Momentum. See this website associated with Momentum on the economy:
http://www.momentumeconomy.com/mission/