Another day, and another good modern monetary theory article, this time from Robin McAlpine at Common Weal in Scotland, with whom I work on occasion. As he said yesterday:
What I think is useful .... is not to think of MMT as a new programme of action or a different philosophy or an ideology.
In fact, what MMT really does is describe what we already do but describe it more accurately. The reason I find it so interesting is that this different perspective helps think more effectively about fiscal and monetary policy.
The real heart of MMT for me is explaining that national finances simply aren't like household finances. Debt is a problem for households, but then households don't control the money system.
As we know, governments can simply create money if they want to, something households can't.
Robin is also right that:
The problem comes not from the theory itself but from how some advocates have explained it.
I happen to agree with that too. My version of a solution to that problem is here. Robin's is well worth reading.
Scotland needs to be a country that embraces modern monetary theory from the outset when it becomes an independent country, as I suspect it will be. Robin will be one of those making sure that happens.
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Yeah I thought this was a good piece too and concur with your reasons.
I also liked that he said they’d been looking at a whole host of economic viewpoints and taking what looked good from each – MMT just being one of many mutually useful ways of thinking about economics.
I think that’s important because of the experience I’ve had trying to tell Marxists about MMT – which hasn’t gone well!
My guess is that the more idealogical someone is the less they’ll want to hear of any alternative ways of thinking. The alternatives seem, to a dogmatic person, to be attempts to invalidate their way if thinking and thus they reflexively reject new ideas and seek ways to poke holes in them or mock and undermine the messenger.
The same can obviously be said for neoliberal idealogues.
Human civilisations and the universe they find themselves in are very complex so it makes sense that there are many different ways to look at the multiple aspects of the various systems that support us. It’s refreshing to hear someone admitting that’s the case rather than deluding themselves that their single vantage point allows them to grasp all the answers – or worse, THE ONE ANSWER!!!
Adam says “I think that’s important because of the experience I’ve had trying to tell Marxists about MMT — which hasn’t gone well!”
There is nothing in the writings of Marx as I understand them that precludes MMT. However, just like there are many different expressions of Christianity there are also different traditions of Marxism. There is no single point of view of either. No need for alarm that is just the principle of relativity exerting itself. Some Marxists may reject MMT, but as I understand Michael Hudson who writes in the Marxist tradition, is a supporter of MMT.
The economy is not principally a money system, it is fundamentally (as is the whole Universe) a thermo-dynamic system. That means every single economic event involves a transfer of both energy and information. Money and our economic theories act as proxies for thermo-dynamic events. Being a thermo-dynamic system means it is also a mathematical system. All mathematical systems need control languages (Gödel’s theorem). Control languages are necessary to help resolve the ambiguities and contractions in formal languages. MMT is simply a fiscal control language, no more no less.
I have been thinking a lot about this. As far as I can see, whenever a Carillion goes bankrupt, £1.5 billion of MMT thin air money disappears back into thin air. Since bankruptcies occur all the time, a responsible Government should normally create and spend MORE thin air money than it receives back in tax. Otherwise the economy will gradually be starved of the money it needs to operate at full efficiency.
Absolutely right
And unless it spends money into existence a growing economy cannot grow…
Which is exactly the problem with the ‘sound money’ advocates (I nearly said fanatics) who want e.g. the Gold Standard or Bitcoin or some other mechanism of having a fixed supply of money so that ‘devious and corrupt politicians (or bankers or whoever) can’t debase our currency’. Bitcoin, for example, has an absolute algorithmic lock on how many ‘coins’ there can be, so that would be a guaranteed recipe for a catastrophic and permanent deflation.
Michael and Richard,
But what happens when an entity goes bankrupt and the majority of its creditors for the bulk of its credit are banks?
Then each bank has to write off some of its “loan” to the bankrupt entity but some of the owners, employees or suppliers of that bankrupt entity walked away with the deposits created by the bank which were created when it extended credit. So the bank writes down the debt by a certain amount (it’s asset side decreases) but the deposits (bank’s liability side) remain in circulation until taxed out of existence.
I.e. bankruptcy or default can cause private sector created money to become free of it’s attached debt and thus become part of the private sector’s net financial assets in the same way that government spending not destroyed by tax in any given period becomes the private sector’s net financial asset.
Is that right?
Michael,
I dont understand your point when you say “whenever a Carillion goes bankrupt, £1.5 billion of MMT thin air money disappears back into thin air.”
Surely the money still exists in someones bank account, just not Carillion’s. Only the government can create money, so does the reverse apply in that only the government can “destroy” money ?
No
Money is created and destroyed by banks as well, albeit under government licence
No, money is destroyed every time anyone makes a repayment on a loan. Given it is double-entry book-keeping then any time you bring an asset and a liability together then the effect is the same as Startrek getting their matter and anti-matter in the same reactor – they disappear in a puff of smoke to leave nothing behind.
So the bank created money only actually exists at all because the debit and the credit are separated.
Adam’s point about a bankruptcy leading to bank created money coming free of the liability actually always applies. If I get a loan and spend it on a house then the former house owner now has the money but no connection at all to my mortgage liability to the bank. If the bank writes something off then it comes off the bank’s assets, i.e. it reduces the bank’s profits and gets deducted from the capital (shareholder’s funds) of the bank. Only the Central Bank can write things off without having to worry about the loss that generates as it can operate quite happily with negative assets.
David,
Private citizens can also destroy money. Just convert your bank deposits into cash, build a bonfire and add the notes to it till they are all incinerated. Hey presto money destroyed!
Strangely those who are most concerned about inflation never see fit to lead by example in this way 😉
The problem with explaining it, is that economists are explaining MMT to other economists, and are not taking into consideration that the majority of people have not even had a basic education in economics – that should be fixed and should be taught in schools. But in the meantime, the majority of the population do not have the most basic understanding, and it takes a lot of effort to read about all the information you need just to get to the stage of some understanding of the concepts.
Starting from ‘what is fiat currency?’ – I didn’t know what this meant 2 years ago – and you ask most people outwith the financial sphere & they will not know. One colleague at work took an interest when I mentioned this to him and has now developed some understanding that country economics does not work like a household budget – the simplest analogy people can understand and that’s the closest most people want to come to understanding. If you take a specialist subject and just expect people to miraculously grasp the concept, it’s not going to happen. You need some basics first on which to base your understanding – and we have politicians and news outlets that themselves have no understanding. Whip up some interest in ‘what is fiat currency’, and don’t bog it down with inflation and taxation (sorry Richard). Build from a solid base and only give details when more interest is shown.
I am talking from a total thicko on finance economic things point of view.
I agree that much more needs to be done
A whole glossary
I have been involved with one on tax, but it needs to be better than that for MMT…
http://taxresearch.org.uk/Wiki/2017/08/15/glossary-of-tax-terminology/
Perhaps you know too much, understand it too well, regarding this subject? A glossary might be helpful, but only after someone takes an interest and actually knows what terms to look up – a list is not the easiest general reading material. If you consider a subject you know nothing about – I don’t know what that would be? Quantum mechanics? If I produced a glossary of terms used in quantum physics, I doubt this would spark interest, but would be a useful crib sheet to refer to. So, say I gave some introductory ‘fascinating facts’ paragraphs – like ‘quantum theory is all based on probability, it is just very probable that a ball will fall to the ground after it has been thrown in the air’ – from here you could explore several different threads of thought (how quantum theory was developed to allow it to tie into our usual physical theories; how that probability is calculated; why anyone bothers; how it has real world applications, for example) and introduce some of the basic technical terms related to each – and from there someone could use the glossary to explore further. So, think of a subject you know nothing about and are not interested in learning about, and discover how you yourself might be compelled to learn more about it? Context is important too…
Sorry – I have no teaching skills either, so do not really know how to get people not interested in learning something (which I suspect most people are with regards to economics – though I suspect you may find a lot more people in Scotland more receptive to learning than elsewhere!) to pick up some basics to enable them to reflect on the merits of MMT. I think MMT makes sense, but find it difficult to explain to people why without getting bogged down in trying to explain the basics that I barely understand myself (fiat currency: after explaining that we no longer have gold standard the interest in original subject, MMT, is derailed and deflated). I know that the biggest problem is trying to get information out to the wider public when the media has no interest or understanding either.
It seems madness that the majority of people know so little about economics when it does affect our lives so much, and we really should have an opinion on it.
Noted….
Re getting the message across. One of the things politicians should be doing is educating themselves on these kinds of issues rather than just spouting nonsensical, populist Party dogma and thereby challenging the status quo – like David Lammy did the other day on Brexit: https://www.theneweuropean.co.uk/top-stories/jeremy-corbyn-and-labour-should-not-back-brexit-says-david-lammy-1-5847370 or Pete Wishart: https://www.thenational.scot/news/17349730.watch-pete-wishart-savages-uk-government-over-brexit-chaos/?ref=mr&lp=6
If a few prominent (or not so prominent, but intelligent) politicians could take MMT on board and spread the news perhaps it might get somewhere. On the other hand, when even respected economists are unconvinced – e.g. Skidelsky says in his latest book “I do not agree with modern monetary theorists that, because the government creates the money it spends, it is freed from the budget constraint faced by the individual firm or household.”
I spent part of yesterday with Skidelsky
I will say no more….
That’s disappointing.
As the self-appointed curator of Keynes legacy, Skidelsky should probably be more thoughtful.
I couldn’t possibly comment…
Schumacher also wrote the lunatic ‘A Guide for the Perplexed’. Scott Bader remains viable and interesting as more or less a chemistry coop-trust. now global. I favour federal independence for British regions and the end of Westminster, replaced by an electronic Parliament open to public scrutiny and deliberation. MPs in this system would run actual local representation with public legal centres. There is a great deal that needs breaking down to get to ‘small’ and up to deliberative democracy. Born Scots I am happy to see independence, but would also like independence for the Greater Lancashire of the industrial revolution and so on. It’s not a Declaration of Arbroath freedom from the English for me, but the Tories, banksters and financial swindling. I’d like to see positive money (MMT or otherwise) across a Federated Europe with Brussels going electronic too.
Small, in what I see of individuals coping with such as universal credit and the job market at that level, is often cruel, a matter made worse by claims the system works successfully for most – amounting to a process of victimisation and re-victimisation similar to street grooming. These situations have long needed something very different than a minister in Westminster telling them it their fault they can’t join the hunky dory life of everyone else of the dole or gangmaster zero hours and stand up for 12 hour jobs. Gangmaster? Try working directly for Amazon.
Radical job guarantee is much more complex than something to be mentioned in passing. Most people don’t bother with economic literacy because nothing economic ever shows up as real help at their door.
I’ll say what I always say about Scottish independence:
I’d rather you were not considering it at all. But I understand.
But if you must – do it right. Please?
If you don’t, the consequences are going to be terrible.
On the currency issue remember that the purest form of national sovereignty in my opinion is the ability to print one’s own currency. Yes – borders and laws are important but printing money when you and the country needs it or not is key. I think that you might be safer that way. But as always there will be dark side to this.
I do not like the Euro because of its many failings plus it puts the Scottish firmly in the hands of the ECB – an institution (like its currency) that I believe should not exist at all.
And do keep away from the English pound. Otherwise, the Scottish economy will be like a bull tethered by its nose to a gatepost – a racist and jealous one at that, whose enmities are rooted in history and never to be expunged it seems.