MMT is itself a phenomenon of fiat currency – a successor to asset-backed money. MMT needs to start not with no money but with how the transition from asset backed money works. The rest is irrelevant.
The MMT argument is that money has only ever been partially asset backed. Randall Wray uses the example of “tally sticks” to show that taxation has long been a key component of the monetary system.
If it's only partially backed, the currency is only one step away from having no backing at all. During times of war the backing was indeed removed entirely , only to be restored when the conflict was over.
There was no great difficulty moving between the two regimes, contrary to what you are implying. This suggests that “asset backing” was more for psychological reasons than anything to do with the actual functioning of the economy.
I do not agree with this. As a political economist, the claim makes almost no sense to me.
Saying so, I do of course accept that as a matter of fact, there was not a precise delineation between asset-backed money and fiat money. I know that there was an element of fiat within asset-backed currency. So, let us accept that is a fact.
Then let us also accept as a matter of fact that all money is a human construct and that what matters about it is not what is, or even is not a fact, because such facts are always to some degree variable in each person's interpretation. Instead, what matters is the issue NeilW dismisses, which is the psychology of money. This is all that matters when we discuss MMT as far as I am concerned as a political economist.
You might think that the technicalities matter and, of course, they are of significance. That is why I pay so much attention to the details within MMT and money more broadly. But, at the end of the day those technicalities, which all eventually come down to the nature of double-entry bookkeeping because that is the only way in which money is really recognised to exist, are irrelevant if the understanding of those entries is wrong, and this is what matters.
The psychology of asset-backed money is that money is in scarce supply, and for the state to use it then it denies a resource to the private sector, thereby potentially constraining beneficial activity in that sector, with the substitution of state activity in its place. This is, of course, the tale told by Warren Mosler, with the suggestion being that the threat of violence ensures this claim by the state is respected even if (by implication, or threat would not be needed) it produces a less than optimal outcome for overall well-being. This is, of course, the view of everyone from the Austrian school, right through neoliberalism, to much of neoclassical economics. From the paper that Warren Mosler put forward in defence of MMT, it also seems to be his view. I accept that may not be the case, but if so he needs to radically improve his writing style, and we need to debate the issue.
I do not share that view. In my opinion, what MMT makes clear is that, as a matter of fact, state spending can precede taxation and, as a matter of fact, a government need not borrow to fund that expenditure, nor need it tax except to control the consequence of inflation created by spending in this way. That is, in my theoretical interpretation, what MMT says, even if it does not in yours.
As a result, the change in psychology is significant. This theory says that the state can spend without harming markets. There is no necessity of crowding out: there is merely competition for resources, with people having a choice as to which sector they wish to participate in. If the state exists, it is not because of the threat of violence but because people chose that it should because they want to work for it.
As importantly, actions otherwise unavailable for collective gain are enabled by MMT with consequent gains to well-being, none of which would appear to be referenced within your MMT framing.
I could, of course, elaborate these arguments, but I do not need to do so. The essential point is about the impact that this change in the psychological approach to economic management, when properly framed and expressed, has on political economy, i.e. the power relationships that determine the actual use of resources within a society. That impact is radical. This is what matters to me in all my engagements. Psychology is at the beginning and end of this framing. You dismiss it. I think it is paramount.
And that is precisely why the difference between asset-backed and fiat currencies is so significant. Whether or not asset-backed currencies were constrained in supply is not the point. The fact that they were thought to be in short supply is the point, and MMT shatters that myth. In that case, I defend my suggestion that MMT is all about explaining the transition from asset-backed to fiat currencies which, so far, the world has got disastrously wrong. Why would you want to disagree?
To put this another way, are we debating angels on pinheads here, or real-world political economy? Only one really matters to me, and I'll only engage with angels and pinheads if there is a real-world consequence. Most of the debate Mosler apologists are promoting has none, and that is what worries me about it.
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Hi Richard
Thanks so much for the clarifications you are providing. Even if you don’t end up winning over your opponents in the debate, you have educated many of us.
I’d like to understand the impact of the competition for resources you mention. Many years ago I attended a number of annual presentations by the Chief Economist of one of the major banks. His assertion was that low inflation was now a permanent feature of the economy (slightly dates the presentations!) and that the role of government was to grow the public sector when the private sector was weak, and vice versa. The implication was that resources were fundamentally capped and that the public sector should grow and shrink to balance demand for resources.
While much of what he said has now been undermined by subsequent events, is there a potentially negative impact if the public sector is effectively competing for resources with the private sector? I can see inflation as one potential consequence, but one that might be difficult to resolve with taxation?
Thanks
Peter
Let me ask a simple question in response
What do we need more of? Healthcare or bigger cars?
Do we need more complex mobile phones that we do not use 98% of the capacity on, or better social care
Do we need more television channels or better education?
Do we need more processed foods or a sustainable future?
Of course resources are limited
Why do we let the power of advertising force us into all the wring choices so that the need for ever greater private debt is fuelled toi keep banks happy?
I understand and appreciate the point, and I would personally welcome a much larger state and more effective taxes. However, I also don’t believe that the products of the private sector are entirely negative.
I did not sy the private sector entirely negative. They very obviously are not in all cases.
What I said was there are choices to be made.
All the big economic ideas of the past had psychology and animal spirits centre stage. We don’t just plug probabilities into a formula and do what it says. Any convincing economic theory needs to treat its audience as human beings rather than calculators.
Sometimes I think the BBC is very one-sided “How much money is the UK government borrowing, and does it matter?”
https://www.bbc.co.uk/news/business-50504151
I will post on this very soon
Richard no one is really engaging with you on this. You have wrote 1000s of words and pushed very hard to get a reaction and barely a murmur. Pulling out the one respondent you have on this is clutching at straws. Mosler tweeted he was happy to meet for a discussion and you want to turn it into a big public debate. I doubt you hear back from him. Just relax on this you look over zealous and dare i say it a bit foolish.
I look foolish?
Most people here seem to appreciate the debate
You have obviously been following it (somewhat disproving your own thesis)
Steve Keen and I are debating it on Saturday at 5pm
I think the whole of MMT is noticing it
But, you think I should listen you, who has never been here before, at least under the name you are using today
List five reasons why I should, with evidence, please
PS I checked that suggestion that you might have had other names here. In fact, this is the eighth you have used. Only yesterday you were Terry Hall. How do you keep up with yourself?
I confess I do not understand why you allow people using multiple pseudonyms to comment. It is your blog of course, but what confidence does such activity inspire in the comments, or indeed the commenter? It seems to me a wretched practice.
I have to spot them and that takes time
It can only be done by checking urls
When I find it I always block the url
The trouble is, VPNs make false urls readily available
It is just tedious, but I do try to stop it whenever I can
Sometimes a little googling may help, Terry Hall was a singer with The Specials, Christian Purslow is currently CEO of Aston Villa & has held positions at Chelsea & Liverpool previously, they would be more difficult to spot if they actually made up a name. I suppose they think they’re being clever!
Indeed
Phew!
Well thank you for a neat definition of ‘political economy’. Noted.
As for the more substantive points – the one being psychology – it always struck me as rather odd when you think about the QE and even state buy outs necessitated by the 2008 debacle.
Obviously, the money was ‘found’ to inject into the private allocative money banking system to get real and day to day flows of money going again. And the CBRA has never been the same since.
I see the CBRA as budget to prevent banking collapse. There’s no lack of asset there is there to back private banking!!! If only the NHS was given that!
But also, lets have a look at this thing called an ‘asset’ shall we?:
1. A useful or valuable quality, person, or thing; an advantage or resource.
2. A valuable item that is owned.
3. A spy working in his or her own country and controlled by the enemy.
I think that we can discount the third one but the other two seem tenable, the top one in particular.
Since an asset can be a ‘thing’, lets look at a particular thing that might qualify as an ‘asset’.
How about ‘power’? State power? Or what we should really call it – sovereignty (thanks to Stephanie Kelton).
My view is that the psychology you speak of – known to have its basis in anti-statist narrative – is simply that, a negation of state power which really is the State’s key asset and should be written in its constitutions, articles and memoranda – because it also a historical and contemporary fact.
Those advocating ‘asset based money’ are either oblivious to this or want to challenge it (and they always have as history tells us).
They reject money as a state resource and especially any notion that the state – let alone anyone – has an advantage over them. This is because the psychology is based on greed, avarice, kleptomania and lawlessness.
Because today, the tale we’re told is that the state is powerless and useless.
Well it isn’t and the private sector’s own stupidity and criminality in 2008 more or less laid that to rest. Or should have.
So to me the asset factor in MMT is quite simply state sovereignty – state power and its crucial role in creating and destroying the currency it has created. That is what a country’s money is issued against whether it be in the CBRA or the NHS or whatever.
The big question then is one of distribution of the currency in the face of private capital who is always seeking to grab as much of it for themselves under the false notion that they are ‘making money’ or that they are impinged by the state in expressing is currency sovereignty.
My advice to all MMTers is to not fall into the trap of denying state sovereignty and its link to currency. It’s a dangerous road you are on and you will robbed blind.
Well said
Throwing out some logical arguments that I believe prove spending comes before tax.
1. Assume there is no money. The government can not levy taxes as there is no money. The government must spend the money before taxes can be gathered.
2. The currency, coins and notes, are minted and printed in the royal mint owned by the government. No taxes involved.
3. At the end on the financial year the government adds up all the expenditure and then takes away the taxes gathered. It does not add up the taxes and then takes away the spending.
This is not a debate I am keen to join but for those who obsess on asset backing, I draw attention to 3% War Loan, 1914; probably the biggest issue (relative to the economy) in history. A failure, treated as a triumph; the government bills were paid. War time. So what? It just added to the national debt (the problem post war was less the scale of debt than the foreign currency commitments). War was the only reason for raising money for most of our history. That is itself a subjective priority. Mutatis Mutandis we can simply apply the same rules to the well-being of people. Nor would I be so quick to assume there are no examples from peace time. How deeply have you explored the history?
Just to underscore the eccentricity of the ‘war time’ is different thesis; the reason 1914 3% War Loan failed is obvious; in a crisis capital takes fright. It didn’t like the risk of that scale of debt issue in a war. The risks are lower in peace time.
When Nixon severed the link between paper money and the Gold Standard in 1971, it seems to me that money became “fiat”. However, if we look at the history of money, we have several people already stating that money was fiat.
In 1944, British economist William Beveridge wrote: “There is no financial limit to spending by the State within its own borders, as there is a financial limit, set by their resources and their credit, to spending by private citizens.”
In 1946, Beardsley Ruml, the Chairman of the Federal Reserve Bank of New York wrote: “While taxes might be important for other purposes (that we’ll examine later), government doesn’t need “revenue” in order to spend.”
This suggests to me that governments provided a promise to back cash with gold that could never be fulfilled if everyone wanted their gold at the same time.
References
➡️ Lord Beveridge, Full Employment In A Free Society, Publ. 1944 Bradford and Dickens, https://archive.org/details/in.ernet.dli.2015.228995/page/n3/mode/2up?q=%22financial+limit%22
➡️ Beardsley Ruml, “Taxes for Revenue Are Obsolete,” American Affairs, vol. 8, no. 1 (January 1946), pp. 35–9, https://cdn.mises.org/AA1946_VIII_1_2.pdf
Thanks Ian
@ Richard,
I didn’t say that “the abandonment of the gold standard was of little consequence”. Any sort of peg between the currency and anything else, whether this be gold or another currency, limits the scope the government has in applying a fiscal adjustment to the economy. I don’t believe there is any disagreement on that point.
If the government pegs its currency to something that is too cheap it can find itself with an inflation problem An example of this is the euro as used in Germany. It is actually a German euro which is pegged to all the other euros on a 1:1 basis by the actions of the ECB. Consequently Germany has an inflation problem which it can’t do much about on its own. There might be small differences in German and Spanish inflation, for example, but if they are using the same currency or if one is tightly pegged to another the differences will be small.
This has happened in the past with gold too. When new supplies of gold were found by conquering armies by Spanish empire in the 15th and 16th centuries the price of gold fell and the Spanish had an inflation problem. Later the problem was just the opposite. A rising price of gold forced President Roosevelt to try to fix its price at approx $21 per ounce in 1933. Americans were also banned from owning gold. What was the point of pretending there was any kind of gold standard when the US’s own citizens weren’t allowed to own it? It can only be for some pseudo-psychological reason. The real reason the dollar had purchasing power was due to the taxation policies of the US government. The gold held in Fort Knox may as well not have existed.
I have had problems deciding how to respond to this comment, because I find it so difficult to comprehend the approach that you are taking, which appears to me to be verging on the irrelevant.
In the comment preceding this one you said, in effect, that there was no difference between the management of money in the gold standard era and during the fiat currency era, because the gold standard was not absolute. I challenged this, saying that the psychology relating to the gold standard was more important than the practice, and the perception of constraint was very real, changing actual human behaviour.
Now you seem to agree that my comment was, in that respect, right.
However, you now bring in another point of regulation to claim as a consequence that it is only tax that gives money value, when what you actually ignore is the fact that the government declaring its money to be legal tender is what gives it value, and the discounted value of future (not past) tax revenue is what provides it with the capacity to spend.
I am trying very hard to engage, but find your claims illogical. I apologise if that makes it seem that I am abrupt in response.
Does PAS 2060 mean anything to you?
Yes
It is a net zero standard
Why?
“I do not share that view. In my opinion, what MMT makes clear is that, as a matter of fact, state spending can precede taxation and, as a matter of fact, a government need not borrow to fund that expenditure, nor need it tax except to control the consequence of inflation created by spending in this way. That is, in my theoretical interpretation, what MMT says, even if it does not in yours.”
One problem with the concept that saving precedes investment is the fact that saving in real terms requires a “form” of saving, as the output of a day of work can take different forms and the saver couldn’t possibly know which type of savings he should accumulate in advance. Saving decisions must take the investments they can be used for into account, otherwise the real savings become worthless as no investment decision can fully utilize them. In other words, for the optimal production of savings, it is optimal for the investment decision to happen at the same time or before the act of saving. The investor may need two years to construct a factory. The saver produces goods in response to the demand dictated by the investor. Those goods are used as the factory is constructed, similar to a just in time model. The saver “saves” after the fact, by not spending the earned investment money, not by piling up products he does not intend to sell, which are supposedly waiting to be picked up by future investors.
This is the essential difference between loanable funds models and models where money is created through loans.
In a simple corn economy with loanable funds. The maximum amount of corn that can be borrowed is the amount of corn produced and not consumed this year. In this simplified model the form of savings is always corn, the saver does not have to worry about producing e.g. too much corn when what is really needed is lumber. There is however, one problem. If an investment needs multiple years of corn production, the investor would not be able to borrow all the corn in the first year, he would have to borrow corn every single year and compete against other investors which may end up with two half finished investments instead of one complete one. In fact, the borrower would have to get a reservation that grants him priority access to borrow over multiple years.
The reservation could take the form of corn coupons, except each coupon is tied to a production period so that a three year project grants the borrower coupons which only allow you to withdraw the corn in specific years. Coupon #1 is tied to year 1 and so on.
If we only take a little step further and remove the production period constraint we arrive at today’s system where money is created through loans. As the money is not tied to production periods, the economy will be prone to economic cycles as people either withdraw too much and cause inflation or withdraw too little and cause deflation during any given production period. This is the simple result of money being less constrained than goods and humans because it is not bound by time or space.
Savings do not fund investment in the modern economy.
Credit funds investment.
You are living in a fantasy world.