{"id":14285,"date":"2018-10-01T16:17:40","date_gmt":"2018-10-01T20:17:40","guid":{"rendered":"http:\/\/multiplier-effect.org\/?p=14285"},"modified":"2018-10-01T16:26:13","modified_gmt":"2018-10-01T20:26:13","slug":"modern-money-theory-how-i-came-to-mmt-and-what-i-include-in-mmt","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/modern-money-theory-how-i-came-to-mmt-and-what-i-include-in-mmt\/","title":{"rendered":"Modern Money Theory: How I Came to MMT and What I Include in MMT"},"content":{"rendered":"

My remarks for the 2018 MMT Conference, September 28-30, NYC.<\/em><\/p>\n

I was asked to give a short presentation at the MMT conference. What follows is the text version of my remarks, some of which I had to skip over in the interests of time. Many readers might want to skip to the bullet points near the end, which summarize what I include in MMT.<\/p>\n

******************************************************************************<\/p>\n

As an undergraduate I studied psychology and social sciences\u2014but no economics, which probably gave me an advantage when I finally did come to economics. I began my economics career in my late twenties, studying mostly Institutionalist and Marxist approaches while working for the local government in Sacramento. However, I did carefully read Keynes\u2019s General Theory<\/em> at Sacramento State and one of my professors\u2014John Henry\u2014pushed me to go to St. Louis to study with Hyman Minsky, the greatest Post Keynesian economist.<\/p>\n

I wrote my dissertation in Bologna under Minsky\u2019s direction, focusing on private banking and the rise of what we called \u201cnonbank banks\u201d and \u201coff-balance-sheet operations\u201d (now called shadow banking). While in Bologna, I met Otto Steiger\u2014who had an alternative to the barter story of money that was based on his theory of property. I found it intriguing because it was consistent with some of Keynes\u2019s Treatise on Money<\/em> that I was reading at the time. Also, I had found Knapp\u2019s State Theory of Money<\/em>\u2014cited in both Steiger and Keynes\u2014so I speculated on money\u2019s origins (in spite of Minsky\u2019s warning that he didn\u2019t want me to write Genesis<\/em>) and the role of the state in my dissertation that became a book in 1990\u2014Money and Credit in Capitalist Economies\u2014<\/em>that helped to develop the Post Keynesian endogenous money approach.<\/p>\n

What was lacking in that literature was an adequate treatment of the role of the state\u2014which played a passive role\u2014supplying reserves as demanded by private bankers\u2014that is the Post Keynesian accommodationist or Horizontalist approach. There was no discussion of the relation of money to fiscal policy at that time. As I continued to read about the history of money, I became more convinced that we need to put the state at the center. Fortunately, I ran into two people that helped me to see how to do it.<\/p>\n

First, there was Warren Mosler, who I met online in the PKT discussion group; he insisted on viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at the Levy Institute, who provided the key to help unlock what Keynes had called his \u201cBabylonian Madness\u201d period\u2014when he was driven crazy trying to understand early money. Hudson argued that money was an invention of the authorities used for accounting purposes. So over the next decade I worked with a handful of people to put the state into monetary theory.<\/p>\n

As we all know, the mainstream wants a small government, with a central bank that follows a rule (initially, a money growth rate but now some version of inflation targeting). The fiscal branch of government is treated like a household that faces a budget constraint. But this conflicts with Institutionalist theory as well as Keynes\u2019s own theory. As the great Institutionalist Fagg Foster\u2014who preceded me at the University of Denver–put it: whatever is technically feasible is financially feasible. How can we square that with the belief that sovereign government is financially constrained? And if private banks can create money endogenously\u2014without limit\u2014why is government constrained?<\/p>\n

My second book, in 1998, provided a different view of sovereign spending. I also revisited the origins of money. By this time I had discovered the two<\/a> best<\/a> articles ever written on the nature of money\u2014by Mitchell Innes. Like Warren, Innes insisted that the dollar\u2019s value is derived from the tax that drives it. And he argued this has always been the case. This was also consistent with what Keynes claimed in the Treatise<\/em>, where he said that money has been a state money for the past 4,000 years, at least. I called this \u201cmodern money\u201d with intentional irony\u2014and titled my 1998 book Understanding Modern Money<\/em> as an inside joke. It only applies to the past 4,000 years.<\/p>\n

Surprisingly, this work was more controversial than the earlier endogenous money research. In my view, it was a natural extension\u2014or more correctly, it was the prerequisite to a study of privately created money. You need the state\u2019s money before you can have private money. Eventually our work found acceptance outside economics\u2014especially in law schools, among historians, and with anthropologists.<\/p>\n

For the most part, our fellow economists, including the heterodox ones, attacked us as crazy.<\/p>\n

I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and Harvard) on the legal history of money\u2014that is where I met Chris Desan and later Farley Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in adopting the MMT view\u2014unlike economists.<\/p>\n

I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist tried to argue against the taxes drive money view. He said he never thinks about taxes when he accepts money\u2014he accepts currency because he believes he can fob it off on Buffy Sue. The audience full of legal historians broke out in an explosion of laughter\u2014yelling \u201cit\u2019s the taxes, stupid.\u201d All he could do in response was to mumble that he might have to think more about it.<\/p>\n

Another prominent Post Keynesian claimed we had two things wrong. First, government debt isn\u2019t special\u2014debt is debt. Second, he argued we don\u2019t need double entry book-keeping\u2014his model has only single entry book-keeping. Years later he agreed that private debt is more dangerous than sovereign debt, and he\u2019s finally learned double-entry accounting. But of course whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in another dozen years he\u2019ll figure that out.<\/p>\n

As a student I had read a lot of anthropology\u2014as most Institutionalists do. So I knew that money could not have come out of tribal economies based on barter exchange. As you all know, David Graeber\u2019s book<\/a> insisted that anthropologists have never found any evidence of barter-based markets. Money preceded market exchange.<\/p>\n

Studying history also confirmed our story, but you have to carefully read between the lines. Most historians adopt monetarism because the only economics they know is Friedman–who claims that money causes inflation. Almost all of them also adopt a commodity money view\u2014gold was good money and fiat paper money causes inflation. If you ignore those biases, you can learn a lot about the nature of money from historians.<\/p>\n

Farley Grubb\u2014the foremost authority on Colonial currency\u2014proved that the American colonists understood perfectly well that taxes drive money. Every act that authorized the issue of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again, history shows that this has always been true. All money must be redeemed\u2014that is, accepted by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is written right there in the early acts by the American colonies. Even a gold coin is the issuer\u2019s IOU, redeemed in payment of taxes. Once you understand that, you understand the nature of money.<\/p>\n

So we were winning the academic debates, across a variety of disciplines. But we had a hard time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used to meet up every year or so to count the number of economists who understood what we were talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina Tcherneva back around 2005 that I was about ready to give it up.<\/p>\n

But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the odds were against us\u2014it would be for a small market, consisting mostly of our former students. Still, we decided to go for it. Here we are\u2014another dozen years later\u2014and the textbook is going to be published. MMT is everywhere. It was even featured in a New Yorker<\/em> crossword puzzle in August. You cannot get more mainstream than that.<\/p>\n

We originally titled our textbook Modern Money Theory<\/em>, but recently decided to just call it Macroeconomics<\/em>. There\u2019s no need to modify that with a subtitle. What we do is Macroeconomics. There is no coherent alternative to MMT.<\/p>\n

A couple of years ago Charles Goodhart told me: \u201cYou won. Declare victory but be magnanimous about it.\u201d After so many years of fighting, both of those are hard to do. We won. Be nice.<\/p>\n

Let me finish with 10 bullet points of what I include in MMT:<\/p>\n

    \n
  1. What is money: An IOU denominated in a socially sanctioned money of account. In almost all known cases, it is the authority\u2014the state\u2014that chooses the money of account. This comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.<\/li>\n
  2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability to impose such obligations is an important aspect of sovereignty; today, states alone monopolize this power. This comes from Knapp, Innes, Minsky, and Mosler.<\/li>\n
  3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU denominated in the recognized money of account; but acceptance can be hard to get unless you have the state backing you up. This is Minsky.<\/li>\n
  4. The word \u201credemption\u201d is used in two ways\u2014accepting your own IOUs in payment and promising to convert your IOUs to something else (such as gold, foreign currency, or the state\u2019s IOUs).<\/li>\n<\/ol>\n

    The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the second meaning\u2014which does not apply to the currencies issued by most modern nations, and indeed does not apply to most of the currencies issued throughout history. This comes from Innes and Knapp, and is reinforced by Hudson\u2019s and Grubb\u2019s work, as well as by Margaret Atwood\u2019s great book: Payback: Debt and the Shadow Side of Wealth<\/em>.<\/p><\/blockquote>\n

      \n
    1. Sovereign debt is different. There is no chance of involuntary default so long as the state only promises to accept its currency in payment. It could voluntarily repudiate its debt, but this is rare and has not been done by any modern sovereign nation.<\/li>\n
    2. Functional Finance: finance should be \u201cfunctional\u201d (to achieve the public purpose), not \u201csound\u201d (to achieve some arbitrary \u201cbalance\u201d between spending and revenues). Most importantly, monetary and fiscal policy should be formulated to achieve full employment with price stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.<\/li>\n<\/ol>\n

      In its original formulation, it is too simplistic, summarized as two principles: increase government spending (or reduce taxes) and increase the money supply if there is unemployment (do the reverse if there is inflation). The first of these is fiscal policy and the second is monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy on course. A modern economy is far too complex to steer as if you were driving a car. If unemployment exists, it is not enough to say that you can just reduce the interest rate, raise government spending, or reduce taxes. The first might even increase unemployment. The second two could cause unacceptable inflation, increase inequality, or induce financial instability long before they solved the unemployment problem. I agree that government can always afford to spend more. But the spending has to be carefully targeted to achieve the desired result. I\u2019d credit all my Institutionalist influences for that, including Minsky.<\/p><\/blockquote>\n

        \n
      1. For that reason, the JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability. This comes from Minsky\u2019s earliest work on the ELR, from Bill Mitchell\u2019s work on buffer stocks and Warren Mosler\u2019s work on monopoly price setting.<\/li>\n
      2. And also, for that reason, we need Minsky\u2019s analysis of financial instability. Here I don\u2019t really mean the financial instability hypothesis. I mean his whole body of work and especially the research line that began with his dissertation written under Schumpeter up through his work on Money Manager Capitalism at the Levy Institute before he died.<\/li>\n
      3. The government\u2019s debt is our financial asset. This follows from the sectoral balances approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to tell students: go home and do the balance sheets because what you are saying is nonsense. Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught Stephanie Kelton from his own, great, money and banking textbook<\/a>\u2014it is all there, including the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency and he insisted that all mainstream macroeconomics is incoherent.<\/li>\n
      4. Rejection of the typical view of the central bank as independent and potent. Monetary policy is weak and its impact is at best uncertain\u2014it might even be mistaking the brake pedal for the gas pedal. The central bank is the government\u2019s bank so can never be independent. Its main independence is limited to setting the overnight rate target, and it is probably a mistake to let it do even that. Permanent ZIRP (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott Fullwiler for much of the work on this.<\/li>\n<\/ol>\n

        That is my short list of what MMT ought to include. Some of these traditions have a very long history in economics. Some were long lost until we brought them back into discussion. We\u2019ve integrated them into a coherent approach to Macro. In my view, none of these can be dropped if you want a macroeconomics that is applicable to the modern economy. There are many other issues that can be (often are) included, most importantly environmental concerns and inequality, gender and race\/ethnicity. I have no problem with that.<\/p>\n","protected":false},"excerpt":{"rendered":"

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