...against fictions and other tall tales

Monday, 15 August 2011

Modern Monetary Theory and its Critics

Paul Krugman published today another of his critiques of Modern Monetary Theory (MMT) (aka neochartalism, for those who've known about this macroeconomic paradigm since the 90s and beyond). For an excellent introduction to MMT, I recommend the following article by economist Pavlina Tcherneva. Prof. Tcherneva's take on MMT is by far the most comprehensive (and relatively brief) description of neochartalism available.*

In his post, Prof. Krugman argues that adherents to MMT are wrong in (1) believing that modern, economically sovereign governments (i.e. governments that have the ability to issue fiat money) do not face financial constraints and in (2) thinking that deficits financed by money issue are no more inflationary than deficits financed by bond issue.

In regard to the first objection, I could keep it short and simply quote the great economist Michal Kalecki, who argued that the only constraint facing a monetarily sovereign government consists of the inflationary impact associated with spending and investment initiatives undertaken by the private and public sectors. As Kalecki wrote in his article "The problem of financing economic development", there are:
...no financial limits, in the formal sense, to the volume of investment. The real problem is whether this financing of investment does, or does not, create inflationary pressures. (1955: 25)
However, it might be best if Kalecki's statement were echoed by the words of someone with Prof. Krugman's credentials, that is, another Bank of Sweden Nobel laureate. For this reason, I wish to highlight the following quote from the late economist Bill Vickrey, who claimed that:
"...in the absence of a norm such as a gold clause, there can be no question of the ability of the government to make payments when due, albeit possibly in a currency devalued by inflation." (2000: 13) (my emphasis)
Having now attempted to give credence to MMT's claim regarding the financeability of government spending, and having determined that the sole constraint affecting the public finances of economically sovereign governments is essentially one of inflation, let me now turn to Prof. Krugman's contention that deficits financed by money issue are more inflationary than a deficit financed by bond issue. Here, I believe a quote by one of the leading figures associated with the "circulation approach" to monetary economics would suffice. According to Augusto Graziani,
The technique of financing a deficit does have an effect on prices, but only in an indirect way, and the effect produced is opposite to what the dominant analysis indicates. In fact a deficit financed by issuing government bonds increases the amount of interest payments and therefore the money incomes of savers; the consequence is that money prices are pushed upwards more than if the same deficit were financed by money creation. (2003: 140) (my emphasis)
One of the best explanations I've encountered for why financing government expenditures using money creation need not be inflationary is contained in "Optimal growth using fiscal and monetary policies", a paper authored by Hassan Bougrine and Teppo Rakkolainen and published by the International Economic Policy Institute. According to Bougrine and Rakkolainen, fears of inflation resulting from the government creating too much money in a context of unemployment are unwarranted given that:
...there is no such possibility for an excess supply of money since all the money that is created has been demanded. When workers seek jobs, they are demanding money. When contractors are hired to build a needed school, a hospital or a bridge, they are demanding money for compensation. Therefore the supply of money is always equal to the demand for money. The supply of money cannot exceed the demand for it and inflation is not a monetary phenomenon. In fact, when the government permits unemployment to exist by refusing to hire workers and neglects the infrastructure by not building the needed schools, roads, and so on, it is voluntarily choosing to suppress the demand for money and keep it arbitrarily low. Understanding money is essential because it effectively liberates the government from being subject to an imaginary budget constraint and allows it to actively intervene to fill the gap of under-utilised capacity of society as a whole, i.e., to strive to achieve full employment and high economic growth and development. (2009, p. 16) (my emphasis)
Before concluding, I should probably also address two points made by Prof. Krugman in a previous critique of MMT. The first point has to do with the role of taxation (note: Prof. Krugman disagrees with MMT that the purpose of taxation is to regulate purchasing power) and the second has to do with Prof. Krugman's belief that increases in the amount of base money is inflationary.

In regard to the role of taxation, Prof. Krugman should understand that it isn't only MMT supporters who believe that the most important function of taxation is to regulate purchasing power. Even some economists steeped in the neoclassical tradition believe this is the case. For instance, economist Robert Eisner in The Misunderstood Economy argued that:
[t]axes serve a number of purposes. The most important is to reduce the purchasing power of taxpayers. Resources are then freed from production of the goods and services that they would otherwise buy. It is in this sense, in real terms, that taxes pay for government expenditures. (1994: 196) (my emphasis)
As for Prof. Krugman's claim that expansions in the monetary base (i.e. reserves plus currency) are inherently inflationary, I wish to point out that leading economists at the Bank for International Settlement have been arguing for quite some time now that the growth in excess reserves need not result in additional credit creation, thus eliminating the possibility that inflation will ensue as a result. Take for instance, this quote from a recent paper by economists Claudio Borio and Piti Disyatat discussing how the amount of base money has no impact on bank lending:
Contrary to what is often believed, [banks’ reserves with the central bank] do not constrain the amount of inside credit creation. Indeed, in a number of banking systems under normal conditions they are effectively zero, regardless of the level of the interest rate. Critically, the existence of a demand for banks’ reserves, arising from the need to settle transactions, is essential for the central bank to be able to set interest rates, by exploiting its monopoly over their supply. But that is where their role ends. The ultimate constraint on credit creation is the short-term rate set by the central bank and the reaction function that describes how this institution decides to set policy rates in response to economic developments. (Borio and Disyatat, 2011: 30) (original emphasis)
To know more on this last point and, more specifically, on why increases in the amount of base money need not be inflationary, please refer to my previous posts here, here and here. In these posts, I discuss the inapplicability of the traditional money multiplier model taught in most macro textbooks and go over some of the implications associated with the Fed's new policy of paying interest on reserves.

* This sentence was updated to include a link to P. Tcherneva's website on 17/08/2011.

Borio, C. and P. Disyatat (2011), "Global imbalances and the financial crisis: Link or no link", Bank for International Settlement Working papers No. 346, May 2011.

Bougrine, H. and T. Rakkolainen (2009), "Optimal growth using fiscal and monetary policies",
Working Paper 2009-11, IEPI, 2009.

Disyatat, P. (2010), "The bank lending channel revisited", Bank for International Settlement Working papers No. 297, February 2010.

Eisner, R. (1994) The Misunderstood Economy: What counts and how to count it (Boston: HBSP)

Graziani, A. (2003), The Monetary Theory of Production (Cambridge: Cambridge University Press).

Kalecki, M. (1955), "The Problem of Financing Economic Development", Indian Economic Review; reprinted in Essays on Developing Economies (Brighton: Harvester Press), 1972.

Tcherneva, P. (2006), "Chartalism and the tax-driven approach to money", in P. Arestis and M. Sawyer (eds), Handbook of Alternative Monetary Economics, (Northampton, MA: Edward Elgar), pp. 69-86.

Vickrey, B. (2000), "Fifteen fatal fallacies of financial fundamentalism: A disquisition on demand side economics", Working Paper No.1, January 2000. A copy of the paper is available on the website of the Center for Full Employment and Price Stability, http://www.cfeps.org/pubs/


  1. Indeed, this is a very strong piece.

    The blabber and chatter on PK's last feature is surprisingly remarkable for a rebuff. One wonders if people aren't vying for a place on the stage or podium. Convincing PK is very compromising. Personally I think Paul perplexed by the opposition. TG Wray didn't sign in.
    There are important structural policy issues that must still be addressed by MMT. My irritant is the role of central (or a central) monetary authorities within a homogeneous and heterogeneous financial system. For a while, I thought you were setting up the conditions; now I think you may be heading for the core problem. Everything else in MMT is a footnote to Keynes.

    G.C. will like your reference to Kalecki. P.T. is also a very selection. FYI, her position on Keynes and full employment was very good:http://ideas.repec.org/p/lev/wrkpap/wp_542.html is the entry.

  2. More and more, Jorge, I get the impression that you've been reading my mail--your comments always resonate quite well. Also, I agree that Pavlina's work on fiscal policy is very good. I'm currently knee deep into Arestis. PK should read him too.

  3. No surprise. Pro footage and feature. MK (more keynesian than keynes) great springboard, but most forgot-best intro is the canonical statesman Sebastiani. The crux with MK is that it is more business cycle (schumpy, i say-no one agrees) and must be stretched to integrate new paradigms because its focal point is investment and full employment (your forte); not money as such: J. (nod)
    The PK feature is pertinent for our times, but it's one-sided on the comments. Bringing Rand in??? Not like PK. The sides are entrenching. The field opinionates too quickly and radically. You're doing great.

  4. FRB should get a canadian nod from an old monetarist.
    @circuit-couldn't read your email unless size 16 font. I did refer on PEF to your features on Bullard's Fed. They are a very good group, and he is a very good man.
    @GC. On Sebastiani, I skipped over canonical, fell on statesman and presumed 'elder' instead. A score ago. Theoretically, the field has not been so opinionated since Chicago. Beats me.

  5. Nice touch inserting Eisner in there.

  6. Yea, Eisner's a good foot, but Graziani's a pearl. Tks

  7. C'est tres bien. Votre biblio me fascine, particulierement le combo B&R et Kalecki. La mise en scene est raffinee. A+

  8. Great to follow one that doesn't squall. Watch those g-men references. Most are biased, some are anachronistic and the little left are golden nuggets!!!

    My favorite G-man is PAV, lol excluding ..&..

    Best are HASimon, and Ken Arrow. Best PMreads Adam Smith on Morals and Hume, Swift on anything. Best AMreads JTobin, RCoase. DNorth, PASam, MFr, JMK, JKG on policy. Underrated MK, overrated 2000AD+ non-keynesians. Lost potential Sraffa. Best! rogue AParguez.

    Work well; very nice moves.

  9. Trevor C, Boston, MA16 August 2011 at 19:30

    OoooK, all 2000AD+ non-keynesians suggests those that survived the Glass-Steagall rollback and the millenium bubbles, and the 2007 collapse and 2010 recession and the forthcoming eurocollapse. Of course, now everyone's a Keynesian..sounds familiar: cit. Pres. Nixon. Most of us were pretty good midshipmen in those fleets; I don't recall Pres. Clinton and SoT Rubin and Summers as non-keynesians.

  10. The MMT limits the capacity of governments to resolve structural problems. Read Keynes, General Theory, chapter 17, for a _more_ modern monetary theory, one where "money rules the roost," but amidst a plethora of quasi moneys - major commodities and tradable assets. In MMT, there is one rooster, and no hens, hence no eggs. Aristotle, in Economics, Book 2, recommends the conventional (to us) mixture of government operations for internal subdivisions, but holds that the central government, because of its size, should engage in the export and import trades and financial dealings so as to maximize its revenues’ profitability. I don’t think Keynes was quite up to this; but Alexander the Great could have made quite something out of Keynes Chapter 17. As is, Aristotle's lesson has not been lost; but in countries such as the U.S. , there is a chastity belt (with MMT hanging off it) keeping all business private and the government out. As MMT suggests, the problem is a moral one, not economic; but the solution is economic. In the “real” world, if the rooster goes crazy, one or more of the hens steps up.

  11. @LF and Flo, I thought some folks would get a kick out of those authors. Welcome.

    @Colleen: Merci et bienvenue au site. Glad you think the references are relevant. Check out the papers linked in the last paragraph. Good references there too. N'hésitez pas à me dire ce que vous en pensez.

    @B. and Trevor: Demand-side is key. No question. Better any Keynesian, notwithstanding the decade than disciples of 19th century tenets inapplicable to today. Thanks for sharing reading list. HSimon, Tobin, Sraffa, Parguez. All excellent.

    @Ron: I go back to GT's chapter 17 all the time. Great read. Feel free to discuss further limits of MMT. As should Jorge above. Would be interested in knowing more. Tks.

  12. @G.C. and Jorge. Thanks for the Sebastiani reference and the rest of valued comments.

    Also, I like this part: "The sides are entrenching. The field opinionates too quickly and radically." Question for you (and anyone else who's interested): Arguably, blogging makes the opinions and ideas flow out and into the public quicker. I've been thinking about this a lot: Is anyone still publishing in academic papers? I remember the days (early 2000s!) waiting months for the next issue of JPKE or whatever. Now, everyday brings out new opinions, views. I wonder about the quality and long term impact...Any thoughts?

  13. Good work. Very Good work. Nod to you,

  14. circuit, as long as the research and op-eds substantiate their views with reliable data, I don't need formalized journal entries. I only speak as a reader, not author.

  15. Circuit,

    Great post. Wish I found your blog earlier!

    Thinking out loud:Although Krugman shared the same conclusion, his approach to get their is still completely mainstream. i.e. it is nonsensical to talk about a currency monopolist being financially constrained in its spending, and it is nonsensical to talk of taxes and bonds functioning to finance government spending. Krugman on the other hand views taxes and bonds as functioning to finance government spending. he arrives at his conclusion by recognising that the government has access to the printing press. In other words, the IGBC is still an ex ante identity, whereas it is an ex post identity for circuitists and chartalists.

    I don't think Krugman would disagree with the taxes function to regulate aggregate demand (so he would agree with your quote) but he would argue that it isn't the only function of taxes.

    My general view of the situation is that there needs to be a drastic change of approach by Post Keynesians. Too many discussions are led by autodidact MMTer's and mainstream economists. The implication is that the mainstream economists could potentially learn the wrong ideas and most importantly it reinforces the idea that MMT is a cult -- Autodidact MMTer's are becoming as vocal as autodidact Austrian's, where ever MMT is mentioned you can be sure that there will be comments. I think a number of these discussions could be well served by more Post Keynesian economists entering the fray.

  16. Circuit. Vous devriez consacrer quelques blogs en français sur MMT pour vos lecteurs francophones. Très peu existe; quelques blogs, participation limitée, aliena economica (traductions de l'anglais. Votre biblio est super. FRB c'est vraiement le 'find'
    [french blogs are limited for mmt. maybe a few introductory blogs to a very large, growing and excited french readership(?)]

  17. @Jorge, I made changes to the font size-hope this helps! Also, I saw your mention of FRB on PEF. Thanks very much. I responded when I noticed it earlier this week. Regarding Bullard and staff, I did read a number of interesting papers on QE at the start of the initiative. These were good explanatory papers. Bullard's "Seven faces of peril" had a good section on the Taylor rule and the need for more action on the part of the authorities.

    @B.Swells, Manfredo and Goffredo: I noticed your endorsements down at Krugman's blog. Thanks very much.

    @mdm: I have to agree with you regarding the current dynamics surrounding the propagation of chartalist and circuitist ideas. Myself, I try to ground each comment or argument using academic or official. I have not finished reading Wray's response (it's a good, detailed rundown response to PK so I'm taking my time), but it seems he would agree with you that more effort needs to be made to circulate the academic literature discussing these matters. What you are saying is key and I wish there was a discussion on this somewhere. My own contention is that much of these ideas have been around for a while so I'm not quite sure why suddenly there is an acronym that is supposedly all-encompassing. I prefer the approach that Wray, Tcherneva and others (at UMKC or elsewhere) have taken recently, which is to describe the paradigm rather as the "Modern Money" approach. With this, they can widen the scope (and range of views and policy prescription) to include the views of circuitists, as well as more conventional chartalists such as Charles Goodhart. For me, the key ideas to diffuse are the endogenous nature of money (and no fixed supply of money) and everything relating to stock-flow consistency. If folks like Krugman would open up to only these two things, I'd be pretty happy.

    @Everyone: For those who are interested, lots of very interesting literature can be found in my links. See especially IEPI, Robinson, and CCEPP. There's some fantastic papers available there.

  18. @Coleen: Mmh, postings in french...That could work. Merci pour la note chez Krugman ;)

  19. @circuit. (16-08-11) Good work shows up on the internet quickly. Authors like to get out there asap. Econometrics and related still prefer journals. Politicians and their staff rarely read journals-no time; politics is about votes and electorates: blogs are sharper, quicker, and give more feedback and impact on interests. Consider Keynes in the Preface of GT and @mdm “the matters at issue are of an importance…it is my fellow economists, not the general public, whom I must first convince…the general public, though welcome at the debate, are only eavesdroppers…between fellow economists…” The internet is the eavesdrop. Not a bad downside mdm. The challenge is to take this discourse onto a higher podium. Nod to @ron,@mdm &@circuit on your tone.

  20. @mdm (nod) Autodidacts (multitudes inc. J.S. Mill, Ramanujan idem to some extent) play an important political and sociological role. Some are excellent thinkers and others, one-time wonders, but that one time is a super-nova. They’re not irritants if they’re not arrogant; they publicize cost-effectively. It doesn’t make a difference whether ideological affiliations ‘come to the fray’-success is when affiliations affiliate with Constitution Ave, zip20551, and Pennsylvania Ave, zip20220, or 234 Wellington K1A0G9.
    On post keynesians-your work is better than ours.

  21. @ron, I didn’t know that Oeconomica had finally been attributed to Aristotle. (nod) When I read Aristotle’s PER, there was no attribution of the topos.

  22. @ron@mdm@circuit: Appreciate your allusions and concerns for the ‘real’ world. Having nourished and having been nourished by pragmatism, it’s difficult to entertain the ‘sunny side of life’ Although neither a cynic nor a skeptic, I am a realist, (to many, the latter connotes the two former) as you seemingly are, and cherish a dose of gradualism (my favorite example: Czeck Rep vs Slovakia) more than pints and drawers full of unfulfilled anticipation. Gradualism implies transitional strategies especially when envisaging paradigm shifts. MMT is a dramatic paradigm shift for the public and the politician. It is not seamless in its application as some would have it. Socially and politically it can be expensive.

    To be politically credible, MMT has to develop a transitional strategy. If there is one, not many, in the right places, know it.
    Some models contend that MMT needs no central monetary authority (let’s forget government for now); in fact, others contend that it doesn’t need banks and/or money and lest one forget, the manner of equilibrating the real rate of interest under certain conditions is still up in the air. However, in the ‘real world’ which is neither a model nor a homogeneous system, there are risks, demand for credit; disparities, inequalities, uncertainties among and within economic sectors: manufacturers, labour, retailers and purchasers, service providers, and the financials. As to the latter, there are definitely differences between Wall Street banks (macros units) and smaller regional banks (micro units) etc.

    Who accommodates and channels (types) the monetary policy and how,etc. How does one (who) manage without monetary aggregates? I

    Everyone of some few know theoretically how. But how do the House, Senate and ultimately the President explain radical policy shifts to the electorate. How do you explain to the public that deficits don’t really matter after a country’s modern history was engaged in attending to them, after assets and lives have been depleted. How do you explain to the poor, the destitue, those that suffered and lost, (using many simple models in mmt and other economics), that since the deficit is not a problem, and you can print all the money you want, you still won’t!

    @ron: Now that's a moral problem.
    Yet, That the problem is a ‘moral’ one is polemical; sometimes the property ‘moral’ is too inclusive. Although one should avoid reductionism, the venue is philosophically tenable in policy: every solution is at least political. Does the system resolve by emergence; or does it need intervention or a combo.

    Paul Krugman is not a problem; if anything he’s the best devil’s advocate and sounding-board MMT has had since inception. Don’t oust the Ambassador!

    @mdm@circuit@ron: Karl Deutsch was best at that. Most policymakers interpret the world as a permutation of transitional strategies, and part of the latter is its communication. If MMT is to engage, then get someone to platform the idea. Some are convinced that mmt may be a solution, some think it requires fine-tuning, much calibration and some heavy duty brakes in case the truck’s engine ignites without a good driver. Paul Krugman was solicited to ‘lead the solution’; Warren Mosler gave Paul a nod (very classy by Mr. Warren Mosler) a few day ago in his comment “And if you can get the debate shifted to inflation, sanity can prevail.” I’d like to think Paul’s column on the Printing Press was a nod to MMT after their comments on MMT, Again. But there’s still too much condescension and confusion and that’s most distasteful. And it’s no longer a debate. It’s a discourse. (Jorge-nod)

    1. All this hair splitting amongst folks with training way beyond the capability of us work-a-day Americans to obtain ends up just giving us headaches with very little new understanding of what economic policies are truly best for our country.

      Are we to wait decades for MMT to become the economic philosophy de jour? Is your dispute with Krugman more important than what, in current reality, could give hope to the innocent who're bearing the brunt of the financial disaster? All I know is, I practiced conservative traditions in my financial life and got royally screwed, while the banks played around in a giant casino they built and keep getting rewarded for bad behavior. What do you suggest we do about that?

      Maybe MMTers and Keynesians could play nicely together and strongly suggest some real, helpful policies instead of sniping about how many angels dance on the head of a pin in the long run. HELP US, DAMMIT!

    2. Tygerrr, thanks for your comment. Let me start by agreeing with you: there's too much focus on the details. My own approach is to *try* to keep it simple. It's hard sometimes but it's feasible. My preference is to write for the general public: the core that matters! As for the sniping, that's also very unfortunate. There's tremendous amount of agreement between all these folks. At times it seems they don't realize it. Some believe the devil is in details and it's worthwhile to iron out all of these before presenting policy recommendations. That's fine. All I know is that I would gladly sit besides during a congressional hearing and support the views of anyone who shares the position that the most important goals of economic policy is to give jobs to the unemployed (ok...decent price stability too). My hunch is that most of these folks agree on this point. That would be my starting point.

  23. @mdm: on four (Keynesians yes; post??? maybe one-push it- two) The four agree that 'posts' did better work than 'classics'

  24. @swells: wasn't Kalecki self-taught when it came to economics. Autodidact? depends on the criteria of schooling required in the field.

  25. Discourse it is!!! Political incorrectness does not promote ‘team spirit’; nor does it revitalize ‘animal spirit’. Maybe Mr. Mosler’s Center of the Universe is the ‘empirical reasonableness of MMT’ but for ‘swells’ the center of the universe is a biased 20º56’N156º15W (lol) and there’s nothing reasonable there unless you have the appropriate resources to optimally work the system. That's why it is a great merit to MMT-ers and the likes to be analyzing monetary systems and policy world-wide, although the lump of the work targets the US. That's normal. Suffice to recall R.K.Merton. In the US, the system includes FRS, Treasury, in particular, and (these few of the millions) having belaboured through Kuznets recessions, one becomes acquainted with troughs. A country cannot afford being a beta-site for a major paradigm shift (Goffredo-nod). 2007+ is bad enough, and it’s not yet over. So when one reads in a good recall (although I would like to nuance some of its content):


    written by a very good blogger, the tenuous

    ‘This bureaucrat drew much of his insight from a fascinating historical piece by the St. Louis Federal Reserve, a bastion of monetarist thought and no obvious friend of MMT.’,

    it is, to at least these few of the millions, very discomforting. In the US, one needs the FRS and Treasury (N.B.: JMK’s language in the Preface to GT is the best rhetoric on paradigms, polity, and political suavity, besides being the best confessional and apologia in scholarship. It should be mandatory reading.)

    No one in the FRS and Treasury is an intellectual partisan to any monetary ideology, and no one in the FRS and Treasury is second fiddle to anyone in the economics community.
    The moment one drops the 'swashbuckling', the quicker the community will get respect, and the easier it will be for inside sympathizers, and there are many, to access the necessary resources to construct transitional scenarios. Things get done, sometimes without acknowledgement. That’s the public service.

    @swells: three classical! Maybe? one 'post' but then he's real good 'classical'

    @coleen: great pioneers were french, but you're right, not many blogs in french

    @anon 17-08-11. At my very advanced age, I don't mind the details. I'm very selective. Before I settle down, I like to know the size of my spread and the quality of the soil, it gives me an idea of the crops I can raise and the market they'll get me. After a while, you know the land is going to give you quality, then you scan over the details and then don't worry about them at all.
    But when I was young and able like you, I was very busy, and I agree with you, details were an irritant. But circuit may be my age, and likes to pin it down; or your age and pin his generation down.

    @Trevor C. You're correct. NOD

    @ron. Feather on Alexander. the belt analogy, contentious.

    @mdm Nod to your caution, but what is needed is political clout! GC is correct, and circuit's columns are interesting because he leans continuously towards policy ops and apps. Part of the meal is the setting and the final service. No better chefs than post keynesians

  26. @ all: Further to Ron's observation regarding the significance of Chapter 17 of the General Theory, I am reminded of Randall Wray's Levy working paper no. 438. It provides a very good intro on Keynes's liquidity approach to asset pricing. See here:

    @ Goffredo, you raise many critical issues here. Transition, risks, PR implications. I want to come back to this...But briefly, aren't we already in a "transitional" phase now that the Fed is paying interests on reserves? Also, on the fiscal side, many widely-held beliefs are now being reconsidered and re-examined as a result of recent circumstances and policy outcomes. (eg, impact of large deficits on interest rates, money multiplier, inflationary role of monetary base...)

    I think the key to all this is for MMT to explain how it is also a "quantity theory" (using other means...) I know some bloggers have touched upon this issue, but why not go back to classic Milton Friedman circa 1948 (in "Monetary and Fiscal Framework for Economic Stability)? In the framework he proposed in '48, Friedman essentially depicting Wray's (et al) preferred approach to fiscal policy (give or take a few elements): "...creation of money to meet government deficits [and] the retirement of money when the government has a surplus". Could this "monetarist link" not attract former/disillusioned/open-minded monetarists to part in these discussions? I'll have to think more about the other concerns you raise. What I do wonder is whether the risks and challenges of the new paradigm are any risker than the approach we have now? That being said, I understand the PR implications for the legislative and executive (including the monetary and fiscal authorities) of trying to support any of these policy changes (eg. "employer of last resort, functional finance, etc).

    As for the first step into the new paradigm, how about the return of full-employment or employer of last resort, as Bill Gross and others are now suggesting? The rest (eg institutional and regulatory changes) could follow.

    Also, there need to be a discussion as to whether MMT is open to fixed exchange rates in some circumstances (eg developing economies). I believe there is disagreement between modern money economists on this. Randy Wray seems to be in favor of China's peg while other would prefer to see flexible exchange rates everywhere. I hate to point out the disagreement but it's there..

  27. @ M. Incantalupi: "No one in the FRS and Treasury is an intellectual partisan to any monetary ideology, and no one in the FRS and Treasury is second fiddle to anyone in the economics community. The moment one drops the 'swashbuckling', the quicker the community will get respect, and the easier it will be for inside sympathizers, and there are many, to access the necessary resources to construct transitional scenarios. Things get done, sometimes without acknowledgement. That’s the public service."

    The above is very well said. And very important for anyone seeking to enact change to econ policy. Also, the preface to GT: mandatory reading indeed.

  28. @jorge (16-08-11; 13:54)nod
    the '48 Framework is very contextualized. caution. putting together arestis, borio with the canadians seems viable. i concur with gc,mi that there's a lot of political naivete among pundits about the fallout. like with galileo & einstein- everyman's daily routine is not affected by the reality; what and how the fed operates behind the veil is non-consequential to a large extent; but explain what's different is a political & communication nightmare.

  29. Thanks JH for your comment. I'd be interested in knowing more about the context to which you refer in regard to Friedman's '48 proposed framework. My understanding is that Friedman's proposal *is* in fact the current system in the US, especially now that the US has a flexible exchange rate (Friedman thought the framework would work best under such conditions). As for the requirement to have 100 percent reserves, Randy Wray has argued that this is not necessary to achieve Friedman's proposed framework (see here: http://www.cfeps.org/pubs/wp-pdf/WP22-Wray.pdf). That said, I too can see a viable project in combining the insight and policy prescriptions of Arestis, Borio and the canadian school.

  30. keynespendulum (KP)24 August 2011 at 17:51


    I read yr request on heteconomist for good phil of science readings. If you been serviced great. I suggest two Wisconsin chaps: Malcolm Forster (general) and Dan Hausman (Phil of Economics). Also UofToronto chap...Ian Hacking...anything by him is good. If you want to be creative and have time on your hands: Paul Feyerabend and Bas Van Fraassen.
    GL with the lecturer

  31. @circuit typo on sims, should be 2010

  32. looks like my prior note didn't get to you. ??? let me know

  33. @circuit: since yesterday's note didn't get to you, here is the revised original:
    most observers would argue along that line: Friedman '48 or '59. before entertaining discretions on the issue, i suggest you scan again marvin goodfriend (whom you surely know), 1988, 2002, and 2010 (02/10-before the House and 10/10). another very interesting paper is sims (2000). i liked your reference to martin, mcandrews and skeie. as to Mr. Wray's gratuitous comment on the numbers that read balance sheets, someone else should probably retort that the count is exponentially underestimated. it is a shortcoming among some mmt-ers, if such label is proper, to be either dismissive or highly selective. ttyl

  34. JH, I got all your comments. They didn't show at first because of a common Blogger/Google system problem. Last I heard, they were working to fix it...Not your fault, nor mine. (BTW, I didn't post your origin given your second comment replaces it)

    Thanks for the references and comments. I know Goodfriend and Sims for their work on the policy of paying interest on reserves. Will check out the articles you list. On my part, I'll share Lavoie (2010) http://www.levyinstitute.org/pubs/wp_606.pdf and Arestis 2009 http://www.landecon.cam.ac.uk/research/reuag/ccepp/publications/WP06-09.pdf and Arestis and Sawyer (2011) http://www.mdx.ac.uk/Assets/arestis_sawyer.pdf

    For Canadians, a must read is Lavoie and Seccareccia (2009) http://www.laurentian.ca/NR/rdonlyres/D65103A3-4F64-4917-B42E-A4F0D2871EEF/0/WP200913LavoieandSeccareccia.pdf

    I think the possibilities/implications for fiscal policy are interesting moving forward.

  35. TY. gc knows arestis. Your focus on policy is welcome-there's the problem; everyone and aunt knows the technical details, dont let the mmters fool you. in canada good are b&r, l&s laurentian, ottawa resp. always follow cmu's goodfriend, queues in the line of bofe's chuck goodhart

  36. Thanks JH. For fellow readers, I take it b&r stands for Hassan Bougrine and Louis-Philippe Rochon. l&s stands for Marc Lavoie and Mario Seccareccia. cmu stands for Carnegie Mellon Uni. bofe stands for Bank of England.

  37. Arestis is a very good thinker. You may know it but his 2007 on NCM is very analytical. Best handbk around on the topic.

  38. Thanks to those you replied to my comment.

    Wray and Bill have had posts recently where they emhpasised the need for academics such as Krugman to engage in the literature, rather than refer to blog posts. I think this is a step in the right direction. I spoke to one of my professors and he wasn't even aware that Cullen wasn't an academic MMTer.

    also, perhaps its time Post Keynesians (defined v. loosely) banded together and created a website and forum similar to Mises.org. Nice central location, with a list of all the various blogs with the research program. A list to various books too. The key thing would be a forum, so a lot of the discussions could be centralised.

    After all, I only found this blog via Senex. I'm sure there are others that I am missing.

    Just a clarification: I didn't mean to imply 'autodidacts' in any negative sense (I am one myself; education in undergraduates economics is in the mainstream tradition after all).

    keynespendulum (KP),

    Thank you for the references. I'll add them to the list.

    I can't believe that economists are so insistent on shoving instrumentalism down your throat (every intro chapter will allude to it) and yet argue that methodology and philosophy of science is NOT worth exploring. Just bizarre.

    Thanks for clarifying the acronyms. Finding it impossible to understand some of the posts here because of it.

    Circuit & JH,
    The Friedman stuff is interesting. I've got honours coming up, and I need to do a thesis. Perhaps I could look into it. Been thinking of a few topics within monetary economics.

  39. @mdm Many good blogs. FRB is very good. As for your cautions on instrumentalism, it depends on the lecturer and sometimes the school. However, if you want a counterargument, I shall very humbly suggest, because someone else (J)is better qualified, Hans Reichenbach: Experience and Prediction.

  40. @mi & mdm: HR a little outdated now but a fine print then.

  41. @mdm: If you do look into it, you should consider the drawbacks of the proposed framework identified by Friedman himself. I believe these include the problem of response lag (associated with stabilization via fiscal policy). I think these could be seen as applying to MMT as well.

  42. I found the problem with MMT and fixed it: