MMT is political philosophy, not economics

robbery-clipart-bank-robber-bandit-robbery-lol-clip-art-clipartWhat puzzles me about Simon Wren-Lewis’s response to MMT is his claim that he finds nothing new or surprising in the theory. I think his claim can be understood in light of the fact that MMT is not a theory of economics. It is a bit of political economy, or, more generally, a bit of political philosophy.

When I read Warren Mosler’s Seven Deadly Innocent Frauds, I found it refreshingly plain and non-theoretical, but also very radical. I find it hard to imagine Wren-Lewis reading the book and finding nothing surprising or interesting in it. Maybe he hasn’t read it. But if he went to it looking for a proof that the consolidated budget equation is incorrect, or something else of obvious relevance to an economics professor, he was no doubt disappointed. But only because he was looking for the wrong thing. It would be like reading Joyce’s Ulysses and saying: “I don’t see how this book is innovative; it fails to refute Newton’s Laws.”

The most radical claim that Mosler makes is summed up in the quotation from Paul Davidson that opens his 1997-8 paper on full employment. The claim is that the state creates unemployment, and this is the only reason unemployment exists. I do not find this claim in the macroeconomic textbooks I have read, and if it is something that Wren-Lewis knew all along, I don’t see how he could have found it too unimportant to bother mentioning.

Imagine a society where there is no state. People use their own labour and available resources to produce what they need to survive. There can be fights over land, enslavement of the weak by the strong, and poverty and deprivation for those who are unable to procure what they need, or forcibly prevented from doing so. But there is no unemployment.

Unemployment is unsatisfied demand for work arising from a need for basic commodities. In the current monetary system, that almost always amounts to a demand for work that pays in state-issued currency, since that is what you need to earn in order to buy basic necessities (lack of currency is a barrier between you and what you need – see this post). In a society with no state, nobody has any demand for pieces of paper and metal with pictures of sovereigns on them, nor for bank accounts that represent debts denominated in those pieces of paper and metal. People will work in exchange for real goods, or even for privately-issued tokens that promise real goods, or because somebody is forcing them to do so. But they will not work in exchange for tokens issued by the state that are not redeemable for anything.

The state, Mosler explains, creates unemployment by imposing taxes. It threatens sanctions against those that do not hand over a certain number of its tokens. It forbids anyone else to create the tokens. Thus it can procure for itself however much labour and real capital it likes, by creating and paying the tokens, the demand for which it creates by force. It is true that those who give up labour and capital to earn the tokens are not always those who need them for tax payments. Once the tokens are needed for tax payments, non-state actors can also accumulate them and use them to purchase labour and capital. Those who do not directly need the tokens for tax payments will then find that they need them to procure food and other necessities, but only because the state has created a general demand for the tokens by coercing payments in them.

Those who say that “the state can print money but it can’t print wealth” have completely missed the point. Suppose the state prints a new sort of special token. It tells you that you must pay a tax in that token, or you go to prison for life. You don’t have the token and neither does anyone else besides the state that prints it. Then it offers to hire you to do twenty hours of labour to earn the token. I suspect you’ll take the deal. Has the state “printed wealth”? No. Has it procured your labour at no cost to itself? Absolutely. A gun doesn’t magic shoes into existence. But a robber can point a gun at you and take your shoes. Or, if he is a tricky robber, he can ‘buy’ your shoes with his own token that you only want because he tells you he’ll shoot you if you don’t pay it to him later. The token is merely ‘printed’. But the coercive apparatus that gives it value is very real.

So why does Wren-Lewis say that MMT doesn’t provide any insight that isn’t already contained in the consolidated budget constraint equation? MMT shows that the concept of a budget constraint is entirely unilluminating when applied to the state. The state’s real purchasing power is its coercive power, not the tokens that disguise the exercise of that power. When facing the tricky robber with the tokens, it would be very unhelpful to draw a budget equation telling us that his total spending power consists of the tokens he prints and then demands back or borrows back. Like a conjuror, the robber has got us looking at the wrong hand. The hand with the tokens is a distraction. Look at the hand with the gun. MMT is trying to remind us about the gun.

Getting distracted by the tokens leads us to forget many important things, for instance that there is only ever as much unemployment as the state wants there to be – for the details of why this is the case, read Mosler’s paper.

So is MMT, as Wren-Lewis claims, just standard macro with tedious accounting details attached? Well, find me a passage in macroeconomics textbook that says something like this:

The monetary economy is the mere byproduct of a system by which the state coerces labour. If the state forces only as many people to need paid work as it employs (or pays others to employ), then there is no unemployment. If it forces more people to need work than it employs (or pays others to employ) then there is unemployment. Therefore, if there is involuntary unemployment at all, it is only because the state has explicitly chosen to have it, quite pointlessly.

Then I’ll concede that the MMT insights are already well appreciated within standard macro.

Was this a new idea in 1998? Not completely, of course. Adam Smith makes mention of something like it in the Wealth of Nations (book 2, chapter 2), though he doesn’t develop the thought. It’s also a part of Marx’s story of primitive accumulation. Knapp’s State Theory of Money says something not quite the same: that the state can give a new sort of value to a preexisting currency by accepting it in tax payments (this, possibly, is also what Smith meant).

But the idea that the state currency is fundamentally a device for coercing labour is not clearly put forward in any of those sources. Mosler’s paper and book put it more plainly than anything else I’ve read. Macroeconomists do not mention it at all. It would appear to have some pretty important implications for political economy, and, again, for political philosophy more generally. Does Wren-Lewis really think it’s not even worth mentioning? Or has he, perhaps, missed the point?

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27 thoughts on “MMT is political philosophy, not economics

  1. drnavinsingh

    State also creates unemployment by upholding the sanctity of property rights, by depriving close to 80-95 % of its citizens an accessory to nature and it’s bounty.
    So state is duty bound to aim at full or near full employment by ot only deficit spending but also by collecting land rents as land value taxes and returning it to the community as community dividend/basic income guarantee, or playing employer of the last resort, or as infrastructure/social sector spending.

    Reply
  2. Ralph Musgrave

    So called “professional” economists like Wren-Lewis are probably a bit upset by the fact that MMTers, many of whom are just amateurs, have a better grasp of economics than a significant number of so called professionals. I’m thinking in particular of the appallingly ignorant OECD and IMF and Rogoff and Reinhart who were advocating consolidation / austerity at the height of the recent crisis.

    I was interested in economics for thirty years before I came across MMT. As soon as I did, I jumped out the metaphorical bath and metaphorically ran round the neighbourhood in the nude shouting Eureka. Can’t say the same for “New Keynsians” and a number of other groups of economists.

    Reply
    1. axdouglas Post author

      Interesting. I’m not an economist, but it seems strange to me how some professional economists react the way that you did and others claim to find *nothing* interesting or surprising in this way of looking at things.

      Reply
  3. grkstav

    In the end, the sovereign who in practice CAN get labor and resources from entities other than itself (those may include other sovereigns) in exchange for its own, exogenously and effectively costlessly produced(even intrinsically worthless) tokens, is its capacity credibly to impose, AND collect on, obligations on a sufficiently large number of entities (or sufficiently large obligations to an even limited number of enties) that can be discharged ONLY by dint of those very tokens.

    When it also allows and credibly enforces ‘private’ (relative to it) contracts denominated in those self-same tokens (or representatives thereof in other forms, material or symbolic) it magnifies its own capacities; of course, it also magnifies the capacities of some such ‘private’ entities to accumulate and deploy those tokens for their own purposes.

    When/if the latter usurp the capacities of the sovereign, effectively using it and its apparatuses as their own instrument(s), the likelihood of an ideological inversion increases. The sovereign can now be convincingly re-presented as needing not only their consent but also their TOKENS (or token-denominated private tokens, trading at part for the sovereign’s tokens) in order to act, spend, etc.

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  5. Schofield

    MMT at base isn’t even political philosophy but systems biology because money’s most important function is “information” conveyance.

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  6. Pingback: MMT and mainstream macro

    1. Tom Brown

      In case you care, there’s actually been quite a bit on this on Jason Smith’s and Brian Romanchuk’s blogs recently, specifically wrt Godley & Lavoie’s SIM model in chapter 3 of their book (SIM is a simple SFC model). Brian and Jason do not see eye to eye. I confess I’m not sure I understand either of their positions entirely… even though I’ve looked at SIM in particular in some detail (in response to both their series of posts).

      Both Brian and Jason have done about four or five posts each this month related to this topic. Here’s one from Brian:
      http://www.bondeconomics.com/2016/03/finding-solution-in-simple-sfc-model.html

      Here’s my latest on SIM (and specifically how to make it sample period invariant):
      http://banking-discussion.blogspot.com/2016/03/sim6-updated-sim-to-preserve-time.html

      Reply
  7. gastro george

    Re Nick Rowe’s post, I should probably read the comments, but isn’t his point 1 rather negated by the fact that the demand for currency is not created by *a* person’s tax liabilities (after which, he argues, what value has the rest of my money), but by *everybody’s* tax liabilities?

    Reply
    1. Stephen Ferguson

      Apologies if this is out of context, but Randy Wray is clear on this…

      “While it could be true that I am more willing to accept the state’s IOUs if I know I can dupe some dope, I will definitely accept it if I have a tax liability and know I must pay that liability with the state’s currency. This is the sense in which MMT claims “taxes are sufficient to create a demand for the currency”. It is not necessary for *everyone* to have such an obligation—so long as the tax base is broad, the currency will be widely accepted.”

      http://neweconomicperspectives.org/2016/02/value-redemption-debt-free-money-part-3.html

      Reply
      1. gastro george

        @SF – not sure if you’re correcting my reply or affirming it in principle – but agreed if it is the latter. Instead of “everybody’s” I should have said “other people’s”.

  8. Luis Enrique

    are you saying that there are two possible types of economy:

    1. an economy with no state-backed currency (barter, local currencies used by consent, clams, gold, whatever)
    2. an economy with a state-backed currency

    and then *defining* unemployment to mean “wanting to work for state-backed currency but not being able to”? therefore the state creates unemployment?

    That looks like circular reasoning to me, so I hope I have misunderstood.

    There are still some countries with state backed currencies but no unemployment, because there is no social protection so if you don’t work, you starve, or maybe you are supported by family or friends, or begging. But in an economy with no state-backed currency (barter or clams) you may also find people unable to support themselves through work. Why doesn’t that count as unemployment?

    What matters is whether people are able to support themselves though work. I do not see in your post the mechanism by which the existence of the state and its currency causes people to be unable to do that. I guess you refer me to Mosler’s paper. But here all you have done is show how the state can coerce people into working, not how it causes a lack of it.

    Reply
    1. Min

      “Unemployment” is a term that originated in the late 19th century to describe mass involuntary unemployment in an industrialized economy, such as when people become unemployed when a factory closes. Its meaning has broadened since then, OC. 🙂 The earlier term for being out of work was “idleness”. I doubt if anyone would have said that idleness was the result of state backed currency, even though such currencies go back to antiquity.

      Reply
    2. axdouglas Post author

      Luis,

      I can see why the argument looks circular the way I expressed it here. Let me try it another way.

      Suppose you have labour to offer in exchange for some basic necessities. But those who have these basic necessities won’t swap them for labour. They only sell them for currency. Why? Because they get taxed on their income and need to earn their income in the form of currency to pay the tax. Or they need to supply their own needs, from other people who only accept currency because *they* need it to pay taxes. Or they need it to buy what they need from others… you go as far down the chain as you need, but at the end you’ll find somebody who needs currency in order to pay tax.

      That’s where unemployment comes from. Deprivation is different. It might be that what you have is valued so little that you can’t exchange it for necessities. That’s a different sort of problem. Unemployment is a specifically monetary problem; it’s a market failure. The people with the goods want the labour, and the people who need the goods are willing to work, but a currency shortage (driven by taxation, which creates currency demand) is getting in the way.

      Reply
  9. axisofevol

    Sorry for the long comment.

    I can understand that the mode of communication of some MMT enthusiasts can be off-putting to some. However, the frustration of MMT’ers at the mainstream’s dismissal of MMT insights as either ‘if correct then not new’ or ‘if new then not correct’ is equally, if not more, understandable.

    For, example, the insight of Paul De Grauwe in 2011 that it makes a huge difference whether you are a currency user or a currency issuer was hailed at the time by Paul Krugman as one of the most important pieces of analysis to come out of the crisis.

    Yet, I (well, my brother) have a book from 1996 in which the author recalls the following conversation he had with Warren Mosler in October 1995 (translated from Dutch):

    ‘If the European Monetary Union becomes a reality, then all European countries will have to borrow money in a currency they cannot print themselves. Some say this will lead to more fiscal responsibility. I think it will cause a massive debt crisis. I do not want any bonds that are not guaranteed by the European Central Bank.’

    I also have a copy of a 1994 edition of De Grauwe’s book on ‘The Economics of Monetary Union’. In it, De Grauwe does devote a chapter to fiscal policy issues and he does concede that there may be problems (he does have his reservations about EMU), but his analysis involves much pussy-footing and quite a few ifs and buts. There is more insight and practical knowledge w.r.t. EMU in in the above 4 sentences from Warren Mosler than in the few 100 pages that De Grauwe devotes to the subject.

    I think of myself as pretty conservative person (in the sense that I don’t believe in every fad that comes along), and I tend to be of the opinion that if you think that everyone is an idiot, then probably the idiot is you. So, when I started reading about macro, I started by first looking at mainstream textbooks. I had the same aha moment as I presume Ralph Musgrave must have had when someone sent me a copy of Warren Mosler’s ‘7 Deadly Innocent Frauds’ paper. If the main insights from MMT (w.r.t. government money and the monetary system) are well known to the mainstream, then they do a terrific job of hiding this fact and do not bother to write it down in any textbooks. And if the mainstream is able to follow MMT’s basic insights to their logical conclusion, they do an even better job of hiding that fact. The stock response from the mainstream seems to be ‘yeah we know the government can’t default’, and the they proceed with their analysis as if it can.

    Cheerio,

    J.

    Reply
  10. Luis Enrique

    Hello – thanks for reply above. I just came across this paper, thought of you:

    A Political Economy Theory of Fiscal Policy and Unemployment
    Marco Battaglini, Cornell University and Stephen Coate, Cornell University

    This paper presents a political economy theory of fiscal policy and unemployment. The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production. Such policies are fiscally costly, but can be financed by issuing government debt. Policy decisions are made by a legislature consisting of representatives from different political districts. With the available policies, it is possible for the government to completely eliminate unemployment in the long run. However, with political decision making, the economy always has unemployment. Unemployment is higher when the private sector experiences negative shocks. When these shocks occur, the government employs debt-financed fiscal stimulus plans which involve both tax cuts and public production increases. When the private sector is healthy, the government contracts debt until it reaches a floor level. Unemployment levels are weakly increasing in the economy’s debt lev el, strictly so when the private sector experiences negative shocks. Conditional on the level of workers employed, the mix of public and private output is distorted. (JEL: E24, E62, H62)

    Reply
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