Response to Anne:
First, I am glad you are struggling through the daunting textbook. But I do wonder why you earlier made the statement that you doubt MMT can be reconciled with Keynes (or Institutionalist thought—more below). As you now know (from the textbook) the MMT approach is built on Keynes—not the bastard Keynes of most textbooks, but the real Keynes of the GT and our textbook. We first present the classical (neoclassical) system in Ch11 then contrast that with Keynes (and his criticism) in Ch12 at a simple level. We then present his D-Z approach with—I think—greater care to keep to his own exposition than any textbook ever has, in Ch13.
We go on to build the model in successive stages through Ch 14, 15, and 16. Again, I don’t think any textbook has been so careful to preserve Keynes’s own approach in putting together the basic building blocks for a macro model. We then begin to apply that to offer MMT’s views of unemployment and alternatives to the Phillips Curve—that is to say, an alternative view of inflation that is actually based on Keynes rather than on the Bastard Keynesian model derived from Hicks.
This is not something new for MMT. This has always been the basis of MMT. As I said, we never saw MMT as a separate school of economics. We were thrown out of heterodox economics. We have always insisted we stand on the shoulders of heterodox economists. All of our heterodox critics pretend that we’ve rejected heterodoxy. No, they rejected us.
That then leads to our MMT approach to policy, presented in Ch 20-24, that builds complexity in steps and finishes with policy in the open economy.
The purpose of that chapter is to demonstrate that MMT is not just focused on the issuer of the international reserve currency (a frequent ignorance-based complaint of critics—which is entirely ridiculous as Bill Mitchell was one of the main developers of MMT and he comes from a vanishingly small open economy that happens to run current account deficits).
And so, in short, I cannot understand why you would have any trouble seeing that MMT is based on Keynes. You could complain that we do not present enough institutional thought, but as I said before, based on my understanding of Dillard and Foster, institutional macro really is Keynes and our textbook is macro. If I were to do a textbook on micro (heaven forbid!) there would be a lot more institutional analysis, based on the work of my former colleague Fred Lee. This is a macro theory textbook and while we do some economic history and history of economic thought, we stick mostly to Keynes and Marx (and some Minsky and Kalecki, as well as some other heterodox macro economists) as we develop the framework for our macro model.
I’ve already dealt with your questions about neoclassicals. As individuals they may not be ideologues; but this is not a legitimate research paradigm. It is apologetics. It will grasp at anything that is useful in defending exploitation and the continuation of a fundamentally retrograde social system that will lead to annihilation of at least all human life if not all life on planet earth. If it is not stopped.
You protest that we shouldn’t call attention to Larry’s missteps unless they are based on his theoretical approach? MMT’s critics, including Heather Boushey, have relied on Larry’s expertise in their critiques of MMT. What, exactly, is his expertise? Neoclassical economics and a bastardized version of macro. Yes, his missteps are directly due to his approach to economics. Developing countries as toxic waste dumps? Yes, that follows directly from his economics. I don’t think he was even that serious about his proposal, but it followed directly from his economics. Women’s capacity? Yes, follows directly from his marginal productivity views. They earn less because they have lower capacity. Their “choice” to stay out of science? Yes, that is a revealed preference that results from the mathematical calculus of an optimization equation, given innate deficiencies. His hatred for MMT? Yes, follows directly from his bastardized version of Keynes. And a heterodox economist would believe him on MMT? Really?
Does it matter that government cannot run out of its own currency? Yes! Did you read Rogoff and Rheinhart? Proclaimed to be one of the most important books ever written on debt? Based on the view that sovereign government can be forced into default. It cannot and this, literally, changes everything. Default would have to be voluntary for it to occur. Bond vigilantes CANNOT force a default. Does that mean that politics don’t matter? Of course not. All we can do is to argue that policy space is bigger than believed. Will policymakers take advantage of that? Well, not if they are Clintonistas. If they are AOC? Yes, I think she will.
You claim even small shifts of returns on relative returns on debt matter a lot? No they do not. Not if you cannot run out of your own currency you can always make the payments. Besides, if you issue your own currency, the shifts of relative returns are wholly within your policy discretion. Downgrades of debt issued by sovereign nations have no lasting impact on interest rates—whether you talk about the US, Japan, or Brazil. None. Yes, central banks often raise rates as deficit go up. And developing countries often CHOOSE very high rates. That is a policy choice; it doesn’t affect solvency and can be avoided by reigning in central banks. Again, it is a policy choice. Should all developing countries pursue low interest rates? We have never claimed they should. Can they? Yes, if they have their own currency.
The US hasn’t always been the reserve currency issuer? Right. And Australia is not now, was not in the past, and is not likely to be so in the future. MMT applies. Being the currency issuer comes with both advantages and disadvantages or at least responsibilities. The US is pretty much fated to run current account deficits as the rest of the world wants dollars. That has come with some pretty severe disadvantages—as most of our formerly industrial cities would tell you; we could adopt policy to alleviate those disadvantages but we have not yet done so. It also has advantages—our current account deficits have negligible if any impacts on the exchange rate. Certainly nothing predictable.
MMT advocating elimination of debt issue violates Foster’s principle of minimal dislocation? OK, don’t do it. No important implications follow. I actually do not advocate this, anyway. We can afford the Green New Deal (or 15 Green New Deals) with no change from current operating procedures. And, by the way, ZIRP (which all the major nations already did) accomplishes precisely the same goal as elimination of debt issue. So what? Does that violate Foster? If so, the Fed, ECB, Japan already did it. And then they went way beyond that with QE. Did that violate Foster? I think so. Silly mistake, based on orthodox misunderstanding of the way the banks operate and the way central banks ought to operate. We survived.
You argue that there are no truths. The most important contribution of macro has been the recognition of the importance of identities, balances, and stock-flow consistency. It is the basis of Keynesian macro; it is the proof against the old neoclassical workhorses of loanable funds theory, crowding out, and balance of payments constrained growth. Accounting, while a human invention, is based on logic; it is universal and not contingent. I know we’ve had this disagreement for over 20 years and you do not agree.
Balances balance. Always. Yes measurement can be hard and we might have to put in a “statistical discrepancy”, but they do balance. The government budget can swing, but its “imbalance” always identically equals the “imbalance” of the sum of the domestic private and foreign sectors. It is an unwavering truth. GDP=C+I+G+NX. Always, to the penny. The sum of financial assets = the sum of financial liabilities is a truth. Now in mainstream macro, these identities do not hold (with the possible exception of the GDP identity). Their models are incoherent; they are not stock-flow consistent. The ISLM model on which bastard Keynesianism was based is utterly incoherent. Its results require that incoherence. None of its important results survive if the incoherence is removed.
Coherence disciplines analysis. I can remember the summer 1999 front page of the WSJ congratulating the US government for final achieving a sustained surplus while berating the private sector for running a deficit. The truth—yes truth—was that this had to be true. If one wants to argue for simultaneous surpluses one must explain how the US is going to get to a current account surplus. Understanding these truths disciplines the analysis. Of course it doesn’t matter if one knows the truth—the truth will still win out. This is why orthodoxy continually gets it wrong.
You say: “international financial markets can alter holdings and lead to changes in the non-monetary sectors of economies, it seems to me that this is an issue that needs to be addressed.” First, it must be understood how international financial markets get hold of US treasuries. The main avenue is this: they export to the US, their central banks get reserve credits at the Fed, and they convert them to treasuries. It is the “non monetary” sector activities that lead to the accumulation of “holdings”. Now, why would they sell to the US? They want dollar assets. They will adjust their economies to get those financial assets. So I think the query puts it the wrong way around. Now what if they decide they’d rather have some other asset? They can sell treasuries. Well they find willing buyers? Yes indeed. Could this affect the dollar exchange rate? Not likely, but possible. Other than exporters who holds US treasuries? Almost all the rest that are held outside the US are held by offshore banking centers. These are their safe dollar assets. Private holders (AKA “vigilantes”) of US treasuries as investments are practically insignificant and declining as a percent. I explained all this (and present the data) in my recent American Affairs article—which also goes through all the causation, which runs from the exports to the accumulation of treasuries. Most importantly, NOT from needy Americans and their government who have to grovel before the Chinese vigilantes to get dollars to “pay for” trade and budget deficits.
Money is a debt denominated in the socially sanctioned money of account. Always has been, always will be. It is a universal truth. I know you do not agree with that—Terry Neale argued that commodities were money, sometimes. But that is a category mistake. Cows might be priced in money. But they cannot be money. Cows might be valuable but that doesn’t make them money. Understanding this leads to a very different understanding of the logic of a monetary system—which itself imposes a logic on the economic system.
And macro cannot be understood without a good understanding of the money of account and balances and stocks and flows. All of the main conclusions of mainstream macro are based on accounting errors. Mainstream macro can never be correct in any monetary society as it is based on mistakes. These mistakes are largely intentional and necessary to the mission of mainstream macro. If they were to be eliminated, the mainstream would reach the same conclusions as MMT on accounting, macro identities, stock flow consistency, and sectoral balances. Because these are all based on truths. Loanable funds theory is not contingently correct; it is always wrong in a monetary economy. Crowding out theory is based on an accounting error. The government budget constraint theory is based on accounting errors. The belief that the US “needs” to borrow dollars from China is based on errors of interpretation of the accounting.
My first book in 1990 tried to bring back the endogenous money approach (also explicated in Basil Moore’s 1988 book). Mainstream views (again) are based on logical/accounting errors, viewing banks as intermediaries—which is an infinite regress argument. Deposit money is created simultaneously with the loan. The money “doesn’t come from anywhere”—it is issued as an IOU. Banks cannot run out. Although they can get themselves into a lot of trouble. But the “laws of supply and demand” cannot apply.
I started to try to introduce (or reintroduce?) the Knapp/Keynes state theory of money approach to Institutionalists with my AFIT presidential address. (As you recall, you declined to publish it in the JEI, but Paul published a truncated version in the JPKE.) Many told me afterward they had always taught the barter story but would stop doing it. I tried to publish a much longer, more academic version in the JEI, but again you declined. I published a book on it in 1998. I edited a book in 2004 that integrated the credit and state theories of money. Some years later, Geoff also declined to publish a paper on the state and credit theory of money. Paul preferred to publish wild critiques of MMT than papers presenting it. I (we) decided to use other avenues—books, blogs, working papers—to develop and spread the ideas. Fortunately, our ideas got picked up outside economics so we were able to publish in the journals of other disciplines, such as legal history.
The upshot? Like bank money, government money “doesn’t come from anywhere”—it is issued as an IOU. Governments, too, can get themselves into a lot of trouble. But the “laws of supply and demand” cannot apply. They cannot run out run out of money. It is never scarce except by design.
My 1998 book began to explore the internal “monetary ops” to show how government “really” spends. In the old days, it was transparent—you impose obligations, you print up notes to spend, you burn them on redemption as taxes are paid. Now there are 2 degrees of separation between the government and the people: the central bank and the private bank. But the logic remains the same. Credits and debits. There is no place in the process for the central bank to “just say no”. There is no place in this process for the bond vigilantes to “go on strike”.
Stephanie continued to explain this in her JEI piece, then Scott Fullwiler and Eric Tymoigne took it up to explain the nitty gritty details and to update as the procedures changed. All the institutional details have been worked out. It is in our textbook, although at a basic level for students. But you worry that this work is not consistent with Institutionalist approach? I do not see how studying and reporting all the institutional details is inconsistent with the Institutionalist method.
Finally, there are the main policy recommendations. First the Job Guarantee. I think this has been accepted more readily by Institutionalists than any other part of MMT, and more accepted by Institutionalists than by any other heterodox group. I am glad for that. Many Post Keynesians are still enamored with the Phillips Curve, and they are often (generally?) less concerned with social issues so they have been less open. Don’t get me started on the “Marxists”. Anything that would ameliorate suffering of the unemployed might slow the march to revolution. Or, anyway, the capitalists will never allow you to have it so don’t bother trying. That is not in Marx, but it has become a favorite of the “political economy” approach. Full employment is an economic issue but more importantly a human rights issue. Few human rights are more important, and indeed as Phil Harvey has argued many other human rights practically require access to a job.
You don’t like the proposal to stop issuing bonds. This is a policy recommendation based on recognizing that payment of interest on reserves serves the same functional purpose as paying interest on bonds. And we know, of course, that the rate paid on reserves is entirely within the control of the central bank; and as that is a creature of congress in the USA, it is entirely within the control of the congress. It can be set democratically if we want. I’d like you to at least consider the possibility that we could exercise democratic control over that. Or at least have a discussion about it and air your views as to why it is a bad idea. I do not see this as a critical policy proposal, and if we were to move that direction I’d like to still have the option of “savings bonds” issued to provide a protected asset.
But nothing about MMT relies on ZIRP. We can have or we can continue to let the Fed set the rate undemocratically.
Finally you put the question this way: “I also understand that the regressive effects of additional bond issues to finance additional government spending could be avoided by skipping the step or issuing the bonds and simply increasing reserves.” But that is not correct. Bonds don’t “finance” government spending; government spending is “financed” through a credit to a bank account (with two degrees of separation). As we say (based on Scott’s detailed work), there are 6 steps involved when government spends (regardless of what the budgetary outcome turns out to be) and currently bonds are involved in the procedures (again, even if you run a budget surplus). The “increasing reserves” will also occur regardless of the budgetary outcome—they are not an alternative. The spending itself is a flow, “financed” by a keystroke; there will be a stock effect resulting from the flow and there is discretion over what form that will take (ie holding reserves or bonds) but that is after the spending occurs. (This is the Davidson distinction between “financing” and “funding”—although I do not like the second term because most people will see those as the same thing.) And I do not understand what you mean by the word “regressive”. As interest-earning net financial wealth, bonds in portfolios are beneficial.
You say: “I remain so puzzled by the emphasis on monetary policy. Why not emphasize the joint importance of fiscal policy.” I do not understand this statement at all. We DO NOT emphasize monetary policy (as normally defined) and indeed argue not only is it fairly impotent but that we do not even generally know if the Fed is stepping on the gas or the brake. Our emphasis is and always has been on fiscal policy. I simply cannot understand where you got this idea from. Our answer is “spend more”. Why do you see that as monetary policy?
We are absolutely opposed to trying to use monetary policy in place of fiscal policy. Indeed, the proposal for ZIRP forever is an explicit rejection of the use of monetary policy. I do not know how I can say that any more clearly, and I have no idea what you must have read to come to the conclusion that we downplay fiscal policy in favor of monetary policy. My ultimate goal would be for Congress to take back control of the interest rate and limit the Fed to lender of last resort, payments system, and bank regulation. However, I am not advocating that right now because it is probably a step too far for the US, which has elevated our Father at the Fed to some place near to heaven.
Well that is long enough for today. A fraction of the book’s length.
OK ON NEOCLASSICALISM
Geoff prefers a definition that draws attention to what Warren Samuels called "technical meanings as to its central problem: the mechanics of utility", "constrained maximization", etc, and method--equilibrium. (in the forward Warren wrote for John's book).
I follow John Henry in focusing on the origins, ideological structure, and purpose of the approach. Its origins are apologia--to defend capitalism against Marx; it is anti-science, using obfuscation to hide the reality. Its choice of utility was purposeful--a subjective theory of value incapable of verification to counter the labor theory of value. It could hide exploitation (exposed by the classical theory of value) behind supply (factors of production) and demand (based on mysterious and fundamentally unobservable utility that is only "revealed" in "preferences"). The basis of the capitalist system cannot be seen and indeed is denied. It is fraud. By design and purpose. The development of neoclassical out of classical has nothing to do with advances in the science of economics. No matter what some individuals who contributed to its creation might have thought. From the get-go it was anti science.
The first panel that I recall attending was at the EEA, "The Economics of Suicide". As my undergrad studies were in psychology, I wondered what economics could add to our understanding of this problem. So I attended. There were 3 papers presented, all of them amounting to an explanation of suicide as maximization of utility under constraints, with high rates of time discount. That five seconds of sheer joy Trumped a lifetime of living because the internal rate of discount was high. Jumping out of a 50th floor window is NOT a problem, it is the SOLUTION to a mathematical problem. The presenters were young, smart, and serious. I expected laughter. There was none (except by me; it was a joke to which I was the sole party).
Now I doubt any one of those presenters was purposely engaging in obfuscation, none intentionally defending the capitalist system, none realizing they were engaged in perpetuating the fraud that is neoclassical theory. To Geoff's point, none appeared to be a bastard.
I see that as irrelevant to the critique of neoclassicalism as anti-science. It does not help us to understand the real world. It's method is by design fraud.
Adding neoclassicalism to heterodoxy is bastard. Heterodoxy attempts to explain the real world. Maybe it often fails. Revisions help. That is simply not the case with neoclassical economics. It is never abandoned after failure. Every "bad" idea it ever had lies in waiting to make a comeback. And invariably does.
Just one point in response to John. Lange did not propose the competitive pricing arrangements of a (hypothetical) capitalist order. Capitalism involves private ownership. Lange did not propose private ownership. Instead he (wrongly) suggested that pricing would be possible if a central planning authority simulated the operations of a hypothetical Walrasian market.
Just one response to Anne. Randy used the term “neoclassical”. He did not define it. I’m asking (again) what he means by the term. BTW, I like much of Tony Lawson’s work, but IMHO his “neoclassical” article is arcane and fails to look at post Samuelson usage of the term.
My main point is that I do not think it is appropriate to call neoclassical (however defined) colleagues “bastards”. It has been rightly pointed out that some people deserve that appellation, but that has little to do with the analytical position that they adopt.
As I've been brought into this discussion, perhaps an elaboration of my position is needed. Geoff writes: “On page xv of his book John explained that his volume tries to show: "why the neoclassical perspective, resting on a utility theory of value, became increasingly prominent, then dominant, in the nineteenth century. The argument rests on the underlying economic change undergone by capitalist society during the period". Not only does this extract highlight the concept of utility, but it also shows that John's argument is more deep and subtle than Randy suggests.”
I'm not sure that the above reference indicates greater subtlety or depth than that offered by Randy (well, Randy is rarely subtle!), but I don't want to be misunderstood. The UTOV was selected for a couple of reasons. The main reason was that, following Adam Smith, we have two choices to follow in theorizing about a commodity-producing economy--that is, capitalism as we call it. Use value and exchange value. Smith, Ricardo, James Steuart, Petty, et al. chose exchange value. This represents the "classical political economy" approach--correctly so in my estimation. To counter this approach, the "neoclassicals" went the utility route, which they identified--incorrectly--with use value. (As an aside, I think Veblen was wrong to label such economists as NEOclassical. He should have labelled them ANTIclassical.) Jean Baptiste Say, the "father" of neoclassicism starts his Treatise by attacking Smith and the labor theory of value. The attack on the LTOV and emphasis on exchange value continues and culminates in the work of Jevons, Walras, Menger, and, in the next generation, Marshall, Clark, et al. We're off to the races. My position is that there's no better authority in all this than Walras, a notable chap who is sometimes labelled a socialist. Ha! He's no more a socialist than my departed mother. All one has to do is read the first chapter of his Elements. He begins with an examination of "economics" that can be seen as favorable to institutionalists. Society is there, history is there, culture is there, etc. He then proceeds to whittle his definition down to what he terms "pure" economics. And this is utility maximization, equilibrium, etc. but--MORE NOTABLY--the preeminence of a competitive, free exchange, profit-seeking structure. That is, capitalism, though in an idealized, hypothetical form. And this is what matters.
Classical theory began as an attempt to understand capitalism--and, yes, I accept the "ism." Capitalism is not of a feudal, nor a slave, nor a primitive communist organization. (Speaking of which, these were still hanging around when capitalism was a new-fangled order, and there were those who wanted to revert to such an arrangement--the Diggers during the English civil war.) Early "economists" (as this grouping was something new as well) sought understanding; by the time of Ricardo, such understanding became criticism. We can see the beginning of such criticism in Smith. And then we get the onslaught--Sismondi, St. Simon, Proudhon, and, in particular, Owen. (On all this, see Claeys, Machinery, Money, and the Millennium.) The reaction, and that's what it was, was directed toward the saving of capitalism from its critics. If one reads the proto-neoclassical writers from Say through the post-Ricardian period, one will find overt statements to this effect. If you want quotes, see my book referenced. (And don't get me started on John Stuart Mill!) To "save" capitalism, one needed an alternate theory to that posed by the Classicals. This was based on a UTOV (in the main), but that was merely a theoretical subterfuge. The whole campaign was to move the dominant discourse away from the Classical perspective (which, of course, by the late 19th C had become dominated by a fellow named Marx, who was essentially ignored, though Marshall took a couple of potshots at the old geezer.) But, in this anti-classical discourse, one could not ignore, bypass, whatever, the nature of the commodity--a use value produced for exchange. So, should use value or exchange value dominate? We're back to Smith. For anti-classicals, it's use value, transformed into a generalized UTOV, courtesy of Jevons, Walras, Pareto, et. al (but based on their anti-classical predecessors). But, why dominance in the last third of the 19th C? This is the period of oligopolization when corporate forms of organization were able to "sabotage" (a la Veblen) the production of use values (in the classical sense). It's also the period when the theory of competition, equilibrium, optimality, etc. was formalized and became increasingly the standard. NOTE WELL: neoclassical theory becomes dominant by erecting a hypothetical economic order just as the real economic order displays characteristics that are the very opposite of the theory supposedly explaining it. Neoclassicism is political and is associated with the defense of capitalism. It has been so since its inception (Say, et al.), and remains so throughout its history. Its main function is to conceal the very nature of a capitalist social order. I'm in fundamental agreement with Randy, though I probably wouldn't have expressed my position so candidly: they're all S.O.B.s! (As a P.S., we’re all political. Ideology or political orientation can’t be eliminated from our theoretical arguments. We’re only human in this regard. Myrdal spoke to this in his The Political Element in the Development of Economic Theory. Heck, this even influences workers in the natural sciences. The various debates on Darwin should be enough to convince, but even physics is not immune.)
Now, if someone wants to take up the issue of Lange, et al., I'll be happy to oblige. Just one thing: in his 1930's article, Lange argued--essentially against Mises--that a socialist order could maintain itself IF it replicated the competitive pricing arrangements of a (hypothetical) capitalist order. This, when capitalism was not only non-competitive, but doing quite badly, and the Soviet Union was actually doing pretty well. So, what, for Lange, et al., did/does socialism mean?
Sorry to take up so much space,