Read it at CNBC/Net Net
The school of economics that best explains this phenomenon is called "Modern Monetary Theory" or MMT. The MMT school is made up of scholars, businessmen and online advocates who have a deep understanding of the operations of the actual operational aspects of our monetary system.
Monetary Theory, Crony Capitalism and the Tea Party
By John Carney/Senior Editor, CNBC.com
John is critical of MMT on some points, too.
• But my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending....
• Likewise, the MMTers seem not to understand the politics of inflation and why government often doesn't prevent inflation from occurring, even though it is obviously within its power to do so.I'm sure we will have some healthy debates on these points and that the MMT economists will clarify their position(s) on these points.
I would also say that it seems to me that these issues have been elucidated by MMT'ers already, but apparently not prominently enough or clearly enough. So there is work to do on this front clarifying these sticking points.
John also issues a call to action by elucidating the connection among economic theory, political economy and policy, based on his perception that the presentation of MMT is overly theoretical and is deficient in the practical.
This objection to cronyism is at the very heart of the Tea Party movement. It is controlling the Republican primaries right now. It is why the bailouts irked so many. It is, in fact, a deep part of the Occupy Wall Street movement....
So my recommendation to the MMTers is that they stop talking about spending in the abstract. Start talking about spending that leads to crony capitalism and spending that does not. Get on the side of the anti-crony, Tea Party brigades. There's a natural friendship to be made.
Let's make it happen.Sounds good to me. After all, Warren Mosler originally ran for office as a Tea Party candidate.
Where I think we can agree is on crony capitalism and political corruption. These are central topics on this blog because they ae central to MMT as an aspect of institutional economics. Warrem Mosler often says of problems, "It's the institutional arrangements."
Economics is largely about reciprocal relationships — production-consumption, investment-income, supply-demand, credit-debt, and so forth. A lot of the debate in economic is over which of the complementary opposites is causal — supply side v. demand side, for example.
Similarly, the debate in political economy today is over the complementary opposites of business-government, and which is causal in the crisis. The correct institutional answer is that this is a chicken and egg question. The real issue is how to reform or reorganize existing institutional arrangement that result in imperfections and frictions in a way that produces an optimal result that is also practically feasible to institute.
This requires a correct theoretical understanding. As Thomas Aquinas said at the beginning of De Ente et Essentia, paraphrasing Aristotle, "A small mistake in the beginning becomes a great one by the end."
MMT holds that understanding how the existing monetary-financial system works is a sine qua non. A great deal of the contribution of MMT comes from the work of MMT economists on government finance, building on Post Keynesian circuit theory developed by Basil Moore, for example, in Horizontal Money. MMT makes the key distinction between horizontal money and vertical money.
Horizontal money is created by the non-government financial system, and since all the assets and corresponding liabilities are in non-government the sum of financial assets is zero. However, vertical money is different in that the liability is that of the government and the asset is that of non-government, so vertical money injected into non-government results in net financial assets for non-government. Elaboration of this simple point eliminates much of the confusion that has arisen around the role of government finance. This view goes under the name of Chartalism, and MMT is also called Neo-Chartalism.
MMT builds on Wynne Godley's monetary economics, which is based on stock-flow consistent models of sectoral balances (see Godley and Lavoie, Monetary Economics, 2007). MMT adopts Abba Lerner's functional finance for managing government fiscal policy. Fourthly, MMT relies heavily on Hyman Minsky's analysis of financial instability for analyzing the financial system. Fifthly, MMT shows how to achieve full employment along with price stability using a buffer stock of employed and floor compensation package as a price anchor.
MMT holds that this knowledge reveals a spectrum of policy options. Political economy is about developing these policy options and institutions for realizing them. MMT is politically neutral, holding that choice among the various policy options along the spectrum is a political question that is decided by voters in a liberal democracy.
Of course, this is not all there is to MMT, and MMT also has various "allies" who are not among the MMT developers or in the MMT lineage, so to speak, such as criminologist William F. Black, and economic historian MIchael Hudson, colleagues of MMT developer L. Randall Wray at UMKC and all contributors at New Economic Perspectives blog.
While MMT may not have addressed crony capitalism and political corruption as a central point, key proponents of MMT such as Prof. Wray have done so in association with Profs. Black and Hudson, who have focused their attention on this.
MMT economists have also blogged and commented on political economy and espoused specific policy options. Australian professor Bill Mitchell writes from the rather far left at billy blog, US professor L. Randall Wray writes from the left at Economonitor's Great Leap Forward, and financial manager Warren Mosler takes a more conservative position at The Center of the Universe. Warren also has a series of proposal on reform at The Center of the Universe under Proposals in the menu bar.
Thanks, John, for launching this debate. It's just what we need.
UPDATE: Steve Randy Waldman (@Interfluidity) tweets, "Excellent. @carney calls for a synthesis of MMT and public choice economics, an anti-crony-capitalist MMT."
Australian MMTer (@AusMMT) tweets: "Only one problem with @carney's conclusion - alienate the global MMT followers for the americo-centric view."