Monday, January 2, 2012
On the future evolution of MMT
My background is in philosophy and I can attest that these issues currently under discussion about the evolution of MMT are hardly new. Plato's most famous work, The Republic, is about creating ideal society in which the goal is living "the good life" individually and together socially. This reflection on human potential and destiny set the stage for thinking about ethics, education, cultural institutions and their application to society in the subsequent debates over social and political philosophy down to the present day. Similarly, in the East, social philosophy has been to the fore form ancient times, perhaps even more than in the West. According to an ancient proverb of India, "The world is my family."
The thrust of the 21st century is globalism. Economies are the material life-support systems of societies. We are entering a global age and the exigency of developing a global economy is upon us. It will occupy the rest of this century.
The world faces enormous challenges. Some of these are either directly economic or pertain in some way to economics. We need to be thinking out of the box about these things, because we have never gone here before as a species conscious of itself and able to control its destiny through knowledge and skill.
In The Effective Executive Peter F. Drucker observed that management is about efficiency and effectiveness. The thrust of the book is that efficiency is about doing things right and effectiveness is about doing the right thing. Efficiency is about means and effectiveness is about meeting goals.
Macroeconomics relates to management of the life-support system of a society through efficiency, e.g, optimizing use of resources in aggregate to achieve societal goals. However, economics receives its goals exogenously.
In a democratic society the will of the people through the ballot box determines the type of society in which citizens choose to live. Democratic societies can only make choices that will result in the good life for individuals and the society as a whole if it is an educated one, and if there is free and fierce debate over ideas, too. In addition, cultural institutions must result in values and behavior that support democracy. These institutions should encourage this debate over direction and means to implement the will of the people as expressed through the political decisions of their elected representatives, and they should fit the citizenry to undertake and fulfill their civic responsibilities.
My concern is that a lot of the debate is not taking place with a view to what the principal challenges facing nations and the world actually are as we embark on the second decade of this century. In fact, it seems to me that we have pretty much wasted a decade, if we have not been heading in the wrong direction. There are a lot of reasons for this, and they are primarily institutionally ingrained. That's a huge problem that economics alone cannot solve.
But this debate is economic to the degree that false notions about economics are shaping it. For example, goals are being set or dismissed based on affordability, when adequate resources are available. Again, submerging externalities and ignoring true cost result in inefficient allocation of resources in a way that privatizes profit and socializes major expenses, such as environmental degradation. For the most part, we are not have a serious debate about this.
So if we are going to talk about the evolution of MMT, lets consider it in terms of the real and pressing problems that the nation and world face. To me the greatest contribution of MMT is knowledge that affordability is never an issue in a non-convertible floating rate monetary regime and that the only economic constraint is availability of real resources. This is what we need to be focusing our attention on.
Human resources are a central component of available resources. Moreover, human resources are clearly the most important because economics exists for people, that is, to make material life more abundant, prosperity greater and more widely distributed, the growing potential for leisure increasing distributed commensurate with productivity advances, and so forth.
However, the material aspect of life is only one aspect of the good life, and it is not the most important on the Maslow hierarchy of needs or in the constellation of human aspirations. According to philosophers, the chief purpose of leisure is for living the good life. Given this opportunity, it is incumbent on people to ask what constitutes a good life, that is, what are the criteria of goodness. From ancient times, fame, fortune, power, and pleasure have pursued. Yet, those considered wise have consistently rejected them as criteria for goodness, based on both appreciation of value theory and also observed consequences of action. Philosophers agree that the good life is a by-product of being a good person, that is, living up to one's potential as a human being and an individual living in particular circumstances. This includes, of course, the relationships of individuals in groups, from the family to society, to be being a citizen of the world.
The teachers of humanity have advised acting universally, taking into account the whole instead of only oneself, rather than acting out of narrow self-interest, Of course, this flies in the face of a fundamental presumption of mainstream economics, which is based on participants maximizing utility as individuals in the belief that the invisible hand of markets will optimize outcomes wrt aggregates. This is not only a non-empirical assumption that is not borne out, but it also involves a fallacy of composition that explains the failure. The paradox of thrift illustrates this fallacy: Saving by thrifty individuals is considered a virtue, but if everyone saves, then there is insufficient demand to purchase the goods and services that the economy can produce, so the economy underperforms.
Although it is not the whole of life, a material life-support system is a sine qua non for the rest of human life. Without the kind of material life-support system we have evolved, however imperfect it may be, humans would still be hunting for their dinner in competition with other big animals, or would be busy poking holes in the ground to grow some beans. So let's congratulate ourselves on our achievements, yet also resolve to move forward by doing even better. We've managed to create an incredible surplus over subsistence, but as a species we have haven't done so well in allocating it.
Going forward, we need to be thinking out the box, or as a species we are going to be boxed in by resource constraints. Then it will be too late for many, perhaps most, to even be considering the good life, since they will be so taken up with just trying to stay alive in the face of extreme adversity and enormous challenges. That would amount to moving backwards. Some scientists have concerns about the future of humanity if the course is not altered in a timely fashion. The present course, they claim, is unsustainable based on resource availability and resource use. Something has to give. We are fouling the nest, for example, by ignoring negative externalities like pollution.
MMT shows how to avoid some of these challenges within the context of the existing system. But we also have to ask how suitable the existing system and its institutions are for seizing emerging opportunities and meeting challenges, on one hand, and on the other innovating to unfold greater potential. Therefore, we need to be looking at what needs to be changed in order to advance, ing addition to fixing existing problems. If MMT is just the next iteration of macro, that will not be not enough to meet the present challenges or seize potential opportunities. As a species, it would not be living up to potential.
There is a new discipline being born called consciousness studies. Its contributors include philosophers, scientists, and people from the arts, humanities and business, who are all interested in how subjectivity impacts humanity in general, as well as their own disciplines and endeavors. Many consider this the next step in science, which will open up a new frontier — inner space.
We need a similarly fresh approach to economics along such interdisciplinary lines as we approach perhaps the greatest challenges and opportunities that humanity has ever had before it — the global age. We need to think in terms of one planet, one people, and we need to begin viewing the global economy as a closed economy in which everyone and everything affects everyone and everything else, directly or indirectly.
I guess you can take this as a New Year's resolution.