Wednesday, March 16, 2016

Simon Wren-Lewis — MMT: not so modern


"MMT is not original."

 None of the MMT economists have said that all the ideas on which MMT is built are original. MMT calls many things to atttention that were known previously but and now seem to be ignored. MMT has updated these contributions in light of contemporary knowledge and organized them for understanding financial and economic conditions. 

Randy Wray has said that about the only thing original about MMT is the MMT JG, which is an elaboration of Minsky's approach to a JG. Warren Mosler has also pointed out that his "Soft Currency Economics," from which MMT grew, was based on his insight that a currency sovereign has a currency monopoly, which it seems that no previous economist noticed as such. 

The difference between MMT and the neoclassical based mainstream lies in MMT rejecting conventional assumptions and developing macro economics. It does this along lines previously laid out by Post Keynesian and Institutionalist economics.

"Assuming full employment.…"

This is exactly MMT's criticism of the mainstream. The theory is based on assuming full employment when most of the time the economies of developed countries are operating at defined full employment based on NAIRU, leaving millions willing and able to work without a job offer and calling that "full employment." That is full employment in name only. Assuming something doesn't make it so. Economists often miss this distinction.

Even at full employment as conventional economists define it, a large swath of real resources are purposely idled when the capacity to put them to work is available. MMT shows how to do this without incurring excessive inflationary pressure. Not doing so is highly inefficient, in order words, wasteful. It also degrades the effectiveness of the entire socioeconomic system as MMT economists have documented, so that the damage is collateral as well as direct. It is not only economically wasteful, but also results in social dysfunction and cruelty to the individuals who are rejected as waste.

"This raises the question of why MMT seems to have quite a following. Perhaps it is a reaction to mediamacro’s often implicit assumption that a country like the UK or US could go bust through a forced default. And, to be fair, some mainstream economists seem to want to keep that misapprehension alive, while others take the existence of independent central banks as a binding constraint. It is suggested too often that the government cannot create money in reaction to a funding crisis because this would cause inflation, even when we are at the ZLB, inflation is well below target and the central bank is creating huge amounts of money."

Now that some economists' have figured out that the conventional policy approach is in error, what are they doing about it. It might just be that MMT has it's following because it is proposing policy that adherents view as preferable to the current policy and its dismal results, when people are told that "there is no other way."

Established economists need to start using their bully pulpits to remind that many answers to current issues were provided long ago and seem to be forgotten, ignored, and even denied now.

"Lately these MMT comments have been getting rather annoying, so I thought I would write all this down. Luckily I do not have to, as Thomas Palley has already done it for me (here and here). I have absolutely nothing to add, except to note that the upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT and that it is hardly a complete macro theory.…"




Eric Tymoigne and L. Randall Wray,  Modern Money Theory 101: A Reply to Critics
Mainly Macro
MMT: not so modern
Simon Wren-Lewis | Professor of Economics, Oxford University

17 comments:

Neil Wilson said...

It's a political blog designed to wave a hand at the plebs bashing at the gates.

Very much a "let them eat cake" attitude.

I'll be honest though, the way Simon has been tying himself in knots recently is very reminiscent of a Catholic having a crisis of faith.

No doubt he'll have a chat with Pope Krugman to calm his fears.

Matt Franko said...

Neil good analogy...

Brian Romanchuk said...

I would agree with him that leaving long comments discussing monetary operations is probably counter-productive at this point. People need to focus on substantive disagreements, and not points of theoretical doctrine. But beyond that, the article is disappointing.

Matt Franko said...

Yeah but the guy doesnt even get the joke... the whole "modern" thing comes from Keynes quote where he said "modern money is 2,000 years old...." so the "modern" is included for irony ..... goes right over this guys head idiot doesnt even get it.

Neil Wilson said...

MMT.

It's not modern, it's thousands of years old.
It's not a theory. It's accounting fact.
And it's not really about money. It's about how best to deploy real stuff.

That's the key point. Today we find that 3.899 million people that want work are without it, and 1.209 million are short of work.

I can guarantee all those people a job at the living wage, because I have got the solution to the fiscal issue, the real-output issue, the matching issue and the value anchor issue.

Simon and his ilk, can't and haven't. Because they are still trying to wobble interest rates around and push private debt onto people.

Ryan Harris said...

Love it Neil.

It's good that mainstream are being forced to stop pretending confidence fairies exist, shocks and equilibrium are a good way to analyze potential, 'money supply' 'monetary base,' "interest rates" and other totems are driving forces of bank lending rather than trailing indicators, along with silly assumptions like, "real output is at its ‘full employment’ level" using dumb data and assumptions that estimate this magical level, despite overwhelming data that suggest it is dependent on a variety of conditions and trajectory can be rapidly changed with policy.

While Wren-Lewis is right that MMT is based on many excellent economists, MMT is also defined by its rejection of many others and hence why its conclusions and policy prescriptions are far different. Mythical unicorns like 'full employment levels' aren't assumed to be know or estimated to ever be a necessary as a precondition. As individuals can always obtain employment, in an MMT world, the question of full employment becomes whether the private sector can provide good-enough jobs and productivity higher than the public sector to persuade people to work in it. Orthodox models assume workers must compete for the scarce jobs resource and governments must remain austere to keep space for private companies. An entirely different universe. So maybe we have some common ancestry with orthoxy, but we do not pretend simpleton equations exist as rules and laws when reality is far more complicated and best not represented as a simplification that obfuscates the important details to focus on an arcane relationships. An equal sign in an equation implicitly assumes a single optimal solution exists to a problem, when often that is not the case. We can't ever share a short hand with orthodoxy because we don't agree on the details they assume their characters embody. More complicated methods assume a variety of factors or statistical analysis can be used to give a bit more nuance. We find often plain old english forces economists to confront head on what they are saying without hiding behind ideology and relationships which are controversial and far from being settled matters, additionally it opens the debate to a wide audience with diverse backgrounds and opinions that are at odds. The debate isn't stifling or rude, it is lively and educational. And because novices are involved that reject portions of theory? That is a strength, not a weakness.

Ignacio said...

They are feeling threatened, is their ego and whole career at play here... be gentle... not! The idiots in ivory towers are responsible for ruining millions of lives and never hold accountable for their bogus theories.

Brian Romanchuk said...

Yeah, like I tweeted - saying that MMT is not "modern" is like complaining that people who do not live in Central Europe cannot understand "Austrian Economics". Disappointing.

Bob said...

Venerable Real Resource Accounting - would that make him happy?

Ryan Harris said...

Remember these old school guys are similar to entrenched media companies in the digital age. Their pay is teaching in class rooms while writing papers to amuse one another between gigs working for government. Suddenly MMT comes along that doesn't provide any teaching opportunities outside UMKC, it grew up on the internet where the info is given away for free. The gigs in government? Forget about it! So a guy like Wren Lewis is nervous, he can see the masses of people forcing government to adopt MMT policies, MMT candidates and media swelling in popularity virally, but if he jumps ship too early, it could destroy his career, or jumping ship too late could destroy his career. So he acknowledges it exists, says he isn't entirely in agreement, but we share the same roots and it is partially right. (He is keeping his options open)

Kristjan said...

I left a comment there saying that Paul Krugman didn't know all this when he was puzzled abot the interest rates on Italian and Japan government bonds. After MMT-ers explained this to him he wrote a blog post saying the euro zone countries were borrowing in foreign currency. Simon Wren-Lewis is saying that mainstreamesrs knew all about this, I wrote in my comment that these charlatans didn't know about it on this list http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_3HK5k8CCffR7iV7

Matt Franko said...

Even the Queen knows all these people are FOS...

Neil Wilson said...

She also knows we'd be better of out of the EU.

Wise old bird is The Queen.

Bob Roddis said...

Warren Mosler has also pointed out that his "Soft Currency Economics," from which MMT grew, was based on his insight that a currency sovereign has a currency monopoly, which it seems that no previous economist noticed as such.

A long long time ago, Hayek noted that the government has a monopoly of the issue of money (which was obvious to Austrians decades before this video):

https://www.youtube.com/watch?v=fXqc-yyoVKg

At 4:40, Hayek says he wants to abolish the government monopoly of the issue of money SO AS TO DEPRIVE GOVERNMENT OF THE POSSIBILITY OF PURSUING MONETARY POLICY:

http://tinyurl.com/hodf87p

Tom Hickey said...

Good catch. Here a transcript:

I am absolutly convinced that no government is capable of
politically or intellectually of providing exactly the amount of money which is needed
for smooth economic development
and I should be all in favour
in fact I am convinced that we shall never have decent money again
before we take from government the monopoly of issuing money
and allow competing institutions.. of course under different names
not issue the same money but competing monies and let people decide
which kind of money they prefer to use
of course they already can do this for all sorts of purposes
for example if I decided to ask my employer to pay me in deutsche marks
I suppose I might be able to pursuade him, or I could agree to sell my house
in terms of gold rather then in terms of pound sterling
well very lately it has become legally possible in England
but only quite recently and for the time being for most purposes
you have practically no choice but to use the established currency
I think that has to change
and I doubt even whether at present governments would not effectivly supress at once
any development in that direction they are very keen on preserving their monopoly
because of course their ability to pursue somthing like monetary policy
depends on this monopoly abolishing the government monopoly of the issue of money
would deprive governments of the possibilty of pursuing monetary policy
that is what I want to see
but most people believe that monetary policy is an essential tool of government


http://transcriptvids.com/v/fXqc-yyoVKg.html

BTW, the video is not working at the link provided above.

Bob Roddis said...

Here Austrian School great Taylor Conant makes Mosler slink away and hide under his bed:

http://publicdebates.blogspot.com/?view=flipcard

Dan Lynch said...

"About the only thing original about MMT is the MMT JG, which is an elaboration of Minsky's approach to a JG."

And the ELR was borrowed from the Randolph/Rustin "Freedom Budget's" job creation proposals. Randolph & Rustin may have borrowed from the Henry Wallace proposal to make the WPA permanent.

Before there was the WPA, Coxey's Army of 1894 demanded that the government hire the unemployed to build infrastructure. Coxey had been a member of the Greenback party and understood that government could pay for the work programs by printing money.