Wednesday, April 11, 2018

Richard Murphy — Modern monetary theory provides the best mechanism for controlling inflation we now have

There are some people who like to suggest that modern monetary theory (MMT) suggests that a government can create money without limit. They go on to say that this has always resulted in economic disaster. The words Zimbabwe and Weimar Republic are never far from their lips. The reality is, however, that MMT does not say that governments can create any amount of money they like without limit. What it does say are two things.
The first is that as a matter of fact all government spending is paid for out of money newly created for the purpose and that this is then cancelled by taxation. I would argue that this is simple fact.
And the second is that this money creation process can be undertaken until such time as real physical constraints are met in the economy, after which if it continues then inflation will follow.
Far from being a prescription for inflation creation then, MMT does in fact provide both a very precise description of when demand-pull inflation might be created in the economy by suggesting that money creation should be curtailed when there is no excess capacity in the economy (this constraint being applicable to both government and private bank created money) and it provides two mechanisms for addressing that inflation. One is to stop the money creation, either by limiting government spending in that situation, or by limiting bank lending. The other is to tax that inflation out of the system.
MMT is then the friend of those who would like to control inflation....
Tax Research UK
Modern monetary theory provides the best mechanism for controlling inflation we now have
Richard Murphy | Professor of Practice in International Political Economy at City, University of London, and UK chartered accountant 
hp ralph Musgrave


Matt Franko said...

How can you control something that nobody knows what it is?

AXEC / E.K-H said...

MMT and the inflation-red-herring
Comment on Richard Murphy on ‘Modern monetary theory provides the best mechanism for controlling inflation we now have’

Inflation theory is wrong, it is essentially the commonplace Quantity Theory that is at the back of peoples’ minds.#1

The lethal flaw of MMT policy is NOT inflation but distribution.#2 Government can replace taxation and, in addition, increase spending at any time for any purpose by deficit spending/money creation. This has two effects:
• The household sector = ninety-nine-percenters is taxed in real terms by an almost imperceptible price hike (NOT inflation). Open taxation turns into stealth taxation, and in real terms NOTHING changes.
• Because Public Deficit = Private Profit, the one-percenters enjoy an immediate profit boost. In addition, part or all of the increased public debt can become a long-term source of interest income depending on whether and how the public debt is consolidated.

The replacement of taxation by deficit spending clearly benefits the one-percenters. In essence, MMT argues that public deficit is good for the ninety-nine-percenters and for democracy. The fact of the matter is that public deficit is good for the one-percenters and for oligarchy.#3

The whole inflation issue has never been anything else than a red herring.#4

Egmont Kakarot-Handtke

#1 Economists never understood how the price mechanism works

#2 MMT was right all along: Gov-Deficits do NOT cause inflation

#3 Keynes, Lerner, MMT, Trump and exploding profit

#4 For the full-spectrum refutation of MMT see cross-references MMT

ANC Driver said...

Correct me if I am wrong but....

Whilst MMT claims to address too much real demand relative to real capacity, what I do not see MMT explaining is how the increased employment they advocate will not increase demand for passive and portfolio income, which will inevitably increase the distributed profit ratio, which in itself then pushes downward pressure on employment. Fuller or higher employment requires a lower not higher distributed profit ratio and yet at the same time when employment increases so too does the demand for distributed profit. You cannot tell someone he must work a paid job in order to contribute to society and at the same time tell him he can't save and accumulate financial assets (and it is hypocritical to say that the 1%ers should not be able to benefit from government bond issuance and at the same time say its ok for middle class workers to accumulate financial assets), yet, when enough people accumulate financial assets then this places downward pressure on employment and wages. How does MMT address this?

Tom Hickey said...

@ ANC Driver

There are many issues that cannot be addressed comprehensively under capitalism.

Addressing one factor complicates others. Both opportunities and challenges are emergent.

Challenges require coordination to address, which is difficult in a system based on competition and preference maximization, especially when institutional factors are disregarded.

As Marx observed, falling profit rate paralyzes the system, which means that profit must be served.

Passive income includes profit, interest and rent. Moreover, financial capitalism is based on interest and rent.

Most wealth is created by increasing marginal value of assets, real, chiefly land value, and financial, chiefly economic rents rather than interest or profit on operations. This becomes an issue when wealth becomes concentrated rather than distributed, like now.

These are the so-called "contradictions of capitalism."

These contradictions exist in the capitalist model, even without adding complicating factors like imperfect competition and rent-seeking behavior.

There no way to privilege one factor (capital) without recreating issues wrt other factors. The design of the system is not integrated and cannot be made integrated without changing the basis of the system in privileging one factor, let alone excessively.

ANC Driver said...

Yes but you can't scrap capitalism without removing the most fundamental of all common law rights - the right to individual autonomy. There is absolutely nothing wrong with capitalism, rent seeking, profit maximizing, or basically holding others in your debt and servitude if one is willing to risk becoming the debtor. That is what the whole of the revolution was founded on and what America is based on and it is today still the country which most (I emphasize 'most') holds true to this most important of individuals rights. Capitalism is a game, which should be seen as a game and those who succeed understand the rules of the game. Those who don't succeed at first usually do eventually because they know its a numbers game. But most others do not seem to understand this and instead come up with socialist ideas aimed at benefiting (redistribution of wealth) from the risks of others without taking on the risk themselves.

The only 'problem' with capitalism is that it is over-crowded because everyone is now forced into it whether they want to participate in it or not by forcing everyone to treat their labour as a commodity under a misguided belief that the only way for anyone to contribute to society is to sell your labours. I can not for the life of me understand why everyone assumes we can all treat our labours as a commodity and not at the same time contribute to capitalism. There seems to be this stuck and unshakable belief instilled in everyone that treating our labours as a commodity is completely innocent and has no adverse effects of any sort. On what basis are people holding on to such a belief?

Please please please, can someone explain to me how you can treat your labours as a commodity without the existence of a credit market? How will your labours be measured? Who will measure it? From where do the resources come from in order to make it possible to measure your labours? How can we measure our 'contributions to society' without the concomitant credit market?

I do not see anything coming out of any anti-capitalist propaganda which addresses the key question of whether to allow people the right to individual autonomy, and I do not say this in defense of capitalism, I say it in defense of those who do not want to, or lack the discipline, to be part of a commodity and credit based economy.

We cannot scrap capitalism without scrapping all other competition based activities from sport to playing monopoly at home. The solution lies in giving capitalists their sandbox to play in (capitalism does not need every single resource in the universe - it only needs enough resources to accommodate the number of players) and segregating enough resources for other economic models. Only then is the right to individual autonomy flowing for everyone. If MMT (especially Bill Mitchell) had their way my right to individual autonomy would be stripped from me on both counts whilst he still earns passive income from selling books and receives large grants.

Tom Hickey said...

In studying such transformations it is always necessary to distinguish between the material transformation of the economic conditions of production, which can be determined with the precision of natural science, and the legal, political, religious, artistic or philosophic – in short, ideological forms in which men become conscious of this conflict and fight it out. Just as one does not judge an individual by what he thinks about himself, so one cannot judge such a period of transformation by its consciousness, but, on the contrary, this consciousness must be explained from the contradictions of material life, from the conflict existing between the social forces of production and the relations of production. No social order is ever destroyed before all the productive forces for which it is sufficient have been developed, and new superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society.

Mankind thus inevitably sets itself only such tasks as it is able to solve, since closer examination will always show that the problem itself arises only when the material conditions for its solution are already present or at least in the course of formation. In broad outline, the Asiatic, ancient,[A] feudal and modern bourgeois modes of production may be designated as epochs marking progress in the economic development of society. The bourgeois mode of production is the last antagonistic form of the social process of production – antagonistic not in the sense of individual antagonism but of an antagonism that emanates from the individuals' social conditions of existence – but the productive forces developing within bourgeois society create also the material conditions for a solution of this antagonism. The prehistory of human society accordingly closes with this social formation.

— Karl Marx, Preface to A Contribution to the Critique of Political Economy

AXEC / E.K-H said...

Tom Hickey

You cite Marx “In studying such transformations it is always necessary to distinguish between the material transformation of the economic conditions of production, which can be determined with the precision of natural science, and the legal, political, religious, artistic or philosophic – in short, ideological forms in which men become conscious of this conflict and fight it out.”

The philosopher and sociologist Marx never understood the “material transformation of the economic conditions of production, which can be determined with the precision of natural science”, that is, how the price- and profit-mechanism works.#1, #2, #3

Marx was a soapbox economist and this excludes him forever from science and any scientific debate. The same applies to the philosopher Tom Hickey.

Egmont Kakarot-Handtke

#1 Capitalism, poverty, exploitation, and cross-over exploitation

#2 Profit for Marxists

#3 For the five basic economic Laws see Wikimedia{{int:filedesc}}