Saturday, September 3, 2011

Capitalism and MMT

Capitalism is about using capital as a scarce resource efficiently with a view toward risk and anticipated return on investment. It is based on risk-weighted investment in expectation of a return commensurate with the risk involved. ROI that exceeds return on its productive contribution is economic rent that is extracted from someone else's productive contribution.

The problem is not "capitalism" per se. It is actually the most efficient way to allocate capital that has been devised. The problem is rent-seeking, which, according to UMKC professor Michael Hudson, all the classical economists recognized.

Hudson observes that Classical economists — Smith, Ricardo and Marx — distinguished price and value. Price is excess of value is economic rent. Value is determined by the cost of bringing an item into production. Price is set the the market. To the degree that monopoly rent is operative, price may exceed value as determined by all the factors of production.

The Classical economists were acutely aware of the problem of economic rent with respect to contribution and distribution. The world was still emerging from feudalism then. Landowners controlled the dominant means of production at a time when agriculture made up most of the economy. The Classical economists did not wish to see this dominance extended to industrial and financial capital, too.

The distinction was obliterated in the transition to New Classical economics, which conflated price and value. Alfred Marshal established the familiar supply/demand curve as the market determinant of price and therefore value in this model. This blurred the distinction between ROI and rent. This shift cemented capitalist control, and capitalists joined the landowners in enjoying distribution far beyond their contribution to production.

Economic rent also includes land rent and financial rent, which are revenue extracted from productive activity in excess of productive contribution. This was quite evident to the Classical economists, since land owners, often aristocrats who inherited their titles and fortunes by fortunate birth, enjoyed wealth, an opulent lifestyle, and leisure, while workers toiled at what often amounted to subsistence wages. As agriculture became less significant to the economy, and workers migrated to cities, shops, and factories, this feudal distortion was forgotten, as well as the lessons learned and the gains that revolutions had won.

Land ownership is now considered an aspect of capital along with industrial and financial capital. Accordingly, economic rent includes land rent, monopoly rent, and financial rent. Economic rent, by definition, makes no productive contribution and is therefore parasitical on the economic system.

Problems arise when capital is considered to be the primary factor of production as the most valuable and irreplaceable scarce resource, therefore, to be accorded special advantages over the other principal economic factor, labor. The result is that capitalists are institutionally incentivized to seek economic rent in order to garner a greater share of value than is accorded to workers, regardless of productive contribution. As their share of income and wealth increases, they are also able to increase their advantage by influencing the political process.

This arises from the presumption that economic behavior is based on utility maximization, i.e., self-interest. The problem is that if everyone pursues self-interest without restriction, then problems develop at the macro level affecting the economic system because not all can succeed anywhere near equally. For example, inequality introduces inefficiency owing to wealth accumulating at the top. Then the economy underperforms owing to demand deficiency in the rest of society, e.g, resulting in boom-bust cycles. Moreover, those at the top become net savers accumulating rent and those at lower levels become net debtors paying rent.

Utility maximization involves a fallacy of composition. Individuals pursuing self-interest does not lead to prosperity in aggregate, especially where economic rent and political influence are involved. Parasitism weakens and eventually kills the host. When economic distortions become great enough, these imbalances lead to social and political problems that further complicate the economic issues.

The mistake involves methodological individualism, which entails numerous composition fallacies when macroeconomics is reduced to microeconomics scaled up. Methodological individualism is often justified on the basis of ontological individualism, the notion of "individual sovereignty" in the extreme, the idea being that "the invisible hand" invariably works to produce the most efficient economic outcome in aggregate.

One of the problems of methodological individualism is that it excludes government from macroeconomics, or even denies macroeconomics altogether. Accepting Hayek's claim that "socialism" is the road to serfdom, i.e., statism, Margaret Thatcher and Ronald Reagan proclaimed that "government is the problem." What they overlooked, according to Michael Hudson, is that laissez-faire capitalism is the road to debt peonage due to the extraction of economic rent and consequent dominance of the political process by the ownership class to the disadvantage of workers. The result is a return to a double-standard of justice and re-establishment of privilege, which is precisely what the revolutions that established liberal democracy sought to reverse.

The antidote to methodological individualism is recognition that society is a system of relationships among individuals and groups, and that leaving out the relationships distorts the reality. All the life and social sciences, as well as millennia of philosophy, assert this this view, and scientific research backs holism up with evidence.

Thus, any view of economics that assumes methodological individualism runs into the difficulty of being in denial of reality. The answer is either methodological collectivism, which involves the reification of society, or methodological holism, which correctly views society as a system whose elements are individuals in relation to each other, to groups and institutions, and to society as a whole system. Like methodological individualism, methodological holism requires that explanation be traced to causal mechanisms grounded individual behavior, albeit in relation to others, which methodological individualism ignores.

Libertarians and other proponents of laissez-faire make the mistake of thinking that the only alternative to methodological individualism is methodological collectivism, which they claim has lead to socialism and totalitarian statism historically and will inevitably do so in the future based on its principles. However, this view ignores methodological holism, which views society as a social system in which individual behavior in aggregate produces an outcome difference from individual behavior considered singly, e.g., as a representative agent. Holism does not reify the state, and it is fundamentally different from historical and philosophical collectivism, since it does not elevate collectivity above individuals.

Distinguishing holism and individualism is essential. As Roger Erickson has often pointed out in comments on MMT blogs, survival and progress in an ever-changing environment is based on adaptive rate and return on coordination rather than individual initiative alone. Economic presumptions that do not accord with what other life and social sciences have found are myopic, inefficient and ineffective at meeting life's challenges.

Interestingly also, from time immemorial those widely recognized as sages have set forth principles and norms, the following of which results in individual fulfillment, social harmony, and evolutionary progress. No person recognized as wise has ever recommended pursuit of self-interest as a way to achieving even individual fulfillment, let alone social harmony and prosperity. In fact, sages are unanimous in advising that pursuit of narrow self-interest yields the opposite result individually and socially.

Methodological holism agrees with methodological individualism that ultimate causal mechanisms in explanation need to be traced to the behavior of individuals. However, methodological hoist rejects the claim of methodological individualism that individuals are "free" and independent agents.

Children are socialized early in life in order to conform to the norms of the society in which they grow up. Society is institutional and institutions are based on institutional arrangements based on rule-based behavior. In society, the freedom of individuals is alway within the bounds of positive law, custom, convention, and culture.

Language is a cultural institution in this sense. Wittgenstein articulated in Philosophical Investigations that language use is rule-based, the rules relating sign to context in order to generate meaningful symbols. Fluency is in language is demonstrated by the ability to follow such rules correctly.

Similarly, all institutions are rule-based and bounded by norms that are privileged rules serving as criteria. Some of the rules and norms are explicit and some implicit. Society is a system constituted not only of individuals acting other their own behalf but also of institutional arrangements that set social and behavior norms. Individuals that are unable to conform to an acceptable degree with these norms are judged to either insane or criminal, using social norms as criteria.

A macroeconomics that accords with reality must reflect these institutional arrangements, which differ in various cultures, societies, groups, and legal jurisdictions. Presuming that an "invisible hand" is operative that infallibly results in the optimal outcome in all circumstances ignores institutional reality. For example, failing to consider the actual role that governments play in macroeconomics is fatal to a theory since this ignores a principal factor and vitiates its model as representative. Similarly, ignoring how major institutions in a society actually operate and influence economics is also fatal, leading to conclusions that clearly can't be correct, such as presuming a money multiplier where there is none.

For this reason, MMT is institutional. It focuses on describing actual operations of key institutions of government such as the Treasury and central bank, as well as their relations to each other, the commercial banking system, the financial sector and the non-financial economy. Failure to do this adequately results in failure to create an adequate macroeconomic theory capable of explaining and predicting through models that are reality-based instead of assumption-based, or that elevate analytical rigor over operational description and evidence.

MMT is also Minskyian in the sense that it is acutely aware of financial instability and the role of rent-seeking in producing financial instability. Thus, MMT recalls the distinction between price and value that New Classicism brushed aside. As a result most mainstream economists did not see the global financial crisis developing and still cannot explain it even after the fact, although MMT economists did identify the causes mounting and warned about the danger based on private debt accumulation and Ponzi finance.

It is also necessary to recognize that no modern developed society has a purely capitalistic economy, or even could have a purely capitalistic one, despite the rhetoric. All modern economies are mixed economies in which government plays a significant role. No serious person thinks that government can be eliminated. The controversy is over the size and role of government. Therefore, government must be considered as an economic factor also, and this must be included in any viable theory.

Failure to identify the factors and appreciation how they actually function results in failed economic theory and failed policy based on it. MMT provides an antidote that saves capitalism in the sense of taking advantage of it advantages as an efficient means of allocating capital, while showing how to reduce its disadvantages, for example, through institutional reform.


JKH said...


Good post.

I’m not steeped in this subject, but a few questions, perhaps mildly provocative:

How is the identification of rent any different than a judgement on the fairness of income distribution?

And how is either one analytical as opposed to judgemental?

Who decides what’s fair and what is value? And how is that analytically objective?

Who is the grand decider of where rent seeking exists. Michael Hudson?

For example, is there even a single dollar in a bank interest margin that isn’t considered rent?

If so, exactly how is that dollar identified and justified?

I have trouble with the terms “rent” and “rent extraction”.

But I see them everywhere now in association with MMT.

Don’t you think this growing emphasis on the motive of rent extraction risks the MMT “brand” in terms of its heretofore advertised ideological neutrality?

PaulJ said...

"Value is determined by the cost of bringing an item into production. Price is set the the market."

Isn't Value set by the market and Price the cost of production? This must be a typo.

Tom Hickey said...

Paul J: "Isn't Value set by the market and Price the cost of production?"

That would be the case if it were so, but it is not so in the case of monopoly, where the producer is a price setter instead of a price taker.

Tom Hickey said...
This comment has been removed by the author.
PG said...

I strongly agree with the ethical choices underlying this post. Rent seeking is an ominous behavior.

Many concepts are important, in particular, methodological holism. Here goes my two cents of doubts on the others.

“Capitalism is about using capital as a scarce resource efficiently with a view toward risk and anticipated return on investment.”

The same could be said of Technocracy .
Wouldn’t capitalism be better characterized by the prevalence of the employer-employee social relation?

“ROI that exceeds return on its productive contribution is economic rent”

The problem is: how the productive contribution of capital can be determined so that one knows the amount of economic rent? Didn’t the Cambridge Controversies show that such a determination is impossible?

“Value is determined by the cost of bringing an item into production.”

Isn’t value the result of a set valuation made by someone in a given situation? Isn’t the value of an item set by individual “valuers” largely independent of its production cost? Capitalism can produce a given item if there is a sufficient number of persons who value the item, as a purchasing option, above production cost in the unit of account.

“Problems arise when capital is considered to be the primary factor of production […] to be accorded special advantages over the other principal economic factor, labor.”

Wouldn’t the sages say that labor is not an economic factor, but rather the source of all production?
Of course, under capitalism, labor becomes what is obtained through a rental of the capability to labor.

Tom Hickey said...

[I removed the previous post because it contained some repetition.]

JKH, the devil is in the details, as you say. Where to draw the line is blurry at the margins, but the most egregious cases are pretty clear. Moreover there are historical standards to go by.

For example, recently a greater share of productivity gains go to top management, then shareholders, and workers without bargaining power are consigned to stagnant wages. They can only maintain lifestyle by borrowing, which turns them into debt peons and risks financial instability. This is the Minskyian analysis of the present crisis.

In discussing this with Warren he is OK with land rent but thinks that monopoly rent and financial rent should be addressed through institutional change, for example, his proposal for financial reform.

I didn't set forth Michael Hudson's solution, which involves not taxing productive contribution and taxing away most economic rent, since it is economic rent that funnels income and wealth to the top. Most people other than the super-rich would be unaffected. But that is where the money is. :)

Michael Hudson proposes not taxing productive contribution and taxing away most economic rent that funnels income and wealth to the top. Most people other than the super-rich would be unaffected.

The advantage of this is that primary investment would not be taxed, but revenue based on economic rent would. This would encourage primary investment and discourage rent-seeking, which is an issue at present.

It would also eliminate regressive taxation. But the problem with progressive taxation is that it captures a lot of income from primary investment, which is a disincentive. Better to incentivize it and discourage rent-seeking. through tax policy using the sectoral balance approach and functional finance to adjust the govt fiscal balance.

Taxation is a political mater and only elected representatives have that power in most liberal democracies. But it is a policy discussion we need to be having because a great many people are at least upset if not outraged over present conditions, which they see as a rip-off. But they have little idea of the issues involved and so the solutions that they advocate are often counter-productive.

As you probably know, Bill Black, and Randy Wray, also of UMKC, are also pushing the Minskyian viewpoint. As they show, it is not only economic rent but also borderline behavior, if not actually criminal. In a surprising number of cases it is actually criminal behavior originating at the top of an institution and pervading its culture.

We are seeing a crisis in capitalism, and more and more people are becoming concerned about it every day. Before quite recently, it is extremely unusual to see anyone referring to Marx, but now this is going mainstream as people see that he got some thing right, and economic rent was one of them. However, many don't know that Smith was concerned about it, too.

More and more, the term neo-feudalism is turning up too. There's a Wikipedia entry on it. Apparently J. K. Galbaith was the first to use it, in The Affluent Society (1958).

GLH said...

I understand you to say that a tax on economic rent, instead of a progressive tax system, should be used to prevent the wealth of the economy from gravitating to the top. If that is correct, would you give some examples of taxes on economic rent?
Also, you say that no serious person thinks that the government can be eliminated, but isn’t that what the EU is designed to do, eliminate government? Isn’t the very way the EU is constructed designed to use a central bank and the market to direct Europe?

Tom Hickey said...

GLH, first, the most easily applied tax on economic rent is taxing land rent. That means taxing the increasing value of land minus owner improvement and construction. Land appreciates significantly over time and it is one of the primary ways that wealth gets concentrated historically. There is also a huge amount of cronyism in land development. It also results in greater efficiency in land distribution, since it reduces land hoarding.

Secondly, it is necessary to examine the facts to discover other ways that wealth is being concentrated. Very little comes from income, other than the outsized compensation packages that top management awards itself through control of the board. These areas would need to be targeted also. This includes both monopoly rent and financial rent, e.g., windfall profits to the petro industry, for example, and revenue the financial sector garners from financial engineering that doesn't actually add value. This is a bit more difficult to do, since decisions have to be made over what constitutes rent. But it is not impossible either. What it does do is exempt business and worker income and tax other revenue sources that the wealthy have managed to have taxed as lower rates. It also would eliminate special interest tax shelters. In this way, neither primary investment nor consumption are taxed, both of which contribute to circular flow and economic growth.

Regarding government, the reason that government cannot be entirely eliminated is that some state control over national security, external and internal, is required at least. This is all the government that many on the right want.

Regarding the ECB, it is good example of politically "independent" institutions that serve the interests of the ruling elite. It represents a trail run of gaining political control through financial control, and it is inherently anti-democratic and anti-capitalistic, too, since it is not market-based. Politically independent institutions with policy-making power need to be eliminated if we are to have liberal democracy. And if markets are to function as markets, there cannot be a command system setting intrest rates and favoring cronies.

Septeus7 said...

Excellent Post Tom. I really like how you pointed out that we don't need to choose between individualism and state collectivism rather the truth in found in the classical geek concept of the holistic trinity (the individual, the society, and systems between them as you put it).

What I can't understand is how Randian Individualism become the darling of the religious right wing when the traditional social doctrines are rooted in concepts like the geek trinity and even Jewish holism.

Holarchy is the goal of a republic and until we come to understand that every individual must have opportunity for full creative development of the their capacities as holons in the network of society then proper government is impossible.

Matt Franko said...


"Randian Individualism become the darling of the religious right wing "

I hate to break the news to them, but they are in many significant ways outside of the truth of the Scriptures....

Matt Franko said...

For instance, I came across this in the 1 Epistle of John the other day, Ch 3:

"17 Now whoever may be having a livelihood in this world, and may be beholding his brother having need, and should be locking his compassions from him -- how is the love of God remaining in him?
18 Little children, we should not be loving in word, neither in tongue, but in act and truth.

What is Michelle Bachmann doing IN ACT AND TRUTH when she advocates for the non-scriptual "tough love" (her exact words) of fiscal austerity (ie DOING NOTHING!) that she thinks will solve our unemployment problem?

Or as John phrased it here, those having a livelihood vs those in need of a livelihood...

This is just one example; Bachmann and her ilk are way outside of the Truth of the Scriptures... Resp,

Ryan Harris said...
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Clonal said...

One of the biggest myth's about capitalism is that free markets will inevitably lead to a fair and equitable distribution of income and wealth, and will lead to the welfare of the community at large.

In fact quite the opposite can be shown to be true. Free markets and unrestricted "capitalism" inevitably leads to an accumulation of wealth in the hands of a few, and the impoverishment of large swathes of the population over time - no matter how evenly the wealth is distributed at the beginning.

The reasons for this can be found in the literature on the "econophysics of wealth" From an article - "Lagrange Principle and the Distribution of Wealth"

The Lagrange principle L = f + λ g → maximum! is used to maximize a function f(x) under a constraint g(x). Economists regard f(x) = U as a rational production function, which has to be maximized under the constraint of prices g(x). In physics f(x) = ln P is regarded as entropy of a stochastic system, which has to be maximized under constraint of energy g(x). In the discussion of wealth distribution it may be demonstrated that both aspects will apply. The stochastic aspect of physics leads to a Boltzmann distribution of wealth, which applies to the majority of the less affluent population. The rational approach of economics leads to a Pareto distribution, which applies to the minority of the super rich. The boundary corresponds to an economic phase transition similar to the liquid − gas transition in physical systems

In general, zero sum games (gambling/speculation) lead to a Boltzmann type wealth distribution, while seeking rent on accumulated capital leads to a Pareto distribution of wealth. Paret0 distributions apply to the top 0.1% of the popultion, while the Boltxmann type distributions apply to the bottom 99%. The remaining 0.9% will typically be in transition from one to the other.

Some good graphs can be seen here

2/ Now That’s Power: In 2003 I published the first of the two charts US income above, to show just how skewed US income and wealth really is. Now there’s a whole statistical discipline called Econophysics and a conference looking at such curves, and they’ve produced the second curve above, showing this data plotted logarithmically. They claim the richest 0.1% of the population’s income is described by Pareto’s Law — meaning that if you’re born into that kind of money, you’ll only get richer, no matter what you do. And they claim the poorest 99.9% of the population’s income is explained by Boltzman’s Law — describing random movement of gases in an enclosed area, and meaning that even if you’ve struggled up to the left end of the green curve, you’re far more likely to then get poorer than to make it to the 0.1% elite.

(contd. in bext comment)

Clonal said...

(contd from previous comment)

See also the article - The super-rich, the 'plain' rich, the 'poorest' rich
...and everyone else

"The super rich...go uncounted in most income distribution reports"

Until 1994, the U.S. Census Bureau simply didn't gather the same info on folks making over $300,000 a year as they did everyone else. Beginning in 1994, they raised the bar to $1 million-- so now everyone making over $1 million a year are often ignored and left out of many economic reports and analyses.

-- The Super Rich Are Out of Sight by Michael Parenti; December 27, 2002

Here, when I speak of the rich or wealthy I am not referring to the riches of intellect or joy or other intangibles which even a penniless monk in Tibet might be able to partake of in some measure, but of cash money or assets easily converted to same, and the power that often accompanies it.

I'm also not referring to the paltry amounts of money most of us deal with in our lives, but much, much higher quantities of the stuff.

Many Americans don't have a clue about what comprises real wealth in the USA

There's often news reports in the US media and elsewhere about how ill-informed and ill-educated average Americans are in regards to matters like world geography and others. But our financial savvy may be the worst of all. Want an example? Many of us have no idea how much money it takes to be truly rich. So we don't daydream about getting rich: we actually long merely to reach the status of upper middle-class(!), mistakenly believing that would put us firmly into the realm of the wealthy.

Many Americans long merely to reach the status of upper middle-class, mistakenly believing that would place them in the realm of the wealthy

marris said...

I think Hudson is setting up a strawman. No defender of freedom (Hayek, Mises, Rothbard, Rand) denied that the IDEAS held by actors influence their actions, values, etc.

I think your disagreement with them is the choice of institutions and their purpose. For example, none of the writer above are egalitarians. They believed that institutions should define property rights over alienable goods.

As you mention above, the devil is in the details, but the easy cases (for them) were outcomes which resulted from voluntary trades. They are "good," even if the outcome was not egalitarian. Government REdistribution, must by definition, violate the previously agreed upon property rights. It is "bad."

Tom Hickey said...

marris, in any advanced society there is a government that sets policy through the political process. Wealth conveys power and influence and that power and influence have been used to through the political process to shape institutions, tax policy, etc., in ways that favor upward flow of funds. Over time, this means that the basic institutions of a society get skewed toward favoring wealth. Just the name "capitalism" implies that ownership is favored over work.

There is always disagreement over distribution between owners and workers, have's and have-not's. HIstory is the record of the overthrow of one set of owners only for another to arise. The challenge is to create a sustainable system that balances the rights and responsibilities of both. Otherwise, this experiment well also end in either revolution against the ruling elite or the serfdom of debt peonage in a police state.

One side sees the issue as one of redistribution from rightful owners to the undeserving and the other a leveling of the playing field.

However, the larger issue is how to make a liberal democracy deliver prosperity. That means eliminating plutocracy and oligarchy.

marris said...

Is there any evidence that there was an "upward flow of wealth" ?

I don't think it's possible to show that wealth flowed "up" just because the income distribution became more skewed. For example, if government policy simply showers NEW money on people who already have a lot, then you will also see an increased skew. However, the low-wealth groups are just as wealthy as they were before, so there was no "flow."

Further, our production processes seem to be divided between (1) very low paying jobs that workers can do with a small amount of training, and (2) not-so-low paying jobs which require a good deal of knowledge [tech, engineering]. If the job requirements for (2) outpace the education of already low-income people, then of course their income will FALL. Even here, it's not the case that their wealth "flowed up." They just did not receive income.

Anonymous said...

Great essay up front, great thread following. To stretch it a bit, it has long seemed to me that China's economic policies seems to strongly resemble a post-Keynesian set of principles which maintains an economic sovereignty and then overlain are the strategies of "Go." in the macro-economic sumo match "our" guy is significantly underweight and fading. The macro-economic interpretation of a honey-trap seems to work, but the proprietary rights to designs, technology, and even to the value conferred by community infra-structure. Further the ideology whose face in economics is neo-classical, aka theo-economics, is the weapon of choice because all damage ends up being self inflicted as a nation. Through the means of control fraud the aggressor inflicts massive harm and escapes any direct responsibility as the macro-economic equivalent of the Pharaoh's scribes, prophets, and necromancers, as well as the highway bandits trade association. It is much like paying the courtiers to bid for new Royal Charters/franchises and forbearances.

As a hypothetical the effects of holding massive amounts of foreign debt in reserve bonds would have little direct effect on the appropriate amount of currency in circulation. However, when this is being disbursed across the planet to establish more favorable economic for the holder of those reserves, it seems that putting those US foreign trade reserves into circulation though outside of the immediate sovereignty as well as buying assets within that economy of origin would put more Dollars in circulation, again under the habitualized theo-logical economic assumption this would be drained to the top accelerating the fire sale process. It is going to be bumpy ride. Tadit

Bob Roddis said...

Tom Hickey is shooting the Austrians with Nerf bullets. And he missed.

1. Austrian thought most certainly does not presume that economic behavior is based on utility maximization.

2. Austrians do indeed deny the existence of macroeconomics altogether.

3. Austrian thought is based upon an empirical and reality-based analysis of humans acting in a sea of ignorance. No one can possibly know exactly what anyone else is thinking. The only way to know what other people truly desire is to observe the prices paid in voluntary exchanges. Economic value is merely what one actually pays for something.

4. The artificial creation of fiat money amounts to theft of purchasing power by those receiving the new money first at the expense of those holding the existing money stock. This and the opportunities for arbitrage in this system by the rich and clever is the mechanism for the massive ongoing theft of wealth from the poor and middle class. Fiat money is a surreptitious attack on the very concepts of private property, privacy and contracts themselves.

5. The recent government bailouts of the rich and bankster class are the opposite of free market capitalism. “Progressive” analysis depends for its very existence a meticulous confusion of these disparate concepts. A giant powerful state will always be captured by the rich and powerful for their own purposes.

6. The artificial creation of fiat money fatally impairs economic calculation because the prices paid in exchanges do not reflect reality but reflect merely the prices distorted by money that was not saved. This process will harm long term investment the most. Generally, it will make everyone think that they and everyone else is richer than they really are and will induce unsustainable malinvestments. That is the cause of the boom/bust cycle.

7. The Austrian concern with catallactics, or the science of human exchange, is based upon real-world observation of real-world human beings engaged in what they do. MMT, based upon the ludicrous “state theory of money”, is devoid of human beings and human social relationships. A running joke in Austrian circles is how MMT and Keynesianism in general are devoid of real-world human beings and are dependent upon an absurd infantile mechanical view of “economics” separate and distinct from the lives of real-world human beings and their relationships.

8. MMTers and Keynesians are totally tone deaf to the difference between voluntary free market behavior based upon common law principles of property, privacy and contract and state intervention, if only for determining the cause of social problems. Austrians and libertarians understand that healthy and sustainable social relationships come from voluntary relationships among free people and that government SWAT teams (the basis of “progressive” regulation and control) are the precursor of war and looting. The Road to Serfdom, to coin a phrase.

9. Thus, it is fiat money that a) causes the boom/bust cycle; and b) that causes the looting of the middle class and poor by the rich. It is the Austro-libertarians who understand and respect sound social relationships that result from voluntary behavior and respect for others’ property, privacy and contracts. It is the “progressives” who destroy these relationships and prosperity with their relentless meddling using the state apparatus to “solve” problems that do not exist such as the alleged “lack of aggregate demand” or monopoly resulting from the free market.

Tom Hickey said...

Bob Roddis, thanks for your observations, but this post has nothing to do with Austrian economics, which has had little concrete influence in the US in the shaping of institutional design and fiscal policy.

The post is about Classicalism, which recognized economic rent, and New Classicalism, which did not. But more than that is is about the TPTB that structured institutions to their own advantage, as they have historically.

The result we are seeing is an oligarchy and consequent privilege and double standard based on capital instead of a government of the people, for the people, and by the people as represented.

Ways to address this nationally lie through institutional change and fiscal policy.

However, the issue also pertains to other nations and also is global. I did not get into this in this post.

The overarching issue, which I did not address, but comes out in the comments is whether human rights or individual and property rights have a higher priority. Those on the left argue for the former and on the right of the latter. This is really the basis of the matter.

We can argue of this until the cows come home — I've done that before — and we are going to disagree over key fundamentals that are based on different value systems.

Tom Hickey said...

"Is there any evidence that there was an "upward flow of wealth" ?"

Just look at charts showing changes in income and wealth distribution. More and more income and wealth is being garnered by the top two quintiles, and looking within the top quintile the distribution there is even skewed upward.

Moreover, there is plenty of evidence that the top tier has increased its lobbying extending back to the Nixon Administration, incrementally gaining more control of the political process and influencing the outcome in it favor.

The idea that there is one faction that favors the free market and another than favors government in order to effect redistribution don't hold water. It is pure propaganda to conceal the institutional structure that is used to capture more wealth, power and influence for a small relatively group of oligarchs that have come to be called the super-rich.

Tom Hickey said...

@ Bob Roddis

1. Did claim that AE is based on max u. That's Classical and New Classical.

2. Right, this is a fundamental disagreement not only between AE and MMT. AE has lost that one to Keynes institutionally, since all economic education now make the distinction between micro and macro.

3. Reality-based? AE is based on arguing from fundamental principles that are taken as self-evident, just like all philosophies. Self-evidence reduce to norms and non-empirical assumptions. Science is based on empirically testable hypotheses. If you want to claim that AE is a philosophy, that's fine. If you want to claim that it is scientific, it is not.

4. AE's theory of money is bonkers.

5. Captured institutions, perverse incentives, and a criminogenic environment.

"A giant powerful state will always be captured by the rich and powerful for their own purposes."

Libertarians of the right think that the solution is no government, or limited government (military and security force). Libertarians of the left hold that what is needed is reform of institutions to ensure government of the people by the people and for the people. They also point out that the problem historical is government limited to the military and security forces, which are than used the the ruling elite to suppress the populace and carry out foreign adventures that benefit the wealthy.

Where is the outrage on the right about loss of civil liberties and a foreign policy of empire?

6. Bonkers.

7. Bonkers.

8. Fundamental disagreement over priority of human rights, and individual and property rights.

9. Bonkers.

Tom Hickey said...

Testimony on institutional capture.

Goodbye to All That: Reflections of a GOP Operative Who Left the Cult

Mike Lofgren retired on June 17 after 28 years as a Congressional staffer. He served 16 years as a professional staff member on the Republican side of both the House and Senate Budget Committees.

This is a must-read.

Bob Roddis said...

Where is the outrage on the right about loss of civil liberties and a foreign policy of empire?

Every day, all the time for four decades.

Try the very Rothbardian

Try the very Rothbardian Tom Woods:

Try Scott Horton and Will Grigg:

marris said...

> Just look at charts showing changes in income and wealth distribution. More and more income and wealth is being garnered by the top two quintiles, and looking within the top quintile the distribution there is even skewed upward.

Yes, the distribution is more skewed. The point is that you cannot infer an upward flow from the increased skew. Not when there's new money entering the system. Claims that "institutions have been captured and used to pull money up" cannot be defended with distribution snapshots.

> The idea that there is one faction that favors the free market and another than favors government in order to effect redistribution don't hold water.

What do you mean? There are some who openly state that they favor the free market. There are others who openly state that they favor government in order to effect redistribution. And there are still others who claim they fall into neither camp. But I think if you really pushed these people, they would probably be sortable into (broadly speaking) egalitarian or non-egalitarian buckets.

marris said...

> Libertarians of the left hold that what is needed is reform of institutions to ensure government of the people by the people and for the people.

This is inaccurate. What you describe above is just a left liberal. Left-libertarians (e.g Kevin Carson) also favor reduction in the scale of government. Duh! That's what makes them libertarians!

The main distinction between them and right-libertarians is that they believe the groups they defend (workers, poor, disabled) will be better off with less government. As you mention, part of the reason is to reduce the use of police power to oppress these groups. Another reason is to prevent the use of government agencies (Fed, Treasury, IRS) to redistribute wealth.

marris said...

Sorry, should have written:

The main difference between left-libertarians and right-libertarians is MOTIVE. The left ones feel that institutions should be structured to benefit the least well off. Further, they believe that a smaller government is the best way to do this... because of the use of police power, government agencies with the power to redistribute, etc.

Tom Hickey said...

@ marris

Your definition.

Tom Hickey said...

@ Bob Roddis, 

True, and I should have pointed out that Ron Paul has been consistently anti-war. 

But by an large, the right has not. And I have heard very little from the small government folks about the US having becoming a national security and total surveillance state.

Moreover, the Patriot Act gives the president broad dictatorial powers, which is really threatening. When such powers are granted, they are very seldom diminished and have a way of expanding.

This is exactly the small government I am concerned with because it has been the basis of tyranny in the past. It is not the quantity of government that is the issue, but the quality. Whether government is small or large it can be captured by a ruling elite. In the US, the danger of this is from plutocracy.

The principle condemnation of this that I have heard comes from the left. But perhaps Libertarians are on this, too, and I just haven't heard about it.

Sam said...

Good article, Tom. But as for feudalism and the middle ages, you understand nothing :-) Just rehashing conventionalisms dating from the so-called Enlightenment. Hudson has the same weakness. Some people even think the enclosure laws are "medieval," so deep does the bias and prejudice run; they don't bother to notice that they date from the Reformation times and later. The "dark ages" aren't nearly as dark as the empty gap in people's knowledge.
@ Jkh

Totally agree. I've always noted a drifting away by Hudson from the MMT paradigm. He is above all a Marxist, and also either with a Marxist agenda or simply a Marxist bias, it would seem.

Anonymous said...

I loved this post! Just wanted to say that.
Being a non-economist "thinker" (that is to say my education doesn't give me any specific tools for analysis of society and the economy), much of this is what i have been thinking.

You, however, lay it out in a very clear way and provides a sound foundation for these conclusions!

Thank you for an awesome blog!


Tom Hickey said...

@ Sam

But as for feudalism and the middle ages, you understand nothing :-) Just rehashing conventionalisms dating from the so-called Enlightenment. Hudson has the same weakness. Some people even think the enclosure laws are "medieval," so deep does the bias and prejudice run; they don't bother to notice that they date from the Reformation times and later. The "dark ages" aren't nearly as dark as the empty gap in people's knowledge.

Interesting. Care to elaborate on that? I was thinking of the manorial system which is generally considered to be feudal.

I've always noted a drifting away by Hudson from the MMT paradigm.

Right, he is sometime out of paradigm.

He is above all a Marxist, and also either with a Marxist agenda or simply a Marxist bias, it would seem.

Marxists attack Hudson as a reformer of capitalism rather than a proponent of the Marxist view of worker socialism.

Like some MMT economists, e.g. Bill Mitchell, Hudson acknowledges Marx as the originator of economic ideas that still have relevance. But that does not make either of them Marxian let alone Marxist. These are pretty well defined categories, which neither Hudson nor Mitchell fit into.

Tom Hickey said...

@ marris

BTW, check out The Political Compass for the definitions I am following in calling myself a libertarian of the left.

I score heavily libertarian as opposed to authoritarian and left as opposed to right.

Chomsky on Anarchism

Bob Roddis said...

Austrian Scott Horton interviews Will Grigg, author of Liberty in Eclipse, who discuss media indifference to police violence, the failed experiment in prosperity via incarceration in Hardin, Montana, the Constitutionalist principles of “Oath Keepers” members, the final looting of America by the rich and the fetishism of government uniforms.

Antiwar/anti-Nixon cartoon from Libertarian Review 1980:

Scott Horton interviews Daniel Ellsberg on Assange and Mannning:

Scott Lazarowitz explains the wonders of military Keynesianism. It’s what you get when the government is “unconstrained”:

I’ve been a Rothbardian since 1973 and somehow I was aware of the rabid antiwar and pro-civil liberties positions of the Austrians and libertarians. I’m not clear why we should be responsible for red-state fascists who wouldn’t know Austrian theory if it bit them in the ass.

Clonal said...


The upward flow of wealth in free (unregulated) markets and through rent seeking behavior is clearly demonstrated in the literature on the econophysics of wealth distribution.

Existence of zero sum games in the market leads to a Boltzmann type wealth distribution - this is generally operative for the bottom 99% of the population. Generally zero sum games are typified by gambling/speculation. One example of this are many transactions in the stock market. Many of the transactions that result in huge leveraged bets are of this nature. These have often been blamed for the 2008 financial crisis.

The other upward movement takes place because of the imputed "time value" of money, and the charging of interest. This results in rent seeking behavior on the part of groups that have already accumulated wealth in the gambling/speculation arena. This results in the Pareto wealth distribution, and it is generally operative for the top 0.1% (1 in a thousand) of the population. The remaining 0.9% are the people in transition from one side to the other.