The central point of MMT with respect to economic policy.
It is nonsensical to imagine that the number of Dollars available is what determines what people can accomplish. Instead it is what people can accomplish that determines how many Dollars exist. This is the essential dynamic of Modern Money systems. Modern Money is the unique socialinvention that enables nations of people—so long as the real resources and citizen’s labor are available̶—to collectively build national goods and services. It has nothing whatsoever to do with the amount of capital the individuals of the society possess at any given point in time (in spite of what Thomas Pikkety tells us.) It has everything to do with what people collectively decide needs to be done, and what real resources are actually available to do it with.
How can this possibly be? How, operationally, can the potential accomplishments of people determine how many Dollars are available to pay them to actually implement those accomplishments? In a nutshell, the answer has four parts:
Shout it from the rooftops.
- The people decide to form a nation and become its citizens, agreeing to abide by the rules they, the citizens, collectively impose on themselves as a nation.
- The nation (the collective form of the citizens) establishes a Central Bank and a Treasury—and then simultaneously does two things: (a) it issues a national currency (money created by fiat, or “fiat money”) and (b) it imposes a tax on the citizens which can ONLY be paid with the national currency.
- Having agreed to abide by the rules (which now include paying taxes) the citizens become willing to provide the nation (the collective form of the citizens themselves) with goods and services in exchange for the fiat money they need in order to pay their taxes. Subsequently, the citizens use that same fiat money as the means of measuring the value of goods and services produced and exchanged privately amongst themselves as well—(i.e. the fiat money becomes the unit of exchange in the nation’s private economy.)
- The nation’s Central Bank and Treasury now have the task of continuing to issue the national currency—and collecting it back in taxes—in quantities as needed to match the actual potential and need the citizens have for producing goods and services. If the citizens have an actual need and potential for production for which there is not enough currency, the Central Bank and Treasury will simply issue and spend the required currency into existence by purchasing the goods and services, or otherwise causing them to be purchased. If the citizens have too much currency relative to what they are actually capable of producing (rising prices) the Treasury will increase the currency it collects back in taxes, re-establishing the balance.
New Economic Perspectives
A Fallacy of Composition
J.D. Alt
Piketty nowhere promotes the idea that the capacities of the public are in some way limited by the number of currency units already in existence.
ReplyDeleteHe suggests that in the 21st century we should seek to develop new forms of democratic control of capital. His calls for aggressive progressive taxes on income and capital have to be viewed in that light.
His focus in the book is on distributional questions, questions he wishes to return to the forefront of economic inquiry, and not on questions about growth and development which arise only tangentially. That doesn't mean he thinks the growth issues are unimportant, but only that they are not his subject.
One reason that he does not go further into the determinants of growth and development is that one of his central conclusions is that while inequality in capital income is less pronounced during periods of high growth than it is during periods of low growth, it is nevertheless always present, and so capitalism shows a permanent propensity for the rich to get richer and command increasing proportions of national income. So we can't combat the growth of plutocracy and erosion of democracy simply by stimulating higher growth levels. What is necessary is for the public to seize real wealth from its owners, and either continually redistribute it into a more level distribution of private wealth, or keep that wealth in private public hands.
Dan, I don't see where J.D. is speaking about Piketty here. He's talking about an objection someone made to one of his previous posts.
ReplyDeleteTom re-read both the first paragraph you reproduced here and also the third paragraph in J.D.'s post.
ReplyDeleteHe throws that off as an observation of Piketty's neoclassical approach. I don't think he means anymore than that Piketty posits a stock of capital that grows as income flows to it. Piketty doesn't seem to be taking a Post Keynesian endogenous money approach but a standard neoclassical one, which is why he is being taken seriously by the mainstream while heterodox economists that have written on inequality have not.
ReplyDeleteThere is no economic reason not to allow the top of the town to save, even to hoard, as long as there is sufficient flow to support circular flow at optimal capacity at full employment with price stability, while funding what needs to be done wrt public purpose., using functional finance. With the MMT model, this can be done by government funding the saving gap ad infinitum. In fact, this is a common criticism of MMT. By offsetting saving desire to maintain full employment it allows the top of town to accumulate without limit with the bulk of net financial assets going to the top of the town.
The argument against inequality isn't so much economic as political. Wealth translates to social, political and economic power and undermines democracy while resulting in social dysfunction and economic asymmetry with economic policy skewed toward the power structure.
As far as I can tell, Piketty hints at this but not enough to get himself labeled as a Marxist or even as heterodox.
But anyway, J.D. is not addressing Piketty directly, and I take his remark as incidental to the post. The post wouldn't change if he hadn't added it. If I had been asked to edit the post I would have advised dropping it. It adds nothing.
Not speaking for J.D. but for myself I'm pretty much appalled that Piketty is getting this much attention meanwhile we have all of our majesterial people all going around saying "we're out of money!" and "we're borrowin' from our grandchildren!"...
ReplyDeleteTo me that should be the bigger story out there... but not in the MSM I guess... MSNBC Hayes has Kelton on wrt 'the coin' and he and Joe Weisenthal and some other idiot do all the talking, while when reefer madness Hayes has Piketty on he closes down the 'roundtable' format for a lengthy 1-on-1... go figure.
Not taking anything away from Piketty he seems like a righteous person who has worked hard compiling a lot of empirical data on what he is into...
rsp,
A great (and gracefully short) read on the limitations of Piketty's analysis can be found here:
ReplyDeletehttp://mattstoller.tumblr.com/post/84443898843/important-economist-pikettys-important-book-capital
Jose I'm just hoping this book somehow turns out to be a long missing segue for some headline progressives to pivot off of... we'll see.
ReplyDeletersp,
Tom, I'm not sure what people mean by Piketty's "neoclassical approach". Given that he has a section in the book called "The Myth of Marginal Productivity", and marginal productivity is the cornerstone of neoclassical economics, this doesn't seem to be a very accurate label.
ReplyDeleteAnd yes, if the rich simply saved all of their income above a certain level and never spent it on anything, then it wouldn't have any economic effect and the government could just continue pumping dollars into the economy from the bottom. But of course that is not what happens. The rich use their money to buy things, including ownership shares in existing land, real resources and enterprises, so their monetary wealth has a lot of effects, both economic and political.
The reason that the mainstream is paying attention to Piketty is that in their view he's got a model (and heterodox economists don't).
ReplyDelete1. Heterodox economists do have models
ReplyDelete2. "Neoclassical" does not mean "has a model"
3. Piketty does not offer a comprehensive mathematical model.
Matt the author is close to the Socialist Party of France, an extremely orthodox organization that was at the origin of the European Single Currency idea.
ReplyDeleteHe has recently co-authored a policy proposal paper arguing for even more economic integration in the euro area, along the policy lines of the previous decades.
Said policies have resulted in inequality in Europe (and in France itself) increasing at alarming rates, in spite of the supposed progressive nature of the tax system.
This Piketty craze among American liberals will likely lead to just another cul-de-sac. The way to address inequality is through higher economic growth, full employment and higher wages, including the minimum wage. Wimpy taxes on "Wealth", however defined, are a political non-starter and ain't gonna do the trick anyway.
Dan, I'm not saying that heterodox economists don't have models. That's the neoclassicals. Krugman is a "proud neoclassical" because he has models and criticizes heterodox people for not having (orthodox) models. Of course, they have models, but not models that the orthodox will recognize as models.
ReplyDeleteSee for instance the ongoing back and forth between Jamie Galbraith and Paul Krugman.
Piketty approaches the subject in terms that they relate to and feel comfortable with. They are using the same universe of discourse.
Piketty's limitations can best be judged by the paper beowulf referenced in a previous MN article:-
ReplyDeletehttp://www.newschool.edu/scepa/publications/workingpapers/archive/cepa0212.pdf
Jose seems like the cul de sac always ends at "we're out of money!".... good comment... rsp
ReplyDelete