Just think what Keynesianism would have been like if Keynes had the time to read more of the work of the economist, Abraham Lerner - well, we may have had MMT much sooner?
Jeremy Corbyn makes the same mistake as Bernie Sanders by wanting to sound fiscally conservative about tax and spend because the paradigm has been set the conservative neoclassical economists who have told the general public that the country has to be run like the family household budget. At face value, this sounds fair, and the Conservatives have repeatedly indoctrinated the general public that there is no alternative- TINA. But the MMT ball is rolling and it won't be too hard to explain how MMT works to the general public once the clever marketing people, who want a better society, get hold of it.
Conservatives bribe the electorate with tax cuts and then cut public spending shrinking the economy and ruining prosperity for most but a few. It's time to call them out!
I’ve seen a couple of references to “Lerner’s Law” on Twitter in the last couple of days and thought “What’s that?”. Before anwering this question, let’s wind back a bit.
Who is Lerner?
Abraham (Abba) Lerner was a Russian-born British economist, who, writing in the 40s and 50s developed a theory he called “functional finance“. JM Keynes was aware of some of this work, and there is evidence he agreed with much of it. Unfortunately Keynes died before really exploring Lerner’s ideas. If he had, maybe what we think we know about “Keynesian economics” would look a lot different today.
Lerner’s functional finance is a key plank of what is today called Modern Monetary Theory (MMT), and it was one of MMT’s key figures Warren Mosler who I first saw mention “Lerner’s Law”:
@RichardJMurphy I'm functionally a supportor. My concern is largely about violating 'Lerner's Law' and thereby losing the debate.
So what is Lerner’s Law?
I’m not sure it’s actually known widely as such, but what Mosler alluded to was a passage from Lerner’s 1951 work “Economics of Employment”. Bill Mitchell quotes this passage in his latest book “Eurozone Dystopia”. I found the relevant section here. Bill writes:
“Lerner’s work also contains a very clear message for progressive thinkers who are reluctant in the current debate to think outside of the confines that the neo-liberals have created. For example, Labour politicians in the United Kingdom confront the austerity debate with claims that they would ‘fix the budget’ over a longer time period to avoid the massive damage that immediate austerity brings. Of course, even debating the ‘health’ of the fiscal position in terms of some financial ratios is ceding ground to the conservatives, ground that is illegitimate. Lerner (1951:15) called progressives who argued in this way ‘proponents of organised prosperity’ and argued:
A kind of timidity makes them shrink from saying anything that might shock the respectable upholders of traditional doctrine and tempts them to disguise the new doctrine so that it might be easily mistaken for the old. This does not help much, for they are soon found out, and it hinders them because, in endeavoring to make the new doctrine appear harmless in the eyes of the upholders of tradition, they often damage their case. Thus instead of saying that the size of the national debt is of no great concern … [and] … that the budget may have to be unbalanced and that this is insignificant when compared with the attainment of prosperity, it is proposed to disguise an unbalanced budget (and therefore the size of the national debt) by having an elaborate system of annual, cyclical, capital, and other special budgets.
Progressives should first and foremost seek to educate the public about how the economy and money actually operate and what opportunities the government has to act on our behalf to advance our wellbeing. If we think in this way, then options that have been constructed by the neo-liberals to be ‘dangerous’, ‘radical’ or ‘taboo’ will start to appear reasonable and grounded in reality.”
So simply stated, Lerner’s Law would be something like “If you try to present your ideas cloaked in the language of you opponents, it will do your cause great damage”.
This offers a lesson to Corbyn and his supporters. Corbyn has manfully tried to present policy ideas that currently sit outside what is thought ‘possible’ within the current orthodoxy. He has done so though while trying to present himself as being enthusiastic about balancing the budget, or at least the ‘current’ budget. He has also talked about how he would ‘pay for’ his policies by raising taxes on the rich. Both of these are examples of disguising ‘new doctrine’ as old as Lerner wrote, and leave him open to attacks from those holding on tight to the old.
D, in his Tweet embedded above invokes Lerner’s Law to criticise the idea of “People’s Quantitative Easing” as proposed by Richard Murphy and adopted by the the Corbyn campaign. It takes an idea that is actually quite revolutionary (Overt Monetary Financing), and cloaks it in the language of something that was on the unorthodox edge of current orthodoxy (Quantitative Easing). This has opened it up to all kinds of criticism (for example the recent FT letter signed by 55 economists).
When it’s suggested that ‘progressives’ should adopt different language to try and explain alternative policies, it’s sometimes replied that this is a hopeless cause as the current orthodoxy is so ingrained in the public’s minds. Lerner has an answer to this (quote also referenced from Bill’s book):
The scholars who understand it [the “new doctrine”] hesitate to speak out boldly for fear that the people will not understand. The people, who understand it quite easily, also fear to speak out while they wait for the scholars to speak out first. The difference between out present situation and that of the story [The Emporer’s New Clothes] is that it is not an emporer but the people who are periodically made to go naked and hungry and insecure and discontented – a ready prey to less timid organisers of discontent for the destruction of civilisation.
Let’s speak out!
https://alittleecon.wordpress.com/2015/09/04/lessons-for-corbyn-in-lerners-law/
MMT Progressives: The knife in the back of WeThePeople
ReplyDeleteComment on Kaivey on ‘Warren Mosler Tweet ― Lessons for Corbyn in “Lerner’s Law”’
Kaivey summarizes: “So simply stated, Lerner’s Law would be something like ‘If you try to present your ideas cloaked in the language of you opponents, it will do your cause great damage’. This offers a lesson to Corbyn and his supporters. Corbyn has manfully tried to present policy ideas that currently sit outside what is thought ‘possible’ within the current orthodoxy. He has done so though while trying to present himself as being enthusiastic about balancing the budget, or at least the ‘current’ budget. He has also talked about how he would ‘pay for’ his policies by raising taxes on the rich. Both of these are examples of disguising ‘new doctrine’ as old as Lerner wrote, and leave him open to attacks from those holding on tight to the old.”
Clearly, “Lerner’s Law” is NOT about how the economy works, i.e. an economic law, but a smart advice for effective propaganda.
The core message of MMT is: Almost all economic problems can be solved by deficit-spending/money-creation. Accordingly, budget-balancing is nothing but the false doctrine of the current Orthodoxy a.k.a. Neoliberals. All arguments against a growing public debt are nothing but fear-mongering of the sadistic ruling elite/one-percenters/oligarchy.
Note that the core message is NOT that temporary deficit-spending/money-creation is a sensible measure in a recession ― almost all economists agree on that ― but that permanent deficit-spending/money-creation is necessary “to advance our wellbeing”.
Radical, progressive, permanent deficit-spenders criticize Corbyn/UK Labour for timid, old-fashioned, cyclical deficit-spending, i.e. long-term budget balancing.
Budget-balancing in any shape or form is anathema to MMT Progressives.#1, #2 MMT Progressives claim to be the true Friends-of-the-People. Nothing could be further from the truth.#3
This is the fact of the matter. The macroeconomic Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M). With regard to the government’s budget, it boils down to Public Deficit = Private Profit, i.e. (G−T)=Qm. This piece of pure economic analysis translates into the scientific insight that MMT’s foundational sectoral balances equation is false, and into the political insight that MMT’s policy of deficit-spending/money-creation is nothing but a free lunch for the Oligarchy.#4
Progressive MMTers promote the cause of the ruling elite/99-percenters/oligarchy and NOT of WeThePeople.#5
See part 2
Part 2
ReplyDeleteAn additional sign is that MMTers argue consistently against taxing the rich.
• “Do we need the rich’s money?” “No”. (Bill Mitchell)#6
• “The time for pussy-footing with new taxes to extract a little more from the rich is yesterday’s news. There is no time for that. This is the time to create money for change.” (Richard Murphy)#7
• “He [Corbyn] has also talked about how he would ‘pay for’ his policies by raising taxes on the rich. Both of these are examples of disguising ‘new doctrine’ as old as Lerner wrote, …” (Kaivey, above)
The Profit Law tells one that deficit-spending produces profit for the Oligarchy.#8 Permanent deficit-spending produces permanent profit and permanently increases public debt. WeThePeople have to pay interest on this debt via taxes and have to pay back the debt eventually.
MMTers are NOT Friends-of-the-People, just the opposite, they promote the cause of the Oligarchy and actively subvert the genuine grassroots movements in the UK and US.#9, #10
Egmont Kakarot-Handtke
#1 MMT-Progressives: stupid or corrupt or both?
https://axecorg.blogspot.com/2018/08/mmt-progressives-stupid-or-corrupt-or.html
#2 How Bill Mitchell stalks Jeremy Corbyn
https://axecorg.blogspot.com/2018/08/how-bill-mitchell-stalks-jeremy-corbyn.html
#3 MMTers are NOT Friends-of-the-People
https://axecorg.blogspot.com/2018/08/hope-you-get-it-mmters-friends-of-people.html
#4 MMT: A free lunch for the Oligarchy
https://axecorg.blogspot.com/2018/11/mmt-free-lunch-for-oligarchy.html
#5 MMT: The fusion of Wall Street and Academia
https://axecorg.blogspot.com/2018/12/mmt-fusion-of-wall-street-and-academia.html
#6 MMT: academic snake oil for the people
https://axecorg.blogspot.com/2018/02/mmt-academic-snake-oil-for-people.html
#7 You are fighting for life? On all fronts? MMT can save you! Or maybe not?
https://axecorg.blogspot.com/2018/12/you-are-fighting-for-life-on-all-fronts.html
#8 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html
#9 MMT and grassroots movements
https://axecorg.blogspot.com/2018/01/mmt-and-grassroots-movements.html
#10 The Kelton-Fraud
https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html
For ruling elite/99-percenters/oligarchy read ruling elite/one-percenters/oligarchy.
ReplyDeleteSorry, EKH
Abba Lerner was a totalitarian lunatic. He wrote a RED book called "The Economics of Control" about how SWAT teams should have the perpetual right to reassign everyone's assets to others.
ReplyDeletehttps://www.flickr.com/photos/bob_roddis/5560086472/in/album-72157626353319778/
Speaking of robbery Bob, how is needlessly expensive fiat not robbery?
ReplyDeleteI always liked Warren Mosler, but now I have read a bit of "Economics of Control ' I like him even more.
ReplyDeleteDo your equations, Egmont, cover the role played by fractional reserve banking in our economy?
ReplyDeleteWarren Mosler would have the Central Bank lend to banks at ZERO percent. That's fascism or corporatism, if you prefer.
ReplyDeleteMosler says the liability side is not the proper side of the balance sheet to discipline the banks but he's apparently never considered that all citizens should be allowed debit/checking accounts of their own at the Central Bank - which would allow all other privileges for the banks to be abolished.
Then it wouldn't matter if banks were disciplined or not since a risk-free, always liquid payment system would exist in addition to the one that must work through banks.
Beware of bankers bearing gifts ...
Andrew, Where did Warren say central banks should lend to commercial banks at zero percent? Nowhere that I know of.
ReplyDeleteWarren DID advocate what he called a "permanent zero rate of interest". But that simply means government and central bank issue enough zero interest yielding base money to keep the econonmy at full employment. I.e. governments should not issue so much base money that they then have to damp down demand by borrowing back some of that money which has the effect of ARTIFICIALLY raising interest rates.
"Just think what Keynesianism would have been like if Keynes had the time to read more of the work of the economist, Abraham Lerner - well, we may have had MMT much sooner?"
ReplyDeleteDon't think it would have made much difference because the two men saw eye to eye pretty much. E.g.:
1. Keynes said "Look after unemployment and the budget will look after itself." Lerner would not have disagreed with that.
2. Keynes said in a letter to Roosevelt in the early 1930s (5th para) that government should simply create or borrow and spend whatever amount of money is needed to escape the recession. Again, no disagreement.
@Ralph Musgrave:
ReplyDelete1. The fed should lend unsecured to member banks, and in unlimited quantities at its target fed funds rate, by simply trading in the fed funds market from http://neweconomicperspectives.org/2010/02/warren-moslers-proposals-for-treasury.html [bold added]
3. I would make the current zero interest rate policy permanent. ibid [bold added]
Warren Mosler, a banker, would increase the privileges for banks, to make injustice MORE STABLE - as if justice can be denied for long anyway or without compound interest.
ReplyDeleteKaivey
ReplyDeleteYou ask: “Do your equations, Egmont, cover the role played by fractional reserve banking in our economy?”
The AXEC equations prove that the MMT equations are false. Therefore, the rest of MMT’s analytical superstructure including fractional reserve banking is also false. To discuss fractional reserve banking at this juncture would be a distraction from the point at issue, i.e. that MMT is (i) a scientific failure and (ii) a political fraud.
Strictly speaking, MMTers do not qualify for a discussion of monetary theory that satisfies scientific standards. It is a matter of indifference what Mosler, Mitchell, Lerner, or Keynes ever said about money/interest because their macroeconomics is provably false.
For the relationship between the axiomatically correct sectoral balances equation and the stock of central bank money, which has to be determined first, see
Money and time
https://axecorg.blogspot.com/2017/07/money-and-time.html
Basics of monetary theory: the two monies
https://axecorg.blogspot.com/2017/10/basics-of-monetary-theory-two-monies.html
The creation and value of money and near-monies
https://axecorg.blogspot.com/2017/12/the-creation-and-value-of-money-and.html
Nick Rowe’s soapbubbling about money
https://axecorg.blogspot.com/2018/06/nick-rowes-soapbubbling-about-money.html
Money: from silly stories to the true theory
https://axecorg.blogspot.com/2017/07/money-from-silly-stories-to-true-theory.html
For more details see the label Money at the AXEC blog
https://axecorg.blogspot.com/
and the working papers at SSRN
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
As long as the relationship between the sectoral balances and the stock of central bank money is not perfectly clear, there is NO use to discuss fractional reserve banking.
Egmont Kakarot-Handtke
War on Cash: State and City Governments Push Back
ReplyDeleteNotice how it never occurs to either the author or to the commenters that citizens should be allowed debit cards that draw on citizen accounts at the Central Bank itself - thus allowing citizens to use their Nation's fiat in convenient, safe, account form.
Or else Yves Smith, who calls the idea that citizens be allowed such accounts "balmy", has censored that obvious solution.
there is NO use to discuss fractional reserve banking. Egmont Kakarot-Handtke
ReplyDelete1) Profits per se are NOT the problem; their unjust distribution is.
2) Government privileges for private credit creation are largely to blame for the unjust distribution of profits.
“Abba Lerner was a totalitarian lunatic”
ReplyDeleteComing from Bob who holds von Mises as a guru. We know what happened in Chile and that the guru loved the totalitarian junta.
So much to love here!
ReplyDeleteThe AXEC equations prove that Egmont is a legend in his own mind, and nothing else. He is the Peter Dow of economics.
Diehard libertarian and bankruptcy lawyer Roddis desperately trying to tear down any idea of social economy when he doesn't even understand what fiat money is.
This blog is flypaper for idiots. Very entertaining.
No one kicks a dead dog, Noah, MMT is a serious threat to them because it is viable.
ReplyDeleteKaivey
ReplyDeleteMMTers tell the world that 2+2=5. They are patiently shown that 2+2=4. Yet they simply cannot get their heads around the fact that MMT is scientifically refuted, that Academia (Bill Mitchell and others) and Wall Street (Warren Mosler and others) jointly betray WeThePeople, and that the clueless social media foot-soldiers (Kaivey and others) are part of the scam.
The scam consists of propagating deficit-spending/money-creation as a social benefit for WeThePeople while it is first and foremost money-making for the Oligarchy.#1
Stop hallucinating: “No one kicks a dead dog, …, MMT is a serious threat to them because it is viable.” and wake up to the reality that MMTers are more an annoyance than a threat ― just like a heap of dead cockroaches.
You cannot repudiate the proof of the inconsistency of the foundational MMT sectoral balances equation. The rest is shame and silence.
Egmont Kakarot-Handtke
#1 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html
Proof tells us EKH is a troll.
ReplyDeleteEHK has not been able to scientifically refute that.
Egmont Kakarot-Handtke is totally correct here:
ReplyDeleteThe claim that the value of money depends ultimately on the taxing power of the state is, of course, plain MMT nonsense.
As Mosler said in his debate with Bob Murphy, fiat money gets its value from government SWAT teams threatening violence against people who don’t use fiat money.
Egmont Kakarot-Handtke is completely wrong here and has no basis in fact or logic to make this claim:
The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
Source of the quotes:
https://axecorg.blogspot.com/2017/12/the-creation-and-value-of-money-and.html
As Mosler said in his debate with Bob Murphy, fiat money gets its value from government SWAT teams threatening violence against people who don’t use fiat money. Bob Roddis
ReplyDeleteAs if requiring that taxes be paid with needlessly expensive fiat requires any less force or the threat thereof.
Hypocrite much, Roddis?
What good does "cheap fiat" do anyone, especially the poor and powerless? Wouldn't the poor and powerless be better off with lots of extremely valuable gold and silver coins?
ReplyDeleteAs I wrote December 10, 2013:
ReplyDeleteLet’s examine the deep understanding by the MMTers of the concept of exchange. David Colander, co-author of a 1980 book with Abba P. Lerner (Grand Pooh-bah of the MMTers and author of “The Economics of Control”) wrote two years before Lerner’s death that Lerner wanted to make it illegal to change prices without a permit in order to control “inflation”:
Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]
ftp://ftp.repec.org/opt/ReDIF/RePEc/mdl/ancoec/0234.pdf
Wouldn't the poor and powerless be better off with lots of extremely valuable gold and silver coins? Bob Roddis
ReplyDelete"Lots"? When the average family income in 1915 was $687? And given - In other words, $100 in 1915 is equivalent in purchasing power to $2,426.93 in 2017*, - that 1915 average income was worth only $16,673 in 2017 dollars? When the actual median (not just average) US family income in 2017 was $61,372?
Can you not grasp that rewarding lazy, risk-free money hoarding is the last thing one should do if progress is the goal?
Or is having a bunch of young slaves in a low tech civilization your idea of justice?
Focus on justice, Roddis, and you'll do LOTS better at the Final Judgment than as a miserable shiny metal worshiper.
*from https://money.usnews.com/money/personal-finance/articles/2015/01/02/a-glimpse-at-your-expenses-100-years-ago
Hey AA, you genius you:
ReplyDelete$687 per capita in January of 1915 has the same buying power as $17,143.57 in November 2018 per capita. Allegedly.
https://www.bls.gov/data/inflation_calculator.htm
Per capita income in the US is now around $31,000.
However, a house in 1915 cost $3200 and in 2015 it cost $117,000.
But…….$3,200 in January of 1915 has the same buying power as $79,853.62 in November 2018.
The price of housing has skyrocketed due to funny money loans, way beyond the increase in per capita income.
Since the funny money regime is what funded WWI and WWII and all the wars since, that destruction and massive slaughter must be subtracted from the “plus” column for funny money. Of course, there is no “plus” column for funny money.
Finally, there is no evidentiary, historical or logical basis to your nonsense claim that broadly held forms of money that constantly increase in value reward "lazy, risk-free money hoarding". What an evil and vicious person you are to sic SWAT teams upon innocent people trying to save for their future.
The price of housing has skyrocketed due to funny money loans, way beyond the increase in per capita income. Bob Roddis
ReplyDeleteNeedlessly expensive fiat means the public is forced to use bank deposits instead.
You Austrians are thus closet bank supporters.
Not surprising since you guys are also lovers of usury (the so-called time value of money; thus negative interest rates utterly baffled you guys).
Come clean and stop supporting needlessly expensive fiat (an ethical absurdity akin to $700 government hammers) in order to unethically suppress the SUPPLY of fiat and instead advocate that all citizens be allowed to use fiat in inherently safe, convenient account form at the Central Bank or Treasury itself thus increasing the DEMAND for fiat.
But you won't because, like I said, you guys are closet bank supporters.
Since the funny money regime is what funded WWI and WWII and all the wars since, that destruction and massive slaughter must be subtracted from the “plus” column for funny money. Bob Roddis
What about the destruction and enslavement of South America in pursuit of that funny money gold? And the needless environmental destruction that continues today in hope of a return to that thieving standard?
I do not support the current system but neither do I support a previous form of oppression and looting, needlessly expensive fiat - which implicitly privileges private credit creation - "the banks."
And blame the gold standard and the deluded thinking about fiat for the Great Depression and WWII since equal fiat distributions to all citizens would have nipped those in the bud.
What an evil and vicious person you are to sic SWAT teams upon innocent people trying to save for their future. Bob Roddis
ReplyDeleteI'm all for generous welfare and retirement benefits and in real terms those require policies that do not encourage lazy, risk-free fiat hoarding.
That said, I would require that all new fiat be created and distributed justly - not just to precious metal owners and miners like you and Ron Paul - and that all other privileges for the banks be abolished.
Since neither you or any other Austrian has ever suggested, to my knowledge, that citizens, at least, be allowed checking/debit accounts at the Central Bank or Treasury itself, I can only assume that you are pro-bank hypocrites.
Detestable, in other words.
What about the destruction and enslavement of South America in pursuit of that funny money gold? And the needless environmental destruction that continues today in hope of a return to that thieving standard?
ReplyDeleteEnvironmental destruction and enslavement are TOTALLY BANNED pursuant to libertarianism. For example, Avatar the film was recognized by libertarians as promoting a clear libertarian message:
[T]he plot is about property rights. In particular, the property rights of the Na'vi, in an established tree-city that they have clearly homesteaded. The Na'vi are not just some uncivilized savages as some curmudgeonly reviewers imply; they live they way they do because of the wondrous bounty of their strange world and some unique features it has--which, again, I can say little of without spoiling, but suffice to say it's grounded in reality and extrapolative science fiction, not some quasi-mystical nonsense. They even have a sophisticated homesteading technique worked out for ownership of the wild, pterodactyl-like creatures known as Banshee or ikran. In addition, the main Na'vi character, Neytiri, although she is betrothed to another Na'vi, is permitted to change her mind and choose someone else--respect for individual choice and autonomy.
https://mises.org/wire/avatar-great-and-libertarian
AA is just a liar.
Bob Roddis
ReplyDeleteYou say: “Egmont Kakarot-Handtke is completely wrong here and has no basis in fact or logic to make this claim: The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.”
In fact, the flawless logic goes thus.#1, #2
Methodological rule No 1: One has to start with the simplest possible economic configuration. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The real value of money is ultimately given by the productivity. From (1) follows W/P=R (2), i.e. real wage = productivity.
If one wants absolute price stability in the elementary production-consumption economy from beginning to eternity one has to apply the simple rule: change of wage rate = change of productivity. This excludes both inflation and deflation.
In the analytical beginning, there is no state and no central bank. The firm pays the monthly wages with a standardized IOU and declares that this conveniently denominated title will be unconditionally accepted at the firm’s store. The employees accept that the IOUs discharge their wage claim against the firm. Since the household sector’s budget is balanced by the initial condition C=Yw, whatever the firm issues returns until the end of the period under consideration. The firm creates IOUs and destroys them again within a short time span, i.e. a month. No IOUs are carried over to the next period and therefore the IOU is not suited as a store of value. The firm’s IOU is a pure transaction medium.
The firm’s rule for IOU-creation is IOU=kYw, i.e. the nominal volume of IOU’s is strictly proportional to the wage bill.
As a result, one has a fiat money economy with absolute price stability. No taxes are needed to force the workers to accept the firm’s privately created money. If all stick to the rules, they get an inflation-free fiat money economy and if the productivity increases over time, the real wage of the workers increases.
Problems arise, of course, if corruption sneaks in. For example, if the firm issues IOU’s in excess of the wage bill and the money is spent by a third party. This causes a price hike (NO inflation) and the real wage falls below the productivity. The business sector makes a profit which is equal to the excess IOU’s. This is what MMT’s policy of deficit-spending/money-creation amounts to when the analysis is stripped down to the bare bones.
Macrofounded economic theory tells one that the Austrian’s constant polemic against fiat money pe se is beside the point. This is where MMT is right. However, the Austrian’s critique of the abuse of the fiat money system for the benefit of the Oligarchy is fully justified.
From the scientific standpoint, though, both MMT and Austrianism is worthless garbage.
Egmont Kakarot-Handtke
#1 The creation and value of money and near-monies
https://axecorg.blogspot.com/2017/12/the-creation-and-value-of-money-and.html
#2 The ultimate ― analytical ― origin of money
https://axecorg.blogspot.com/2017/07/the-ultimate-analytical-origin-of-money.html