Wednesday, February 6, 2019

Jo Mitchell — Misunderstanding M

Jo Mitchell corrects Richard Murphy on what MMT actually says.

Critical Macro Finance
Jo Mitchell | Senior Lecturer, University of the West of England, Bristol


Konrad said...



In the latest proof of Russian evil, scientists say the magnetic north pole is moving toward Russia at a rate of 31 miles a year.

Russia has been perpetrating its Great Pole Heist for fifty years, and it is accelerating as the north pole shifts from Canada into Russia’s Siberian region, throwing off compasses by one degree every five years.

Officials familiar with the global crime say it is a Russian plot to destroy the GPS system. Or it may be a Russian plot to destroy the earth’s magnetic field, thereby ensuring that most life forms will be wiped out worldwide, and that no one will ever see auroras again.

(In reality the magnetic north was 70 degrees away from geographical north in 1900, and it is now almost aligned with geological north.)

Konrad said...

“Something that caught my eye in Jonathans’ discussion was this quote from Richard Murphy: ‘A government with a balanced budget necessarily denies an economy the funds it needs to function.’ This is an odd claim, and not something that follows from MMT.” ~ Jo Mitchell

No it is not and odd claim, and yes it does follow from MMT. In the USA, recessions always follow from austerity and the attempt to get a balanced federal budget.

“I don’t believe that any of the core MMT scholars would argue that deficits are required to ensure that there is sufficient money in circulation.” ~ Jo Mitchell

Wrong again. This article is too full of errors to waste time with.

Ralph Musgrave said...

Jo Michell is a bright spark: I've followed his blog for a few years - not that he publishes all that many articles.

I left a comment after this latest article of his. Don't know if he'll publish it. I said:

Quality stuff there from Jo Michell. My only quibble is that there is no sharp distinction between base money and government debt as Martin Wolf and others have pointed out. E.g. £X of government debt which pays almost no interest and matures in a week’s time is virtually the same thing as £X of base money, which pays no interest at all (e.g. a wad of £10 notes).

So the statement that “deficits are required to ensure that the system has enough money to function” is arguably true if one is using the word “money” in a very vague or broad sense: i.e. to include all forms of very liquid assets, like government debt with less than a month to maturity, for example.

But to repeat, that’s a minor quibble, not an attempt to contradict Jo Michell.

AXEC / E.K-H said...

From MMT misunderstandings to the true Theory of Money
Comment on Jo Michell on ‘Misunderstanding MMT’#1, #2

Jo Michell summarizes what Robert Murphy says are his core points of MMT:
1. All money is created by the state or other banks acting under state licence
2. Money only has value because the government promises to back it …
3. … because taxes must be paid in government-issued money
4. Therefore government spending comes before taxation
5. Government deficits are necessary and good because without them the means to make settlement would not exist in our economy
6. This liberates us to think entirely afresh about fiscal policy

Jo Michell focuses his critique on point 5 and concludes: “The macroeconomic reason for running a deficit is straightforward and has nothing to do with money. The government should run a deficit when the desired saving of the private sector exceeds the sum of private investment expenditure and the surplus with the rest of the world. This is not an insight of MMT: it was stated by Kalecki and Keynes in the 1930s.”

Because already point 2. of Robert Murphy’s list can be shown to be false, there is no need to say anything about Jo Michell’s argument.

In order to see where MMT fails, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e. the real wage is equal to the productivity.

Monetary profit/loss of the business sector is defined as Qm≡C−Yw and monetary saving/dissaving of the household sector is defined as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. Under the initial condition of budget balancing C=Yw, total monetary profit is zero.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

See part 2

AXEC / E.K-H said...

Part 2

From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank.

The transaction equation reads M=kWL in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium.

So, the crucial point is to make sure that the business sector gets transaction money from the central bank if it plans to increase employment. In the old days, firms issued bills of exchange which were discounted by the banking system and redeemed within a short time span. Something a bit more sophisticated is required to ensure that the business sector is in no way hampered by a lack of transaction money. That is a question of the institutional design of the central bank.

In sum, (i) money is a generalized IOU (ii) no taxes are needed to get the monetary economy going and growing, (iii) there is NO fixed quantity of money, (iv) money is created and destroyed by the transactions between the household and the business sector, (v) money is endogenous, (vi) the value of money is given by W/P=R, i.e. is equal to the productivity, (vii) if the rate of change of the wage rate W is equal to the rate of change of productivity R there is neither inflation nor deflation.

The unhindered creation of fiat money for the payment of the wage bill is the correct way of bringing money into the economy. MMT’s deficit-spending is the incorrect way. Why? Because of the macroeconomic Profit Law, it holds Public Deficit = Private Profit, in other words, bringing money at the demand side into the economy creates a free lunch for the Oligarchy.#4

When all misunderstandings are clarified, this is the ultimate reason why self-styled Progressives like Richard Murphy want Labour so badly to adopt MMT’s policy of deficit-spending/money-creation.#5, #6

Egmont Kakarot-Handtke

#1 Jo Michell, Misunderstanding MMT

#2 Richard Murphy, Why the left and Labour really do need to adopt the core ideas of modern monetary theory

#3 Wikimedia, Idealized transaction pattern

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

#5 Very busy these days: Wall Street’s agents

#6 Why the British Labour Party should NOT adopt MMT

Ralph Musgrave said...

I find theories about Russians stealing the North Pole much more interesting than E.K-H stuff.

Konrad said...


Every year the the Military Industrial Complex holds a telethon to increase the billions of federal dollars that are thrown at it.

For this year’s telethon, Senate Armed Services Committee Chairman James Inhofe (R-OK) urged callers to donate money because CROP CIRCLES are being used worldwide to communicate sensitive information to Russian satellites.

This truth will become obvious, Sen. Inhofe said, once the NSA and Robert Mueller have broken the codes embedded in the pictographic designs. Rachel Maddow has all the facts.

“As World War II had Nazi Enigma machines, so we have crop circles," Sen. Inhofe said. "Call and donate your billion dollars now. Operators are standing by. And remember…it’s for the children.”

Konrad said...

W times L, (A2) O=RL output O is equal to X=O and budget balancing C=Yw in each period, the price is P=W/R (1) determined by W/P=R (2), i.e. the real wage is Qm≡C−Yw and monetary defined as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, C=Yw. Thus, total intelligence quotient is zero.

Edgemont, the following item may help you. Be sure to consult your neurologist first.

Noah Way said...

Lurasidone is not effective for cranial rectal inversions.

Kaivey said...

We certainly don't want to give the rich a free lunch, Egmont, that's why the 70% tax on the oligarchs is part of the proposal.

AXEC / E.K-H said...


Richard Murphy, as a hardcore MMT foot soldier of the Oligarchy, is not at all enthusiastic about taxing the rich: “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.”#1

Egmont Kakarot-Handtke

#1 MMT: Distribution is the drawback NOT Inflation