Saturday, February 2, 2019

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

Important for those interested in MMT. It is a must-read if British or interested in the UK affairs.

Richard Murphy takes Jonathan Portes (and Simon Wren-Lewis) to task for betraying Labor and the left, while misrepresenting MMT.

The issues that MMT addresses in terms of political economy are social, political and economic, as well as cultural and institutional. A lot of different expertise needs to be brought to bear in addition to theoretical economists. Academic economists don't own this debate. Neither do financial professionals. While both these areas of expertise are required, they are not the only necessary ones. Given the broad context, many inputs are relevant in addition.

One of these areas is the so-called Green New Deal. The issues involved are fundamentally economic but they are also fundamentally social as an existential threat and fundamentally political in that a political solution is required. Moreover, it's a huge engineering problem, since the energy system is involved. It's also a global challenge that in which all will have to cooperate.

Any viable solution will require changing institutional arrangements, e.g., legal requirements, and it will also require a cultural shift that involves mass education, since the low-hanging fruit is conservation in an environment where consumption is promoted. It is a huge undertaking, which is a big reason that it is a hot potato that few are brave enough to pick up — not to mention, smart enough.

What MMT has to offer in particular is the knowledge that the only constraint on currency sovereigns addressing issue of public purpose is availability of real resources. The financial constraint is inflation and inflation is a consequence of resource scarcity relative to demand. Governments can address this by controlling demand through taxation or increasing availability of real resources through public investment. 

This being a finite world there are physical limits. Knowledge is potentially unlimited, however, limited only the ability to tap potential. Ignorance limits potential, and willful ignorance and dissimulation are culpable.

Richard Murphy broaches these issues skillfully. Good job — although I don't agree with everything he says, notably, about the job guarantee.

Tax Research (UK)
Why the left and Labour really do need to adopt the core ideas of modern monetary theory
Richard Murphy


See also

Labour’s chief economic adviser [James Meadway] confirms it is committed to the thinking that will deliver yet more austerity (6 Aug 2018)

* Demand is the term that economists use to describe the ability and willingness of buyers to purchase a product or service. … 

This general idea of demand is often called notional demand, which is composed of both latent demand and effective demand.

Even if a buyer needs or would be willing to purchase a particular product or service, he cannot do so if he lacks the necessary funds or if he does not know about that product or service. This portion of market demand is called latent demand.

Effective demand is a representation of the actual amount of goods or services that buyers are purchasing in a given market. Effective demand is the difference between notional demand and latent demand. Effective demand is a reflection of the extent to which buyers' income, perceptions and needs combine to result in an actual purchase rather than a mere desire to purchase.


Andrew Anderson said...

Governments can address this by controlling demand through taxation ... Tom Hickey

Except the economy runs using bank deposits and while spending by the monetary sovereign creates bank deposits so does bank lending but not for the general welfare but for the private welfare of the banks and their "borrowers."

Andrew Anderson said...

Second, let’s also leave aside the policy prescriptions that some say flow from MMT, like the job guarantee. I suggest that they are not core to the argument even if Mosler and others suggest that they are. No one who creates an economic idea has the sole right to say how it might then be interpreted for policy use, and those who say they have are simply wrong. Richard Murphy

Perhaps I'll bend Mr. Murphy's ear then since he appears to not be over-awed by bankers.

Konrad said...

“The financial constraint is inflation and inflation is a consequence of resource scarcity relative to demand, and relative to money supply. ~ Tom

There. Fixed it.

Demand can be high, and resources can be scarce, but if money and / or credit remain scarce, there is no inflation. We have inflation in housing prices because demand is high, housing is scarce, and credit is almost infinitely available.

“Governments can address this by controlling demand through taxation or increasing availability of real resources through public investment.” ~ Tom

Yes. The basic cause of inflation is “too much money chasing too few goods and services.” Therefore, to control inflation, we must increase the availability or goods are services, or else we must reduce the supply of money in circulation. (Or we can do both.)

One way to reduce the money supply is via taxation. Another way is to sell government bonds, so that the money used to purchase bonds gets temporarily locked up as reserves. Still another way is to adjust interest rates upward so that more money gets destroyed via the paying off of loans.

(In US society there are two ways that dollars are created. One is by federal spending. The other is by bank lending. Likewise there are two ways that dollars are destroyed. One is by federal taxation. The other is by paying off the principal on bank loans.)

Richard Murphy: “MMT says all money is created by either government central banks or other banks acting under state license.”

No. Wrong. This error keeps popping up. Many federal agencies create money. The Social Security Administration creates money when it credits the bank accounts of beneficiaries. The US Treasury creates money when (on orders from Congress) it credits the bank accounts of weapons makers. And so on. Banks create money as loans, and as interest on loans, such as the interest paid on T-securities. Monetarily sovereign governments create money by spending. Sometimes the later involves the central bank. Often it does not.

Tom Hickey: ”I don't agree with everything he says, notably, about the job guarantee.”

Yes, I wish that MMT proponents would mature past their unworkable and unnecessary “job guarantee” thing.

Tom Hickey said...

@ AA and Konrad

I fixed the post by specifying effective demand and bank regulation. Thanks for your comments. Attention to detail is important now that MMT is undergoing extreme scrutiny.

Andrew Anderson said...

Except I call for de-privileging banks and other depository institutions - not regulating them.

Regulating banks justifies their modus operandi which is stealing purchasing power and lending/investment opportunity from the poor for the benefit of the banks themselves and for the most so-called "credit worthy", the rich.

And for what reason since interest rates in fiat can be driven as low as desired via a Citizen's Dividend and negative interest rates on large* accounts at the Central Bank?

*But not on individual citizen accounts below a reasonable account limit at the Central Bank,

Noah Way said...

Nationalize the banks, problem solved.

The only reason to keep private banking is to sustain the parasite culture that only benefits itself. Leeches have to eat, too!

Andrew Anderson said...

So nationalizing theft from the poor solves the problem of theft from the poor?

Besides, we don't have truly private banks but government-privileged pirates, i.e. privateers.

Konrad said...

When I ask what "truly private banks" are, I get gibberish...

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Vestibulum semper elit id lorem congue scelerisque. Interdum et malesuada fames ac ante ipsum primis in faucibus. Praesent vel tellus tincidunt, vestibulum elit quis, dignissim massa.

Andrew Anderson said...

Truly private banks would mean:
1) No government-provided deposit insurance.
2) The public could have debit/checking accounts at the Central Bank alongside those of the banks or at the Treasury.
3) No lender or asset buyer of last resort.
4) No positive yielding sovereign debt since such debt is risk-free and thus positive yields would constitute welfare proportional to account balance.
5) etc., etc., etc.

I've pointed all this out before so ???

Noah Way said...

You're reserving lending for private banks because ... it's good for bankers?

Andrew Anderson said...

Your un-principled method of killing banks is naive and will just make martyrs of them.

Besides, why haven't you complained about Warren Mosler's plan to vastly INCREASE privileges for the banks?

Because you don't care if the banks steal as long as they do it for things YOU approve of?