Tuesday, July 16, 2019

Modern Monetary Theory's promise — Dirk Ehnts

If the model of the market-compliant democracy has outlived its usefulness, it is time to look for an alternative political vision. It must convince people that politicians can solve the problems of the 21st century. This kind of alternative blueprint for society needs a theoretical basis. Modern Monetary Theory (MMT) can make an important contribution. Understanding MMT enables us to envisage progressive politics without getting tangled up in misguided debates about whether we can ‘afford’ things or not: a new political realism. The first major thing to note here is that ‘modern money’ is always government money. The state is the originator of currency as it puts money into circulation through its spending. If we have to pay our taxes in euros, the state has to spend a sufficient amount beforehand. That is the only chance we have of getting the right amount of money.

It is also crucial to understand here that modern money can be regarded as tax credit. Specifically, this means our money – the euro – is purely and simply a promise by the state to accept it in future for payments to the state. As taxes account for most of these payments, modern money can essentially be described as tax credit. Money is therefore a creature of law as the state defines the currency in which it accepts payments via its monetary system. In return, we accept the money because we need it for tax payments. Or because we know other people who need it for tax payments and would hand over goods and services or assets such as property or shares to us in exchange. So modern money is not a scarce resource. Under the gold standard, things were rather different. The fact that many of our economic-policy assumptions are still based on this old model of the gold standard is a self-imposed restriction that keeps us as a society from using all the economic-policy options at our disposal.

This means that the state, as the creator of money, puts the money into circulation in its own currency first in the form of tax credits before we use it to pay our taxes later. Although this understanding is fundamental, it supersedes the widespread view that tax payments fund state spending. In a modern monetary system, taxes are not needed to fund state spending. The state first spends money that it practically forces acceptance of through taxes. State spending is not technically limited here. In other words, the state can print as much money as it deems sensible. As it creates the money, it doesn’t rely on an income before it spends anything....
International Politics and Society
Modern Monetary Theory's promise
Dirk Ehnts | Lecturer at Bard College Berlin, research assistant at the Technical University of Chemnitz, and spokesperson of the board of Pufendorf-Gesellschaft eV in Berlin


AXEC / E.K-H said...

The right and the wrong way to bring money into the economy
Comment on Dirk Ehnts/Skender Fani on ‘Modern Monetary Theory’s promise’*

“Politicians seem ill-equipped to put scientific findings into practice.” says the MMT propagandist Dirk Ehnts. The problem is that MMT has no sound scientific foundations but is political agenda-pushing in the bluff package of science. Dirk Ehnts, for example, has not realized to this day that Keynesian macroeconomics is proto-scientific garbage.#1

The fact that economists, i.e. Walrasians, Keynesian, Marxians, Austrians, MMTers, lack the true scientific theory has never hindered them to give economic policy advice. Economists have always been a menace for their fellow citizens.#2

Dirk Ehnts repeats the MMT mantra: “The state is the originator of currency as it puts money into circulation through its spending. If we have to pay our taxes in euros, the state has to spend a sufficient amount beforehand. That is the only chance we have of getting the right amount of money.” This assertion is false because MMT’s macroeconomic foundations are false.

There are two ways to bring money into the economy (i) by financing the wage bill, and (ii), by deficit-spending.

To get economics right, it has to be consistently reconstructed from scratch.#3 As the correct analytical starting point, 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. For the graphical representation see Figure 1.#4

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, which is a generalized IOU, 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. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#5

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, 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 economy NEVER runs out of money. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.

As long as the central bank finances a growing wage bill with money creation out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/decreases according to (2) but there is NO inflation/deflation.

Obviously, this is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy by government deficit spending. This has an immediate effect on macroeconomic profit.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.

The complete Profit Law reads Qm=Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the Oligarchy.

Conclusion: MMT academics in general and Dirk Ehnts, in particular, are not scientists but political agenda pushers, i.e. Wall Street’s useful idiots.#6 Dirk Ehnts’s claim: “As a theoretical basis, Modern Monetary Theory provides a stable scientific foundation to underpin new political instruments and policy measures” is an empty promise. MMT is plain proto-scientific garbage.

Egmont Kakarot-Handtke

* International Politics and Society Modern Monetary Theory’s promise

#1 Keynesians ― terminally stupid or worse?

#2 Econogenics in action

#3 MMT and the canonical macroeconomic model

#4 Wikimedia AXEC31 Elementary production-consumption economy

#5 Wikimedia AXEC98 Idealized transaction pattern, household sector, balanced budget

#6 How counterfeiters save America with an extra profit and make WeThePeople pay for it