Bill Mitchell — The provenance of the Job Guarantee concept in MMT

As the public scrutiny of the body of work we now refer to as Modern Monetary Theory (MMT) widens there is a lot of misinformation abroad that distorts or otherwise undermines what has been done to date. Most, but not all the misinformation or emphasis comes from those who attack our work. Their criticisms usually disclose an incomplete understanding of where MMT came from and what the core propositions and logic are. They stylise, usually using terms and constructs that are present in mainstream thinking, but inapplicable to an MMT way of thinking, and end up spitting out things like ‘printing money’ etc, which they think represents a devastating rejection of our work. As part of my own work, and I do this in liaison with Warren Mosler, I am interested in documenting the train of events that led to what we now call MMT. I love history and think it is very important in helping us understand things. So today I am continuing to examine archives to trace the provenance of key MMT concepts. And I am continuing to document the idea of a Job Guarantee, which is central to the MMT framework, despite many who claim to be MMTers thinking otherwise. I have noted in the recent press, claims that the origins of the buffer stock employment approach that became the Job Guarantee was the work of Hyman Minsky. Nothing could be further from the truth as you will see. It is important, in my view, to make the provenance very clear and that is what this blog post is about....

Essential reading (higher category than "must-read"). The MMT JG is probably the most misunderstood aspect of MMT. Hence, it is also the most mischaracterized.

It is a BUFFER STOCK (Bill Mitchell) based on an EMPLOYER OF LAST RESORT (Warren Mosler).

It is not Keynes. It is not Minsky. It did not come from Post Keynesianism. 

The BDE/ELR concept is original to MMT, being attributable initially to Mitchell and Mosler independently of each other. They worked out the together to put flesh on the bare bones. 

Randy Wray subsequently pointed out the similarity with Minsky, but the concept of a JG that Minsky proposed and the concept of the MMT JG are different.

The point is that:

1. The concept of a Job Guarantee that is now core MMT was entered into the discussion at that time by Warren Mosler (ELR) and myself (BSE). This was the provenance of the concept within MMT.

2. Minsky was never mentioned. Only his former PhD student, Randy Wray, once exposed to the BSE/ELR ideas, noted some overlap between the BSE/ELR approach and Minsky’s own, earlier ideas. But that was well into the PKT debate about the concept.

3. Anyone with knowledge of the history and the beginnings of the MMT work would not reasonably say that the reason that MMT considers a Job Guarantee to be an essential part of the body of work was due to anything that Hyman Minsky had written or said.
It is important to render history as accurately as we can.

This blog post is a key document of MMT on this matter. Bill is in the process of documenting the history of MMT, and I think it is safe to assume that this will eventually result in a formal document as an article or book. In the scholarly world, provenance is of the highest importance, and Bill documenting MMT history will be valuable in establishing priority. In the meanwhile, here it is.

Bill Mitchell – billy blog
The provenance of the Job Guarantee concept in MMT
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Minsky Explains Financial Instability — Michael Stevens

In this rare video from 1987 (there is very little surviving footage of Minsky discussing his work), Hyman Minsky summarizes his theory of the financial fragility at the heart of modern capitalist economies:

Multiplier Effect
Minsky Explains Financial Instability

Michael Stevens

Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy — Tracy Mott

A version of what Lawrence Summers and Anna Stansbury (2019) recently pointed to as “original” Keynesianism can be found in the work of Michał Kalecki and Hyman Minsky, Their work offers analysis of the determination of investment spending and effective demand which avoids the deficiencies found in the New Keynesian economics in which Summers and Stansbury find shortcomings. In the paragraphs below, I describe how their insights and those of other economists sharing their approach provide an answer to the questions with which Summers and Stansbury are grappling, and more....

Larry Summers awakens from his "dogmatic slumbers" (ht Emmanuel Kant on reading himself after reading David Hume).

Well, better late than never, but unfortunately not soon enough to avoid doing extensive damage.

Also, it doesn't seem that Professor Summers has gotten around to attribution yet. Or does he not even know of this previous work?

INET

Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy

Tracy Mott, Professor of Ecnomics (retired), University of Denver

Brian Romanchuk — Minsky Versus Steindl Debt Dynamics?

In Marc Lavoie's Post-Keynesian Economics: New Foundations, he has an interesting discussion in Section 6.10.4, which is labelled "Minsky or Steindl Debt Dynamics?" The Minsky dynamics are the well-known Financial Instability Hypothesis (link to primer), while the Steindl dynamics refers to the discussion in Maturity and Stagnation in American Capitalism by Josef Steindl. Lavoie's discussion raises some issues with the limitations of aggregated analysis in this context. This is a brief comment on this topic.…

In summary, we need to be cautious about putting too much emphasis on aggregate debt ratios as a shorthand for riskiness of borrowing.

Important for the topic itself but also as a demo of how care must be taken to include all the factors that are relevant to analysis. 

What appears to be a simple issue may be complicated by additional factors, or it may even be complex and therefore affected by emergence that can't be foreseen from the data. In a word, uncertainty rather than risk that can be projected by probability and statistics. 

This pertains to non-ergodic systems like social systems, and to a lesser degree biological systems, as evolutionary theory shows. The more psychology enters into the picture, the less ergodic the system.

Rules of thumb are just that and no more — heuristic rather than analytic.

Bond Economics
Minsky Versus Steindl Debt Dynamics?
Brian Romanchuk

Brian Romanchuk — Primer: Financial Instability Hypothesis (Part I)

The Financial Instability Hypothesis was associated with the economist Hyman Minsky, although it could be viewed as Minsky’s interpretation of Keynes. One summary of the concept is that stability is destabilising: economic stability leads to changes in behavioural changes that destabilise the economy….

Bond Economics
Primer: Financial Instability Hypothesis (Part I)
Brian Romanchuk

Wray, Dantas, Fullwiler, Tcherneva and Kelton — Public Service Employment-A Path To Full Employment

Now that MMT is going mainstream, the MMT version of a universal permanent job guarantee that pays a living wage is under scrutiny. Here is an April 2018 presentation on the MMT JG proposal by some of the American MMT economists that clarifies the MMT position.

Key government spending for public purpose falls into important categories, including 1) public service employment, 2) public investment and 3) public welfare (different from "welfare" as transfers). The first and second are about production, that is, generating supply, although some of the income involved also goes toward increasing consumption. The third is mostly about increasing consumption, that is, demand.

Public service employment involves increasing both production/supply through work and consumption/demand through incomes paid to workers. The argument is often heard that "government work" is not productive because "it doesn't make anything." That is to say, the output of work does not increase supply of consumer goods. This objection is rather irrelevant in a consumption-led economy where service work is predominant. Overall productivity is sufficient to meet demand. The increased demand would be supplied by increased investment to meet it.

Where the problem of a mismatch between supply and demand is likely to occur is in extending health care and education to all. This would require increased supply, which could be addressed through increased public investment. However, there could be supply bottlenecks in the interim from passage of the programs to scaled-up facilities.

National defense is another key category. Production and consumption resulting from this category are limited to the category itself. It diverts real resources that would otherwise be available to the economy to use for national security. The incomes involved increase consumption, that is, demand, in the economy.

A job guarantee doesn't exist in isolation from public policy as a whole and it needs to be discussed in  terms of the whole. This requires a public policy vision, which thus far seems to be lacking, or at least is inchoate and needs developing. This will require addressing tradeoffs. It is unlikely that the US can continue to the status quo and simply add desirable programs. Changes will be necessary, especially in incorporating a Green New Deal (GND). This has been inadequately addressed thus far. The GND is chiefly an engineering problem rather than an economic one, and it is international in scope since a global solution is required to address the emergent challenges.

Levy Institute
Public Service Employment-A Path To Full Employment (PDF)
L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton

Michael Roberts — MMT, Minsky, Marx and the money fetish

This is a good historical backgrounder and it should be read for that reason alone. But Michael Roberts also brings up other issues that follow upon this history that are relevant to the current debate, at least some of which that have been brought up previously in the comments here. Highly recommended.

As Maria Ivanova has shown, there remains a blind belief that the crisis-prone nature of the latter can be managed by means of ‘money artistry’, that is, by the manipulation of money, credit and (government) debt. Ivanova argues that the merits of a Marxian interpretation of the crisis surpass those of the Minskyan for at least two reasons. First, the structural causes of the Great Recession lie not in the financial sector but in the system of globalized production. Second, the belief that social problems have monetary or financial origins, and could be resolved by tinkering with money and financial institutions, is fundamentally flawed, for the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure “balanced” accumulation.

None of the ‘money fetish’ schemes have worked or will work to get the capitalist economy going. Instead such measures have just created financial bubbles to the benefit of the richest. That’s because these “tricks of circulation” are not based on the reality of the law of value.

Now that we are in the midst of a debate over capitalism and socialism, these issues are coming to the fore. Michael Roberts provides perspective from a Marxian POV.

We are going to hearing a lot of Marx as this debate unfolds and also learn about the rich history of socialist thought. Here is a quick reference on socialism.

Michael Roberts Blog
MMT, Minsky, Marx and the money fetish
Michael Roberts

Nina Banks — The Black Woman Economist Who Pioneered a Federal Jobs Guarantee

Decades before it caught on with other economists, Sadie Alexander was the first economist to recommend a government jobs guarantee in the US.…

Many contemporary economists have endorsed this idea, which is often credited to Hyman Minsky in the 1960’s[1]. But, its genesis actually begins two decades earlier, with Sadie Tanner Mossell Alexander, America’s first black economist.

Good to know. Like the fact that Aristotle wrote that money/currency (nomisma) is a creature of law (nomos).

INET
The Black Woman Economist Who Pioneered a Federal Jobs Guarantee
Nina Banks

Lars P. Syll — What is missing in Keynes’ General Theory

Hyman Minsky quote.

Lars P. Syll’s Blog
What is missing in Keynes’ General Theory
Lars P. Syll | Professor, Malmo University

Jerome H. Powell — The Federal Reserve's Framework for Monitoring Financial Stability

It is a pleasure to be back at the Economic Club of New York. I will begin by briefly reviewing the outlook for the economy, and then turn to a discussion of financial stability. My main subject today will be the profound transformation since the Global Financial Crisis in the Federal Reserve's approach to monitoring and addressing financial stability. Today marks the publication of the Board of Governors' first Financial Stability Report. Earlier this month, we published our first Supervision and Regulation Report. Together, these reports contain a wealth of information on our approach to financial stability and to financial regulation...

Mentions Hyman Minsky's view on financial instability.

Board of Governors, Federal Reserve
The Federal Reserve's Framework for Monitoring Financial Stability

Jerome H. Powell, Chairman

See also

To our thinking, Chair Powell’s speech was a stroke of genius. By easing the Fed’s public stance on rates, he puts all the responsibility for near term market direction on President Trump’s shoulders as he prepares to meet Chinese President Xi at the G20….

Zero Hedge
Why Powell's Speech Was "A Stroke Of Genius"

Nicholas Colas, DataTrek

Brian Romanchuk — Primer: Minsky's Financial Instability Hypothesis

The "Financial Instability Hypothesis" is a phrase describing the economist Hyman Minsky's views on the driver of the business cycle. The description here is based on the essays found in the book Can "It" Happen Again? Essays on Instability and Finance. The objective here is to capture highlights of his thinking, and not attempt to cover the breadth of his world view.

If the reader wishes to find a fuller description, I would recommend the essay "The Financial Instability Hypothesis: A Restatement" on pages 90-116. This article is a very high level overview of that summary article. At the end of this article, I will comment on some of the implications of the hypothesis....

Bond Economics
Primer: Minsky's Financial Instability Hypothesis
Brian Romanchuk

Diane Coyle — Finance, the state and innovation

Yesterday brought the launch of a new and revised edition of Doing Capitalism in the Innovation Economy by William Janeway. Anybody who read the first (2012) edition will recall the theme of the ‘three player game’ – market innovators, speculators and the state – informed by Keynes and Minsky as well as Janeway’s own experience combining an economics PhD with his experience shaping the world of venture capital investment.

The term refers to how the complicated interactions between government, providers of finance and capitalists drive technological innovation and economic growth. The overlapping institutions create an inherently fragile system, the book argues – and also a contingent one. Things can easily turn out differently.... 

Bingo.

The fundamental assumption of a free enterprise system ("capitalism") is that entrepreneurship drives innovation, which accelerates growth and overall prosperity.

Looking at the historical record, this is obviously true. But it is more complicated than that, and a lot things can go wrong if all the gears in the machine are not always in sync. History also shows that they are not as evidence by cycles, where all cycles are a combination of business (economic) and financial factors that are influenced by a number of contingencies in a dynamic environment, including policy and its application.

The Enlightened Economist

Finance, the state and innovation

Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

also

The problem I have with this type of reasoning is that assumes away contingency. Technological innovation land the creation of a consumer society through marketing and advertising lead to the creation of mass markets, which changed the dynamic in a way that models did not anticipate and likely could not have because the new technology that made this possible was emergent and foreseeable in advance.

I don't think that this vitiates Marx and Engels' approach, but rather strengthens the argument for the need for conceptual models that are based on "fuzzy logic" to complement formal modeling based on technically defined analytical concepts and precise measurement to delimit the boundaries of sets.

Contingency implies uncertainty. Uncertainty implies the need to use fuzzy logic rather than the strict formalization that conventional economics as "science" demands. Both are necessary tools, especially as scale increases — which is what the fallacy of composition is about. Macro is not and cannot be scaled up micro analysis.

Of course, what can be formalized usefully should be used. But not everything is capable of being modeled formally in a dynamic way when contingency is involved, and static models are mostly gadgets when cet. par. is assumed.

Michael Roberts Blog
The fallacy of composition and the law of profitability
Michael Roberts

James K. Galbraith — We Work

Jamie Galbraith recounts his transition from JG sceptic to JG advocate and the reasons for his change of mind.

The Baffler
We Work
James K. Galbraith | Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin

Kimberley Yoo — When Minsky Meets Complexity

Dissertation summary.

Progress in Political Economy

When Minsky Meets Complexity

Kimberley Yoo is a PhD candidate at the University of Sydney researching computational modeling and complexity theory.

Edward Harrison — Hyman Minsky And Asset Price Inflation Versus Consumer Price Inflation

Hyman Minsky’s financial theory of investment rests on a bifurcation of an economy’s price systems. On the one hand, there’s the price system for goods and services. And inflation here is what central banks look to hold in check. But at the same time, there is a wholly separate price system for assets. And it’s here where stability leads to asset price inflation, a build up in debt, instability, and, eventually, crisis.

Economics professor Randall Wray is a real Minsky scholar. He studied under Minsky at Washington University in St. Louis. And last year, he wrote a book “Why Minsky Matters: An Introduction to the Work of a Maverick Economist“. Here’s what Wray says about Minsky’s two price systems:

Credit Writedowns
Hyman Minsky And Asset Price Inflation Versus Consumer Price Inflation
Edward Harrison

Daniela Gabor — MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)

Recently, a colleague emailed with the following set of questions: ‘a balance sheet approach to defending currencies. Do you know literature that explains in detail the globally interlocking balance sheets between central banks, commercial banks and what happens when a national government has to defend its currency? What is the role of national and foreign reserves and how do they travel these balance sheets in the process of trying to defend a currency? I came back to this question when discussing the Swedish fight to defend the Dollar-pegged Krona in the early 90s and the promise of MMT? Most particularly we wondered to what extent national governments can just issue Krona and use them to buy foreign reserves or what sets the limits exactly to this attempt?' 

My MMT friends do have answers to these questions (and they do spend a lot of time defending MMT from critiques that it doesnt consider balance of payment constraints to monetary sovereignty). I thought I would answer these questions a la Minsky, with balance sheets, since that’s how I teach my undegrad students about exchange rate management in emerging/developing countries. I teach by setting those questions within the broader conversations about global liquidity, global financial cycles and Rey’s dilemma – independent monetary policy is only possible if countries manage capital flows (capital controls)....

Critical Macro Finance

MMT Meets Rey’s Dilemma: A Balance Sheet View Of Capital Flight (Coming Soon To An Em Country Near You)
Daniela Gabor | Professor of Economics and Macro-Finance, University of West England Bristol

Edward Harrison — Minsky’s financial instability hypothesis and the Fed’s reaction function

As the Federal Reserve meets today to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.

In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. As someone who used to work in debt capital markets and do financial models for private equity investing and corporate finance for mergers and acquisition, I find the Minsky analysis a huge benefit in thinking about the macroeconomy that standard macro modelling techniques don’t incorporate. So I want to use this as the prism through which to look at the Fed’s reaction function to predict future yield curve flattening and the resulting economic impact....

Randy Wray post follows.

Credit Writedowns
Minsky’s financial instability hypothesis and the Fed’s reaction function
Edward Harrison

David Nicklaus — China's worry about 'Minsky moment' may be a good sign

Randy Wray gets a mention.

St. Louts Post-Dispatch
Nicklaus: China's worry about 'Minsky moment' may be a good sign

David Nicklaus, business columnist for the St. Louis Post-Dispatch.

Reuters — China's central bank Anticipates a "Minsky moment."

Hyman Minsky goes to China.

China will fend off risks from excessive optimism that could lead to a "Minsky Moment", central bank governor Zhou Xiaochuan said on Thursday, adding that corporate debt levels are relatively high and household debt is rising too quickly.

A Minsky Moment is a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. The theory is named after economist Hyman Minsky....

"If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment," Zhou was speaking on the sidelines of China's 19th Communist Party congress.

"We should focus on preventing a dramatic adjustment," he said. China will control risks from sudden adjustments to asset bubbles and will seriously deal with disguised debt of local government financing vehicles, Zhou said....

CNBC

China's central bank just warned of a sudden collapse in asset prices

Reuters

Nick Johnson — Minsky on stagflation and the limits to state intervention

Minsky shows his Austrian side.

This sort of evolutionary view of the capitalist economy is admittedly not very Keynesian, and seems to go against much of Minsky’s writing. But Minsky did study under Joseph Schumpeter who coined the phrase ‘creative destruction’; some economists use this idea to legitimise the positive impact of economic cycles on the evolution of the economy, as productivity increases with the failure of weaker firms and the survival of stronger ones in a process of ongoing structural change.

The Political Economy of Development
Minsky on stagflation and the limits to state intervention
Nick Johnson