Clint Balinger — Endogenous money, MMT, Positive Money, & financial reform

Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions. 

There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:

Clint Balinger
Endogenous money, MMT, Positive Money, & financial reform

Philip Pilkington — The Theory of the Monetary Circuit: A Critique

In a series of comments on my previous post involving myself, Neil Wilson and Oliver it became clear quite quickly how closely my asset-pricing framework is tied up with the Post-Keynesian theory of endogenous money. Oliver suggested that I look into the Theory of Monetary Emissions (TME) — a forerunner of the modern ‘Circuitist school’ of monetary theory. In this post I consider how and why my approach differs from the Circuitist theory through a reading of Sergio Rossi’s excellent paper The Theory of Monetary Emissions which can be found in A Handbook of Alternative Monetary Economics.

I will not here deal with the theory of the monetary circuit itself. It is, in all respects, basically identical to the Post-Keynesian theory of endogenous money and can be summarised aptly in the phrase: loans create deposits. Where it departs from the latter is, and this will prove important in what follows, in its tendency to think primarily in terms of models — a tendency which readers of this blog will know I find objectionable. For me good theory starts from the ground up and the desire to build little models should take a back seat.

Fixing the Economists
The Theory of the Monetary Circuit: A Critique
Philip Pilkington
(h/t Clonal via email)

Joe Firestone — Lavoie's Critical Look at Modern Money Theory: A Reply

In October 2011 Marc Lavoie, a post-keynesian economist, very friendly to Modern Money Theory (MMT) wrote a paper presenting a friendly critical look at MMT. In his conclusion, Lavoie states that “. . . the neo-chartalist analysis is essentially correct . . . “ affirming his substantial agreement with MMT's analysis of banking operations and fiscal realities in nations with non-convertible fiat currencies, with floating exchange rates and no debts in currencies they do not issue, as well as MMT's analysis of Eurozone viability. But he goes on to say (p. 25):

“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”

So, Lavoie questions the wisdom of MMT economists and writers making certain counter-intuitive statements he perceives as certainly questionable, perhaps untrue, and also confusing to people, economists and decision makers trying to understand MMT writings. He considers these statements an important barrier to understanding, and he wants this 'baggage' to be discarded because he thinks it hurts MMT and post-keynesian efforts to get important new approaches to economics accepted.

Recently, Lavoie's work was used in a very vigorous and important discussion at Rodger Malcolm Mitchell's Monetary Sovereignty web site by a commenter named “Tom,” questioning some of Rodger's formulations and the statements of other commenters who defended theMMT and MS positions. I participated in the discussion, but also concluded that it would be more useful to write a more formal reply to answer Lavoie's question of what is gained by taking some of the positions MMT and MS writers often take. This is my reply.

Corrente
Lavoie's Critical Look at Modern Money Theory: A Reply
Joe Firestone

Cross-posted at New Economic Perspectives here.

Nathaniel Cline and Nathan Cedric Tankus — Fiscal Systems, Organizational Capacity, and Crisis: A Political Balance of Payments Approach

In the preface to the forthcoming Festschrift to Alain Parguez, Mosler argues that in the mid 1990s he thought, “the theory of the monetary circuit was correct to the point of being entirely beyond dispute”. However, he also argues that the theory “could be further enhanced by starting from the beginning”. This beginning for Mosler was of course why the workers accepted the units of a currency as payment for their labor services. His answer (which is quite well known among heterodox economists by now) was that imposed debts denominated in that unit of account, give it's units value; in other words taxes.

This is an important part of the story, but we would argue it is in fact not the beginning. The true beginning to the circuit is the question of where people and organizations gain the ability to tax.

INET
Fiscal Systems, Organizational Capacity, and Crisis: A Political Balance of Payments Approach
Nathaniel Cline and Nathan Cedric Tankus

Andrew Lainton — Optimum Taxation Policy and the Impact of Public Debt Under Modern Monetary Theory

This post was prompted by Tim Wortsall, of all peoples, post on whether progressive taxation makes sense a MMT world. In a sense he was right, and perhaps Randall Wray in response was not, the principles of taxation radically change in an MMT world as the overiding princple is how taxation can create inducements to restore full employment not how taxation can fairly fund public spending.

Decisions, Decisions, Decisions
Optimum Taxation Policy and the Impact of Public Debt Under Modern Monetary Theory
Andrew Lainton

Lord Keynes — Endogenous Money 101

Money is at the centre of all modern capitalist economies. Understanding its nature and origins is therefore of great importance. At the heart of Post Keynesian monetary theory is the idea of endogenous money.

This is opposed to the mainstream exogenous money supply theory: the idea that the central bank has direct control over the money supply and its growth. The latter theory is wrong, and I review that major points of endogenous money below.

Social Democracy For The 21St Century
Endogenous Money 101
Lord Keynes

Clint Balinger — Towards A Pure State Theory Of Money

MODERN MONETARY THEORY (MMT) notes correctly that money is a creature of the state, and that important macroeconomic and policy conclusions follow from this understanding, e.g., sovereign states are not revenue constrained and spending is primarily limited by inflation. Taxes give value to state money and maintain its value (i.e., inflation can be controlled through taxes).

One (among many) key policy insight is that a job guarantee is possible. A job guarantee not only achieves what many think should for myriad social reasons be a primary goal of macroeconomics but also further creates a buffer stock that achieves an additional primary macroeconomic policy goal – stability.

However, most of the world does not operate under pure state systems of money. Most of what serves as money in most banking systems in the world is privately created credit money.

We can compare the current most common banking system with a pure state system of money:....

Clint Balinger
Towards A Pure State Theory Of Money

Steve Keen — Production, Entropy and Monetary Macroeconomics (video)

Economics must be based on an energy theory of value. Here I explain how the laws of thermodynamics and production are consistent, and outline the kind of energy-entropy aware, monetary, multisectoral dynamic nonequilibrium model that economics needs.

Production, Entropy and Monetary Macroeconomics

Steve Keen

Steve Keen — MMT Convergence?

Neil Wilson recently posted A Double Entry View on the Keen Circuit Model

at 3spoken.

This elicited some excellent comments, including a couple of extensive contributions by JKH.

Keven Fathi emailed me that Steve Roth just posted at angry Bear that he regards Neil's post as The Most Important Econoblog Post This Year.

Congratulations, Neil, on moving this debate significantly forward.