So-called Modern Monetary Theory Does not Qualify as Scientific Macroeconomics

 

1. Introductory

Scientific macroeconomics, if it is to be genuinely scientific, must not be contaminated by human psychology.  Gustav Kirchhoff’s laws of the electric circuit do not incorporate the psychology of the human who operates the levers or switches.  So, Lonergan, the scientist, strove to discover the purely relational, purely functional laws of the circuits of the objective economic process.

Unfortunately, many proponents of Modern Monetary Theory exhibit sentiments and inclinations favoring a totalitarian bureaucracy for the management of fiscal and monetary affairs. Their purported science contains some valid assertions, but is not a coherent set of objective laws to which participants must adapt, regardless of sentiment; rather MMT is an admixture of several ideological and psychopolitical sentiments transformed into a contaminated set of mandates for the management of fiscal and monetary affairs.  The tenets of MMT fail to constitute a fully explanatory theory of macroeconomic dynamics.

A genuinely scientific macroeconomic analysis must prescind from human psychology; however, MMT is blinded by a set of social values which obviate both the discovery of and the implementation of a purely functional and purely relational theory.

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situationOur aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

Indeed, economics seems little different from other areas of knowledge in its tendency to form closed schools of thought (i.e. Keynesian, Monetarist, Modern Monetarist, Marxist, etc.) This fragmentation into schools places political and other social values at the source of theoretical differences. [Michael Gibbons, Economic Theorizing in Lonergan and Keynes]

 MMT’s proponents do not understand what constitutes science and explanation in the form of terms related among themselves. (click here, and here, and here)

  • Lacking a scientific and explanatory heuristic, its proponents do not understand the role in science of insight yielding implicit definition of explanatory terms.
  • Lacking a scientific and explanatory heuristic, MMT fails to understand the system as dynamic and evolutionary rather than as static and subject to mysterious, unexplained sudden shifts.
  • MMT does not scientifically analyze the overall dynamic functioning as a system of interdependent, mutually defining, mutually conditioning, velocitous functional flows.
  • Consequently, MMT is not constructed upon precise analytic distinctions among terms of scientific and explanatory significance.
  • It naively attributes scientific, explanatory, and significance to nonexplanatory levels of unemployment and inflation.
  • It does not understand that, functionally, money is a dummy whose use is to be congruent with the network of the real productive process.
  • MMT does not constitute complete explanation; it does not sufficiently grasp a) the difference between real and relative vs. monetary and absolute price changes; b) the accelerative significance of point-to-line capital products; c) the theory of booms and slumps; d) the manipulation of the interest rate as double edged; e) that, for economic justification, new money should enter the system through the supply functions (S’ – s’O’) and ( S” – s’O”)
  • MMT makes an artificial distinction between the private sector and the government sector.
  • Because its treats money as a commodity rather than a dummy, MMT fails to treat government deficits and the fiscal aspects of the issuance of money as solidary.
  • In FMD’s explanatory schematic of a superposed circuit (CWL 15, 162-65, 173-76), MMT’s signs are the opposite of FMD’s; pluses are minuses and vice versa; the arrows run in the same direction as those of FMD’s superposed circuit but its categories of source and use, praise and blame, cause and effect, and responsibility and irresponsibility, are oppositely signed.
  • Rather than prescindng from human psychology, it transforms the ideological motives of its cohorts into the operational requirements of the system.
  • It ignores the requirement that the creation of new money must be “justified” by production of value.
  • It is insufficiently profound and nuanced; it is incapable of discovering a theoretic of phases of expansion; it is silent with respect to the functional cyclical requirements of price changes, quantity changes, and double-edged interest rate changes.
  • It conceives government as an independent and totalitarian third party rather than as a re-presentation of We-the-free-people. Management of productive and monetary affairs is according to ideological, totalitarian decree rather than according to the laws of the process.
  • Its so-called theory is founded upon its advocates’ faulty sense of their own omniscience and their psychological need to exercise totalitarian rule; their theory is a rationalization of an inner compulsion.

Consequently, MMT is unscientific and mistaken in its diagnoses and prescriptions.  Its ideological premises, psychological inclinations, and faulty precepts constitute an invitation to totalitarianism, and it constitutes a danger to the good of order.

Finally, once an empirical human science is developed sufficiently to be relevant to practical applications, there arises the supreme danger that the scientist will despair of human intelligence and reasonableness and will ambition the role of consultant in the policy-making of the ever more paternalistic state … the desertion of intelligent and reasonable solutions for ‘realist’ policies is the operative principle in the breakdown and the disintegration of civilizations. [CWL 3, 747]

We try to keep our presentation purely scientific, and, thus, to keep human psychology and politics out of the analysis.  But, we find it necessary to counter the politics of MMT.  For an orientation to scientific macroeconomics and for an introduction to Lonergan’s views on liberty relevant to MMT, we, first, encourage all proponents and opponents of MMT to review four pieces:

Also, since MMT is insufficiently nuanced and, thus, lacks a satisfactory understanding of the phases of an intrinsically-cyclical expansion, we refer all to sections §§26-29, and 31 in CWL 15.

  • The Cycle of Basic Income,
  • The Cycle of Pure Surplus Income,
  • The Cycle of the Aggregate Basic Price Spread, and
  • Deficit spending and Taxes

The discovery of general and universally-applicable laws and the preservation of human freedom were major concerns of Lonergan.  He sought universal laws which men themselves administrate in the personal conduct of their lives.

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons. To treat them as persons one must know and one must invite them to know.’ Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest. Instead, Lonergan envisaged a vast and long-term educational effort. He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]

Functional Macroeconomic Dynamics analyzes and relates the always-current functional interdependencies and mutual conditionings of both the shorter-phase dynamics and the longer-term dynamics of the intrinsically-cyclical economic process; FMD’s analysis is purely functional and purely relational.  MMT, on the other hand, focuses superficially, but exclusively, on simplistic tradeoffs between, unemployment and inflation, and thus it fails to come to grips with the relativity and variations within expansionary cycles of quantities, prices, types of incomes (antiegalitarian and egalitarian), saving and investing verily constituting the successive phases of expansions and contractions.

As prices are in themselves relative, insofar as they express demand, so also they must be interpreted relatively with regard to expansion and contraction.  When the prices both of iand jare falling, and i more than j, it may still be true that the production of both should be increasing, though with  production of j increasing more than the production ofi. For the fall of prices may be general and absolute, as such it will result not from a change in demand but from a failure in income distribution to adjust the rate of saving to the phase of the productive process; to allow such a general maladjustment to convert a basic expansion into a slump is to cut short the expansive cycle of the productive process because one has confused real and relative prices with monetary and absolute prices.  Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices; to allow them to stimulate production is to convert the surplus expansion into a boom.  This, I believe, is the fundamental lack of adaptation to the productive cycle that our economies have to overcome.  The problem, however, has many ramifications of which the most important is the relativity of the significance of profits. [CWL 15, 140]

MMT’s defective bureaucratic solution, with its ignorance of the distinctions and nuances of the economic process and its purely psychological premises and preference for a totalitarian central bureaucracy is dangerous.

The excellence of the exchange solution becomes even more evident when contrasted with the defects of a bureaucratic solution.  The bureaucrat … (gives the people) what he thinks is good for them, and he gives it in the measure he finds possible or convenient; nor can he do otherwise, for the brains of a bureaucrat are not equal to the task of thinking of everything; only the brains of all men together can even approximate to that. … when a limited liability company has served its day, it goes to bankruptcy court; but when bureaucrats take over power, they intend to stay. … when the pressure of terrorism (by the goons of the bureaucrats) is needed to oil the wheels of enterprise, then the immediate effect is either an explosion or else servile degeneracy. [CWL 21, 34-35]

… the materialist is condemned by his own principles to be no more than a manipulator. He will apply to human beings the stick-and-carrot treatment … . He will maintain with Marx that cultural attitudes are the byproduct of material conditions, and so he will bestow upon those subjected to communist power … clear and firm indoctrination, controlled media of information, (and) a vigilant secret police, … [CWL 15, 104]

There is a loud call for a new paradigm in macroeconomics. There is needed,

not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]

Keyenesianism is not a satisfactory answer, for Keynesianism cannot properly interpret the relationships between monetary events.

From Lonergan’s perspective, this failure truly to work out a new paradigm for economic science had an adverse effect upon Keynesian interpretation of the relationships between monetary events (such as government deficit spending, interest rates, credit volume, and the volume of the supply of money) and the determination of demand, not to mention other economic conditions. [CWL 15, Editors’ Introduction l]

As we will demonstrate, Modern Monetary Theory (MMT) does not merit the compliment connoted by the word “theory.”  MMT lacks a) an understanding of what constitutes science, b) a scientific heuristic, c) precise analytical distinctions at an adequate level of abstraction, d) explanatory basic terms, and e) a superstructure of coherent, explanatory formulae which would constitute a complete theory.  MMT fails to explain a) the intrinsic, double-circuited cyclicality requiring antiegalitarian and egalitarian shifts of incomes, b) the transitional dynamics of accelerating and tapering growth, having no necessity of contraction or decline, c) the series of unbalanced flows colloquially and superficially described as booms and slumps, d) the distinctions between real and relative vs. monetary and absolute changes in prices, e)  why the basic expansion, which would bring about full employment, fails to be implemented, f) the requirement respectively for antiegalitarian pure surplus income (capital expansion’s monetary correlate), in the surplus expansion, and for egalitarian basic income in the basic expansion in order to achieve and sustain full employment.

MMT’s proponents advocate the discretionary control of government spending and taxation, and of the expansion of the money supply by a totalitarian central bureaucracy, which lacks a reliable theory of macroeconomic dynamics by which to manage the fiscal and monetary affairs of the overall functioning of production and exchange.  And unfortunately, because most persons in government, journalism, and academia lack a satisfactory understanding of the economic process, MMT has received a lot of laudatory press and psychopolitical advocacy.

Our conclusions herein include that

  • Monetary policy should be based on a normative, scientific, macroeconomic theory.
  • Congress and the Executive re-present We-the-free-people. They are not a disinterested, omniscient, independent third party.  They are we, and we are they. And we are all responsible to one another to understand how the process works and, therefore, how it must be conducted.
  • The money supply should be increased in conformity to the requirements of the intrinsically-cyclical dynamics of any growing economy.
  • Whether new money is created by the printing press or by the granting of credit to an account through the Fed’s system of reserves and multiplier makes no difference, provided it is issued distributed conformably to the laws of the intrinsically-cyclical economic process.
  • The Fed lacks the tools to significantly effect full employment.
  • Money is a dummy invented by man to serve the economic process, not to rule the economic process.
  • The structure of the productive process itself is the primary analyzand. Flows of money are correlative to the productive process; i.e. payments flows are congruent with the network of the flows of production and sale.
  • The magnitudes and frequencies of turnovers are correlated with the magnitudes and frequencies of payments flows.
  • The relentless drift to a totalitarian central bureaucracy and the loss of freedoms suggested by MMT must be stanched by a) understanding, and b) the implementation of the basic expansion.
  • There is no automatic mechanism for adaptation to what should be the basic expansion and full employment.
  • Therefore, effecting higher basic incomes andfull employment by implementation of the basic expansion is the responsibility of enlightened and willing entrepreneurs.
  • Therefore,

the exchange economy is confronted with the dilemma either of eliminating itself by (totalitarian) suppression of the freedom of exchange or of certain classes of exchanges, or else of effectively augmenting the enlightenment of the enlightened self-interest that guides exchanges.   [CWL 15, 5-6],

Many have criticized MMT saying that its implementation would be a then-present cause of a future upward spiral of higher wages, higher prices, higher wages, etc., repeated as often as you will.   Our responsibility and purpose on this website is not to enter a psychopolitical fray by arguing the social merits  or demerits of particular government policies and programs, but rather to explain the economic process of production and exchange and, thus, to debunk MMT by Functional Macroeconomic Dynamics, an explanatory theory of functional equilibria and disequilibria.  We may criticize MMT for being shallow and incorrect, but we must not be shallow in return.

The subsections of this topic are as follows

  1. Introductory (the present section)
  2. Four Diagrams of explanatory, interdependent flows
  3. Key premises, principles, and laws of Functional Macroeconomic Dynamics
  4. Modern Monetary Theory’s totalitarian premises, tenets, and goals
  5. FMD agrees with MMT
  6. FMD disagrees with MMT
  7. Implementation of the basic expansion is necessary to achieve full employment
  8. The nature of money and the expansion of credit
  9. Nuances and interpretations of price changes
  10. Nuances and interpretations of the double-edged manipulation of interest rates
  11. Further excerpts and comments …
  12. How additional money should enter the expanding economic process
  13. Historical research into what goes wrong;  Documentary or fantasy; Four countries?
  14. A normative theoretical framework is required
  15. The entire populace is responsible
  16. Elsewhere on this website
  17. Paul Krugman re MMT
  18. Lonergan Marx and Liberty
  19. Totalitarianism
  20. Politics and Political Economy
  21. Economics
  22. The Incompetence of a Central Bureaucracy
  23. Self Enlightenment
  24. Appendix: Alignment of the phases of expansion

2. Four Diagrams of Interdependent flows:

We advert, first, to four diagrams, which represent the relationships constituting the theory called Functional Macroeconomic Dynamics. These relationships capture and explain the always-current, functional interdependencies of the objective economic process.  The first diagram is the familiar Baseball Diamond which explains how the operative circuits relate to one another and to the banking system.  The second to fourth diagrams regard the fiscal deficit in the explanatory perspective of a superposed circuit.  All four diagrams, representing a coherent set of equations isomorphic with the functionings of the process, explain; they are of explanatory significance.  But, unfortunately, none of the diagrams is within the ken of  Modern Monetary Theory as it overlooks the differentiations, nuances, and normative precepts of Functional Macroeconomic Dynamics’ theory of equilibria and disequilibria.

Note in the following two excerpts that there are no politics.  Lonergan’s analysis prescinds from human psychology and constitutes scientific explanation.

Deficit spending arises when government expenditure exceeds its revenues.  It may be represented by payments made to the circuits from the redistributional area in excess of payments made from the circuits to the redistributional area. [CWL 15, 173-74]

In each of these cases the balance of the circuits is upset  In the former case (Z”-T”)>(Z’-T’), the basic circuit is being drained of funds while the surplus circuit is invited to expand or inflate or deposit in excess in the redistributional area.  In the latter case, (Z”-T”)<(Z’-T’), the surplus circuit is being drained of funds while the basic circuit is invited to expand or inflate or enter the redistributional market. [CWL 174-75]

 The Appendix to this topic will invite the reader to copy certain diagrams and align them in accord with the phases of the long-term expansion, so that the reader will understand the required shifts in incomes, savings, and consumption, which culminate in a successful basic expansion and a higher static phase featuring full employment, stable monetary values, and a higher standard of living for all..

Below are

  • Figure 14-1: Diagram of Rates of Flowhaving the Redistributive Function, as it were, outside the operative circuits [CWL 15, 55]
  • Figure 29-1: Diagram of Superposed Circuits [CWL 15, 164]
  • Figure 31-1: Diagram of Government Spending and Taxes [CWL 15, 174]
  • A simple diagram containing only the channels of a superposed circuit in order to show clearly a) the absence of the c’O’ and c”O” connectors of outlays and incomes, and b) the Redistributive Function as a regular stop in the circulation of money.

 Diagram of Rates of Flow 2

A scientific understanding of the dynamic process, formulated in relationships represented by the diagrams above, will yield a normative theory explaining both how a system should work and how disequilibria systematically necessitate systematic corrections.  The normative theory of Functional Macroeconomic Dynamics provides plain precepts for entrepreneurs, households, consumers, commercial and investment banks, central banks, government, risk-takers, investors, organizers, and doers.

3. Key premises, principles, and laws of Functional Macroeconomic Dynamics

We list some key premises, principles, and laws, of Functional Macroeconomic Dynamics, primarily selected and arranged so as to be contrasted to elements of so-called Modern Monetary Theory:

  • The process of production and exchange is always the current, purely dynamic process. It is dynamic, and its analysis must be in terms of velocities and accelerations.
  • Analysis of the overall functioning is based upon precise analytic functional distinctions of scientific, explanatory significance; thus the analysis is purely functional and of purely functional relations.
  • The structural dynamics of the productive process is the primary analyzand.
  • Money is an instrument invented by man to make possible a large and intricate exchange process. … invented to serve the objective process and the social good.[CWL 21, 104]
  • Money is a dummy; money is not a commodity owned and controlled by a totally independent, fictional third party called “government”
  • The analysis is purely relational. It is not a deduction from absolute truths.  Its immanent intelligibility will be a field theory, a scientific relating of a number of things among themselves.
  • Products of distinct, but interdependent, functional types must be defined purely relationally with respect to their quantity, timing, and accelerative or accelerated effect.And the flows of payments correlated with the flows of these products must be related to the flows of products with respect to both magnitude and frequency.
  • The price changes of products themselves must be understood as either real and relative or monetary and absolute.
  • The projection, or mapping, of the accelerative and lagged structure of the productive process onto payments yields the intelligible, normative, and necessary pattern of cyclical, wavelike payments to be formulated in a circulation analysis; i.e. classes of payments flows are correlated with the structure of the classes of product flows.Expanding circular and crossover payments flows meet lagged and expansionary products flows.
  • Thus, payments are congruent with the network of the process of production and sale.
  • The productive process is a multi-level process with a surge on a lower level waiting for and then succeeding the surge on the next higher level. Thus, the process exhibits a serial pattern of successive surges  and taperings; and it is, therefore, intrinsically cyclical and purely dynamic.
  • The phases of the process are called the static phase, the proportionate phase, the surplus phase, the basic phase and the higher static phase.
  • In an expansion, the increase of the surplus process is an acceleration lag.
  • Again, money is an instrument invented by man to make possible a large and intricate exchange process. … invented to serve the objective process and the social good. [CWL 21, 104]
  • And again, money is a dummy; money is not a commodity owned and controlled by a totally independent, fictional third party called “government”
  • The laws and principles of scientific macroeconomics are general and universally applicable in all political systems.In the U.S., the government is We-the-free-people collectively, not an independent, autonomous, totalitarian, third party; it is elected by us to re-present us.  We count on it to regulate us responsibly, but it does not rule us in any totalitarian manner.  On the other hand, We-the-people are responsible for understanding and acting according to the precepts yielded by Functional Macroeconomic Dynamics.
  • Real analysis identifies the dummy money with what the dummy money buys. This dummy, invented by man, enables divided exchange and lubricates the real production and sale of goods and services
  • Money should have a constant exchange value. It should be a store of value having constant purchasing power.
  • Inflation and deflation swindle elements of the populace [CWL 21, 37-38]
  • The function of credit is to bridge the gap between payments made and payments to be received for legitimately productive purposes; loan outflows must have good prospects of return inflows; high credit standards should be maintained.
  • The normative interest rate is endogenous.It is a formulation of internal relationships based upon technical relationships.  It will vary depending on the money supply and on the opportunities for investment.  It varies with the prospects and requirements of the distinct phases of an intrinsically-cyclical economic process.
  • Today’s low or high market interest rate may, or may not, equal the internal normative interest rate. It too will vary; it is not an absolute, exogenously-given, fixed-forever, rate.  A government will not experience existing low rates, or suffer from existing high rates, forever.
  • It is the responsibility of issuing entities, which create and lend the dummy money, a) to understand Functional Macroeconomic Dynamics, b) to be reasonably admonitory to their customers, c) to enforce strict lending standards, and d) to issue only so much credit as is required for equilibrated functionings, i.e. to issue only so much credit as is economically justified by the production it finances in the current phase of the process,
  • Thus, the issuing entity is responsible for a) providing enough money to the system to enable efficient transacting without menacing the financial system, b) preserving the store of exchange value, and c) supervising the always-vital banking system so that that issuing entity does not cripple or destroy the monetary system and the entire economic process by excessive lending, or by seeding inevitable defaults and eventual collapse.
  • The private-sector-government combination– We-the-free-people as a group of individuals and as a represented collective; not the Central Bank or an independent, central, totalitarian, third-party bureaucracy alone – is responsible for full employment and for the shifts in incomes systematically required for strong employment in the phases of the expansion per

I’ = Σwiniyi   (35) [CWL 15, 134], and

dI’ = Σ(widni+ nidwi)yi(36) [CWL 15, 134].  [1]

(click here)

  • In particular, the free private sector and its elected re-presentatives, not the Fed and not a totalitarian central bureaucracy, bear primary responsibility for implementation of the basic expansion , which provides full employment.  The private sector, especially, must honor the precepts for the preservation of full employment, and seek the general well being.
  • The economic process blunders into booms and successor slumps because there is no automatic mechanism effecting the implementation of the basic expansion. It can be effected only by intelligent, willing, enlightened free people.  And, as yet, We-the-people are not willing and enlightened free people.
  • A detached central bureaucracy of few people has neither the experience nor the brains to understand what is required in the nooks and crannies of the process. Only the brains of all persons existing dispersed in the trenches of operation of private industry and commerce have a shot at making intelligent decisions and doing things right. [CWL 21, 34-35]
  • Money is a promise to pay and a store of value and, thus, requires trust between parties that neither is swindling the other by defective goods, debased currency, or deceitful promises.
  • Inflation and deflation are avoided by proportionate flows of products and payments in the same interval.
  • Excess borrowing – whether by a) We-the-people-collectively called the government, or b) an aggregate of us-irresponsible-individuals-in-the-housing-market prior to 2008 – systematically generates inflationary booms followed by deflationary crises easily explained by a superposed circuit in a functional framework. [CWL 15, 162-65, 173-76]
  • Dummy money is justified by actual production and sale of goods and services. “the work for money to do is to move, say, wheat from the western plains to the householder’s table” [CWL 21, 61-62]
  • Expansionary money should enter the economic process from the Redistributive Function to the Supply Function, so that the new money is validated and justified by real production and enhanced benefits effected by free people in the objective economic process of production and exchange.
  • Excess transfers of money from the Redistributive Function to a Demand Function –whether to basic demand or surplus demand – are intrinsically inflationary and belong to the Theory of Booms and Slumps [CWL 15, 64]
  • Key questions to the participants in the economic process are:
  1. Whether lending to finance wristwatch, car, house, or large government-run program, are there good prospects of justifying value in return? Will there result a widespread enhanced standard of living, or is it likely that the money will, a) first, support boondoggles providing little of justifying value, then b) circulate into the basic demand function to result initially in much more money chasing fewer offerings, then c) cause the swindle of rampant inflation, d) consequently, induce higher risk-adjusted interest rates triggering some degree of financial chaos, and then e) induce an ignorance-based depression consisting of contractions, liquidations, unemployment, collapse of markets, expropriations, and other misery?
  2. Can we manage the productive and monetary orders of the overall functioning so that both private and government sector activities are conducted within the confines of a balanced and equilibrated system of justified outflows and justified inflows?
  3. Will the intelligent risk-takers, organizers, and doers of private enterprise a) achieve an enlightened self-interest, and b) not misinterpret the natural inflation in the surplus expansion as a signal to invest beyond bounds, and c) effect the necessary egalitarian shift of income required to properly implement the successful basic expansion? [CWL 15, 133-44]
  4. Will macroeconomists, government officials, monetary authorities, and entrepreneurs gain the enlightenment provided by Functional Macroeconomic Dynamics?

The failure to understand the process’s interdependencies prompts careless, nonscientific, nonrelating minds to advocate and promote disequilibrating policies and programs whose economic consequences would eventually and ineluctably summon forth the ignorant totalitarian demagogue with his prison camps and purges. (demagogue – a leader who makes use of popular prejudices and false claims and promises in order to gain power)

The drift to totalitarianism can be stopped only in the measure that human scientists work out intelligent and reasonable solutions to human problems and theologians succeed in convincing hard-headed practical men, on the one hand, that by God’s grace intelligent and reasonable solutions can work and, on the other hand, that the desertion of intelligent and reasonable solutions for ‘realist’ policies is the operative principle in the breakdown and disintegration of civilizations. [CWL 3, 747/768]

4. MMT’s totalitarian premises, tenets and goals

For this list we have relied heavily on “Modern Monetary Theory” in Wikipedia: https://en.wikipedia.org/wiki/Modern_Monetary_Theory as listed in our Bibliography (see Table of Topics > Bibliography on our Home Page) and on The Nature, Origins, and Role of Money:  Broad and Specific Propositions and Their Implications for Policy by Pavlina Tcherneva, July, 2005. https://www.google.com/search?client=safari&rls=en&q=%E2%80%9CThe+Nature,+Origins,+and+Role+of+Money:+Broad+and+Specific+Propositions+and+Their+Implications+for+Policy,%E2%80%9D+Working+Paper+46,+Center+for+Full+Employment+and+Price+Stability,+Kansas+City,+MO,+July+2005.&ie=UTF-8&oe=UTF-8

Note as one reads that we do not agree with all of the principles and priorities in this list.

  • The central bureaucracy is an independent third party having totalitarian control over fiscal operations and the issuance of money
  • Full employment is the primary objective of the totalitarian central bureaucracy.
  • This totalitarian third party – however composed of some combination of government mint, Treasury, and Central Bank – is solely responsible for full employment.
  • The central bureaucracy need never default on debt denominated in its own currency because it can always pay its bills and redeem its bonds by simply printing the money needed.
  • Along with full employment, a major goal of the totalitarian fiscal authorities is to provide all social services it deems worthwhile by printing any amount of money or incurring any level of debt deemed necessary.
  • If full employment requires it, the government is empowered to provide a guaranteed job to everyone and distribute the necessary “compensation” despite possible unfavorable inflationary consequences.
  • Per MMT’s simplistic tenets, inflation can occur only in a situation of full employment, and therefore, inflation is, by itself, a perfectly reliable sign that full employment has been successfully achieved.
  • Money is put into circulation by the independent, totalitarian third-party. In MMT’s accounting and reckoning, money in circulation has been gifted as a financial asset by the totalitarian government; it is an account receivable by the government and an account payable by the private sector; therefore, it may be taken back at the government’s discretion either by a) direct and immediate taxes or by b) bonds, which were first issued (as a gifted asset) associated with government expenditures, but will be called to be sold as dictated so as to pay taxes and/or reduce inflation.
  • Money is to be regarded as a commodity owned and controlled by the totalitarian central bureaucracy to manage the tradeoff between inflation and unemployment.It is not to be regarded as a dummy invented by man to serve the objective, intrinsically-cyclical, process of production and exchange.
  • In contrast to the Fed’s monetary policy tools of a) fixing overnight interest rates, b) adjusting the money supply and interest rates by creating money through open-market operations, and c) regulating bank reserve requirements and lending limits, the central bureaucracy’s monetary policy tools are a) incurring deficit or surplus, b) the simple printing and distributing of money, and c) taxation.
  • Thus, a fiscal deficit is viewed as not to finance government operations, but rather as a policy tool used primarily to regulate unemployment and inflation.
  • The central bureaucracy assumes for itself sole responsibility for correcting unemployment, other social ills, and inflation because it psychologizes itself as omniscient, having more effective tools than the Fed, and able to use them more wisely.
  • In other words, MMT emphasizes that a bond is not so much an IOU for money used for central bureaucratic operations; it is a UOMe-taxes from the benefit accruing to you of my wise and fruitful investment in full employment and social services As a song goes and as the central bureaucracy would sing, Everything I do, I do it for you.
  • Under the permissiveness of MMT, there are no firm rules, guidelines, reins or constraints governing the government’s running a deficit with the money it printed to effect its deficit. Despite the Phillips Curve’s failure to explain stagflation, unemployment and inflation are satisfactory indexes for all decisions for management of the economic process.

Note in the following the quotation marks around excerpts from Modern Monetary Theory in Wikipedia and The Nature, Origins, and Role of Money… in Tcherneva, 2005.  We recommend that the reader study pages 3, 4, and 14-21 in Tcherneva, 2005.

  • (10) “MMT emphasizes that governments create central bank reserves when they run budget deficits and expunge those reserves when they issue debt securities.” … bank credit should be regarded as a “leverage” of the monetary base … only the government or central bank is able to issue high-powered money with no corresponding liability.”  [MMT, 2019, page 10]
  • “Under MMT, fiscal policy (i.e. the government taxing and spending decisions) is the primary means of achieving full employment, establishing the budget deficit at the level necessary to reach that goal.” [MMT, 2019, page 13]
  • “raising (interest) rates is a form of stimulus (because it injects money into the private sector by increasing the budget deficit, other things equal), while cutting rates is a form of austerity. [MMT, 2019, page 13-14]
  • “The private sector treats labor as a cost to be minimized, so it cannot be expected to achieve full employment without government creating jobs as well, such as through a job guarantee.” [MMT, 2019, page 14]
  • Therefore, a job guarantee for any and all is substituted for a required, but limited, unemployment insurance
  • While it is desirable that the budget be balanced by tax inflows equaling spending outflows, it is not necessary if the government chooses to print and distribute money at will, resulting in an annual deficit adding to the cumulative government debt.
  • “The appropriate context for the study of money is cultural and institutional, with special emphasis on social and political considerations.” [Tcherneva, 2005, 3]
  • “The purpose of taxation is not to finance government spending but to create demand for currency – hence the term “tax-driven money.” [Tcherneva, 2005, 3]
  • “Logically, and in practice, government spending comes priorto taxation, to provide that which is necessary to pay taxes.” [Tcherneva, 2005, 3]
  • “States with sovereign control over their currencies (i.e. which do not operate under the restrictions of fixed exchange rates, dollarization, monetary unions or currency boards) do not face any operationalfinancial constraints (although they may face political constraints).” [Tcherneva, 2005, 4]
  • “Nations that issue their own currency have no imperative to borrow or tax to finance spending. While taxes create demand for currency, borrowing is an ex anteinterest rate maintenance operation.  This leads to dramatically different policy conclusions.” [Tcherneva, 2005, 4]
  • “Government spending in sovereign currency systems is not limited to the ability of the state to “raise” revenue. In fact, as it will be explained below, sovereign governments face no operational financial constraints.” [Tcherneva, 2005, 14]
  • “To fully grasp the logic of sovereign financing, one must make the analytic distinction between government and non-government sectors.For the private sector, spending is indeed restricted by its capacity to earn revenue or borrow.  This is not the case for the public sector, which ‘finances’ its expenditures in its own money.  This is a reflection of its single supplier (monopoly) status  For example, in the United states,  the dollar is not a ‘limited resource of the government’ (Mosler 1997-98: p. 169)  Rather it is a tax credit to the population, which is confronted with a dollar-denominated tax liability.  Thus, government spending provides to the population that which is necessary to pay taxes (dollars).  The government need not collect taxes in order to spend; rather it is the private sector, which must earn dollars to settle its tax debt.  The consolidated government (including the Treasury and the Central Bank) is never revenue-constrained in its own currency.” [Tcherneva, 2005, 14]
  • “If the purpose of taxation is to create demand for state money, then logically and operationally, tax collections cannot occur before the government has provided that which it demands for payment of taxes.In other words, spending comes first and taxation follows later.  Another way of seeing this causality is to say that government spending ‘finances’ private sector ‘tax payments’ and not vice versa.“ [Tcherneva, 2005, 15]
  • “Borrowing, like taxation, does not fund government spending. Rather bond sales are monetary operations to hit the target interest rate, notfiscal operations to finance.  Borrowing allowsthe private sector to earn interest on hoards.  In reality, because of the reserve effect of deficit spending on interest rates, borrowing is necessaryto maintain interest rates. [Tcherneva, 2005, 17]
  • “All of the above completely reverses conventional wisdom. Governments do not need the public’s money to spend; rather the public needs the government’s money to pay taxes.” [Tcherneva, 2005, 17]
  • “… bond sales are necessary to drain excess reserves generated by fiscal operations in order to maintain a positive interest rate.” [Tcherneva, 2005, 17]
  • “Neither taxes nor bond sales serve a financing purpose; the former generate demand for the currency and the latter are needed to hit interest rate targets, and thus government spending is not operationally constrained by either.” [Tcherneva, 2005, 17]
  • “As Innes stressed: ‘A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it’ (1914: p. 161)” [Tcherneva, 2005, 18]
  • “What this means is that the state as a monopoly supplier of HPM (high powered money) has the power to exogenously set the price at which it will provide HPM, i.e. the price at which it buys assets, goods and services from the private sector. … As it will be discussed later, Chartalists recognize that the money monopolist need only set oneprice to anchor the value of its currency. [Tcherneva, 2005, 18]
  • For Chartalists it is not necessary to use unemployment to fight inflation. Rather they advance a full employment policy in which the state exogenously sets one important price in the economy, which in turn serves as stabilizing anchor for all other prices (Wray 1998: pp. 3-10).  This proposal rests on the recognition that the state does not face operational financial constraints, that unemployment is a result of restricting the issue of the currency, and that the state can exercise exogenous pricing.” [Tcherneva, 2005, 19]
  • “After disclosing the nature of government finance, Chartalists argue that governmentscanand shouldimplement ‘functional finance’. The latter was proposed by Abba Lerner, who vigorously objected to any conventional ideas about what constitutes ‘sound’ finance. … Functional finance can be subsumed under the Chartalist approach, because it appropriately recognizes money as a creature of the state and attributes two important policy roles to government.  Lerner argued that the state by virtue of its discretionary power to create and destroy money, has the obligation to keep its spending at a rate that maintains 1) the value of the currency and 2) the full employment level of demand for current output (Lerner 1947).” [Tcherneva, 2005, 20]
  • Lerner proposed two principles of functional finance, which inform decisions on the requisite amount of government spending and the manner of financing it. More specifically, the first principle provides that total government spending should be neither greater nor less than that rate which the current prices would buy all the goods that it is possible to produce’ (Lerner 1943: p. 39). Spending below this level results in unemployment, while spending above it causes inflation.  The goal is to keep spending always at the ‘right’ level in order to ensure full employment and price stability.  The second principle states that government spending should be ‘financed’ through the issue of new currency.  This second ‘law’ of functional finance is based on Lerner’s recognition that taxation does not finance spending but instead reduces private sector money hoards (ibid.: pp. 40-41).” [Tcherneva, 2005, 20]
  • “Furthermore, it is argued that ELR (Employer of Last Resort) enhances price stability because of its buffer stock mechanism (Mitchell 1998). In a nutshell, when recessions hit, jobless workers find employment in the public sector at the ELR wage.  Total government spending rises to relieve deflationary pressures.  Alternatively, when the economy heats up and non-government demand for labor increases, ELR workers are hired into private sector jobs at a premium over the ELR wage.  Government spending automatically contracts, relieving the inflationary pressures in the economy.  Thus public sector employment acts as a buffer stock that shrinks and expands counter-cyclically.  This buffer stock mechanism ensures that government spending is (as Lerner instructed) always at the ‘right’ level. … this proposal innovatively suggests that full employment can anchor the value of the currency (quite contrary to the conventional belief that unemployment is necessary to curb inflation).  The ELR proposal utilizes the logical extensions of chartal money to achieve the two goals of government – the elimination of unemployment and the stabilization of prices.” [Tcherneva, 2005, 21]
  • “The ELR/Buffer Stock approach recognizes that
  1. The government is the only institution that can divorce ‘the offer of labor from the profitability of hiring workers’ (Minsky 1986: p. 308) and can thus provide an infinitely elastic demand for labor, without concerns about financing.
  2. The government can formulate an anchor for the value of its currency by exogenously fixing the wage of ELR workers.” [Tcherneva, 2005, 21]

5. FMD agrees with MMT

  • Full employment is an important goal of good self-government.
  • For a safety net to those in need, money should be circulated as transfer payments back by taxation into the redistributive function and back out of the Redistributive Function as support payments.
  • A balanced budget is an important goal of good self-government.
  • Avoiding inflation is an important goal of good self-government.

The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

  • As the superposed circuits explain, an increase in the money supply is the monetary correlate of a fiscal deficit; the deficit can be explained as an increase of the financial assets of nongovernment participants. Refer to Figure 31-1, Diagram of Government Spending and Taxes, CWL 15, 174

Government (deficit) spending is simple.  In each interval Z’ is spent at the basic final market for any type of goods or services that have no tendency to accelerate the productive process, while Z” is spent at the surplus final market for goods and services with that tendency.  There results a corresponding increment in income (to entrepreneurs) which, as it has nothing to buy at either final market, is counted as surplus and is moved to the Redistributive Function where directly or indirectly it purchases government securities.  Thus in each interval, labor, land, and capital are providing Z’ + Z” of goods and services.  Those who do the required monetary saving are built into a solid and richly endowed rentier class at the rate Z’ + Z” per interval.  The community possesses the goods and services but, unless it is going into business deliberately, their productive value will be slight. Finally, the public debt mounts by the same rate, Z’ + Z” per interval. [CWL 15, 176]

Now I have been looking at the dynamic structure of the industrial exchange economy…I beg to note that such an analysis has not been tried and found wanting.  Rather … it has been thought hard and not tried.  What has been tried is roughly as follows: … 4.) the welfare state with its substitutes for a properly functioning basic phase and with its crumbling foundations in economic science, [CWL 15,  95-96]

  • The Fed does not have satisfactory tools to directly effect the egalitarian shifts of incomes required for the implementation of the basic expansion so as to reach full employment.

The purpose of this section is to inquire into the manner in which the rate of saving Wis adjusted to the phases of the pure cycle of the productive process. Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior tochanging interest rates and more effective.  [CWL 15, 133]

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

The difficulty with (traditional) theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15,  141-144]

[1]  Lonergan formulates the adjustment of incomes as “migrations” between strata of incomes.[1]  We quote at length:

The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. … The simplest manner of attaining a fairly adequate concept of basic income is to divide the economic community into an extremely large number of groups of practically equal income. … In any group i let there be at any given time nimembers; let each member receive an aggregate (basic and surplus) income yiper interval, so that the whole group receives niyi; finally,let us say that the group directs the fraction wiof its total income to the basic demand function, so that basic income per interval is given by the equation

I’ = Σwiniyi

… and so one obtains for the increment per interval of basic income the simpler equation

δI’ = Σ (wiδni+ niδwi)yi

where niincludes the adjustment due to migration.  We shall consider in turn variations in basic income in virtue of  δniand variations in virtue of δwi . … Hence, in migrations from low to less-low income groups, most of the increment of individual total income becomes an increment of basic income; but in migrations fro high to still higher income groups, most of the increment of individual total income becomes an increment of surplus income. Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving. To increase the rate of saving, increase the income of the rich; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  To decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction.  (price changes) [CWL 15, 133-134]

6. FMD disagrees with MMT

So-called Modern Monetary Theory exhibits at least three major flaws:  First, MMT makes a false distinction between the government sector and the private sector.  The government’s incurrence of a national deficit and a cumulative debt, and its administration of the money supply, do not constitute it as a separate functional sector.  Rather the private sector is we functioning individually, and the government sector is we functioning collectively through representatives.  Both the government sector and the private sector perform the same functions:  we invest and consume; we provide goods and services; we operate in the point-to-point circuit and in the point-to-line circuit.  And the productive and monetary functionings themselves are indifferent as to our identity.

Second, MMT is not a theory of economic dynamics.  The proponents of MMT do not understand that science explains phenomena by the formulation of terms which implicitly define one another; in the formulation, the terms define the relations and the relations define the terms, and insight fixes both; and the patterns in the explanatory formulation must be isomorphic with the patterns in the data under investigation. The terms explaining the dynamic economic process, therefore, are interdependent, mutually defining, and mutually conditioning; and, as velocities, they are implicitly defined by the functional relations in which they stand with other velocities.  That is, in the economic process, which may be viewed for understanding as an overall dynamic functioning, the explanatory terms will represent the interdependent, mutually defining, mutually conditioning,dynamical (velocitous and accelerative) functionings. Neither commonsense descriptive accounting categories nor nondynamic, static statistics in isolation – such as historical unemployment or inflation– are adequate dynamical indices by which to explain an intrinsically cyclical, dynamic, economic process.

Third, MMT regards money as a commodity owned and controlled by the government, but which may be temporarily hoarded, then taxed, rather than a dummy invented by man to overcome the friction of barter in the vast and intricate modern process of production and exchange.

A distinction has been drawn between description and explanation.  Description deals with things as related to us. Explanation deals with the same things as related among themselves.  … description and explanation envisage things in fundamentally different manners.  The relations of things among themselves are, in general, a different field from the relations of things to us. … The scientist selects the relations of things to us that lead more directly to knowledge of the relations of things among themselves.  Ordinary description is free from this ulterior preoccupation. [CWL 3, 291-92/316-17]

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situationOur aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

Need the moral be repeated?  There exist two circuits, each with its own final market.  The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay.  But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. [CWL 15, 175]

  • MMT would have us believe that an increase in the money supply via government deficits is a magic lever. It would drive activity higher, which would reduce unemployment.  Not necessarily.  First, in and of itself, the dummy money is neither animated nor intelligent, nor charismatic.  It is neither a genie magician nor a magic wand.  As the existence of the Redistributive Function in the Diagram of Rates of Flow shows, the increase of money might eventually get directed out of the operative circuits into the secondary markets for previously-issued stocks, bonds, high-end real estate, and works of art; thus, an increase in the money supply might at least serve only to increase static wealth and to cause a bifurcation of purchasing power in the basic circuit vs. the inflated secondary markets.
  • MMT overlooks the vital contributions in the c’O’and c”O”channels of the Diagram of Rates of Flow, and it changes the minus sign of failure to the plus sign of achievement. It (and Keynes) changes the name of the deficit and calls it a stimulus. It contends that the only way for new money to enter the economic process is through fiscal spending through the demand functions (D’-s’I’) and (D”-s”I”).  But as is clear from insight into the Diagram of Rates of Flow (CWL 15, 55) and the Diagram of Superposed Circuits (CWL 15, 164), the proper way for new money to enter is through credit to the supply functions (S’ – s’O’) and (S” – s”O”), which would “justify” this creation of new money by the production of goods and services.
  • MMT contends that the most effective way to avoid unemployment is by fiscal authorities injecting money as compensation to guaranteed jobs, which compensation will be spent and will increase economic activity to the level of full employment. But a) Such an injection through the demand function is intrinsically inflationary and belongs to the theory of booms and slumps. b) To effect full employment, the basic expansion of the process, with its egalitarian shift of income, must be implemented.
  • MMT thinks that, to charge the process simply connect it to the Treasury ATM; the power source of the economic process is the printing and distribution of money.   The motive power, i.e. the efficient cause of economic activity, as distinguished from FMD’s formal cause or field theoretic immanent intelligibility of the system, lies in human desires and fears effecting invention, innovation, and productive work.

From the viewpoint of intelligence, the satisfactions allotted to individuals are to be measured by the ingenuity and diligence of each in contributing to the satisfactions of all; from the same high viewpoint the desires of each are to be regarded quite coolly as the motive power that keeps the social system functioning. [CWL 3, 214/]

Again, Functional Macroeconomic Dynamics prescinds from human psychology

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situationOur aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

  • While the formal cause of the economic process is the field theory of Functional Macroeconomic Dynamics, the efficient cause of the economic process is human persons using dummy money wisely or foolishly, i.e. adapting to the field theoretic laws and norms of the process, or out of ignorance failing to so adapt.
  • As objective and scientific, macroeconomics should not be ultimately grounded in subjective psychopolitical tendencies and dispositions and the consequent “isms”, such as modern monetarism which is ultimately grounded in psychopolitical preferences.  Thus, if the insights of any particular inquiry contradict the economist’s political or mythical inclinations, the economist has the choice of either abandoning objectivity and truth to pursue economic mythmaking and obscurantism or of accepting the objective findings of corrective understanding in the name of truth and light.
  • MMT pays lip service to maintaining money’s exchange value so that the financial system is not jeopardized, menaced, and destroyed, but MMT fails to emphasize the government’s responsibility not to swindle elements of the populace. Money should be a store of value and, ideally, should remain constant in value. The “exchange value that concerns us is the actual exchange value, and it emerges  only subsequently to actual exchanges.” [CWL 21, 32]

… the dummy (money) must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services.  The alternative to constant value in the dummy is the alternative of inflation and deflation. [CWL 21, 37-38]

(We) state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy. To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

Again,

The alternative to constant value in the dummy is the alternative of inflation and deflation. Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

  • Politicians and monetary authorities must act intelligently and responsibly; and they must not recklessly swindle the populace.

It may help to clarify the issue if one distinguishes between normative, probable, and actual exchange values……..The first of these statement is with regard to normativeexchange value, and pertains to the science of ethics.  The second of the statements is a probableexchange value, and it pertains to the art of forecasting.  But the exchange value that concerns us is the actual exchange value, and it emerges only subsequently to actual exchanges. [CWL 21, 32]

  • Per Tcherneva: “The appropriate context for the study of money is cultural and institutional, with special emphasis on social and political considerations.” [Tcherneva, 2005, 3] But per FMD, macroeconomics is a science.  The economic process is to be studied as an objective process having a set of explanatory and normative laws prior to cultural, social, and political categories; the appropriate context is science and explanation: first, discovery of these laws and, second, adapting one’s psychology to them.

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation.  Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. [CWL 21, 56]

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43 ]

  • Per Tcherneva: “The purpose of taxation is not to finance government spending but to create demand for currency – hence the term “tax-driven money.” [Tcherneva, 2005, 3] Per FMD, money is to buy things.The economic process is a dynamic process whose continuity and equilibrium depend on series of exchanges keeping pace with one another in circular flows and in crossover flows which balance so that one circuit does not drain the other.  There must be concomitance of supply with demand and of demand with supply.  This is not to deny that, in practice, government cash outflows may, or may not, temporally precede cash inflows provided by the issuance of bonds. But analytically, the flows should balance in any interval, and in that evocation of continuity and equilibrium, they are simultaneous, with neither dominating the other.  The ideas of “to finance” or “tax-driven” are anthropomorphic projections of muscular effort or efficient cause rather than of a field-theoretic formal cause.

These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

A condition of circuit acceleration was seen … to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure.  Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence [1] brings automatic correctives to work.  The concomitance of outlay and expenditure follows from the interaction of supply and demand.  The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]

Need the moral be repeated?  There exist two circuits, each with its own final market.  The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay.  But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. [CWL 15, 175]

Per Tcherneva: “Logically, and in practice, government spending comes priorto taxation, to provide that which is necessary to pay taxes.” [Tcherneva, 2005, 3]  Per FMD, it is helpful to regard the payments within any circuit to all occur within the same interval, and in that sense, being of scientific simultaneity.  There must be concomitance of flows, and the condition of circulation must be satisfied.

In studying the superposed circuits one may begin at any function to move in either direction. One may begin anywhere because the total movement is circular, One may move in either direction, for one may ask where the money goes or where it is coming from.  Finally, one may regard the eight movements as simultaneous: they all occur within the same interval; the condition of circulation is satisfied if they occur within the interval; and the condition of circulation is the one condition required. [CWL 15, 165]

  • Per Tcherneva: “States with sovereign control over their currencies (i.e. which do not operate under the restrictions of fixed exchange rates, dollarization, monetary unions or currency boards) do not face any operationalfinancial constraints (although they may face political constraints).” [Tcherneva, 2005, 4] True enough; they face no operational constraints, even if what they do is harmful and to the extent they do it is so harmful as to cause chaos and destroy the good of order. Is a lack of operational constraint a prudent thing?  Per FMD, they face “legal” constraints; i.e. they must obey the laws of the objective process. To disobey the laws may result in boom then bust, inflation then deflation, swindle of savers then swindle of borrowers. Tcherneva’s assertion displays a lack of appreciation of the existence of a theory and, thus, of the perilous general bias of common sense against theory.  (See CWL 3, 225 f/ 250 ff.)

The drift to totalitarianism can be stopped only in the measure that human scientists work out intelligent and reasonable solutions to human problems and theologians succeed in convincing hard-headed practical men, on the one hand, that by God’s grace intelligent and reasonable solutions can work and, on the other hand, that the desertion of intelligent and reasonable solutions for ‘realist’ policies is the operative principle in the breakdown and disintegration of civilizations. [CWL 3, 747/768]

  • Per Tcherneva: “Nations that issue their own currency have no imperative to borrow or tax to finance spending. While taxes create demand for currency, borrowing is an ex anteinterest rate maintenance operation. This leads to dramatically different policy conclusions.” [Tcherneva, 2005, 4] Tcherneva appears to be making two assertions. 1) Nations can simply print and distribute money any way they want, 2) borrowing is not only a fiscal operation, it can also be a monetary operation by the government in place of open market operations by the Fed.  Per FMD, we are interested in discovering and obeying the laws of the overall functioning economic process. We-the-people may farm out the same necessary collective operations either to a central bureaucracy-politburo or to some combination of institutions responsible for spending, taxing, and issuing money.  But, however the responsibilities are divvied up, the authorities are responsible for obeying the objective laws of the economic process so as to preserve the good of order.
  • Per Tcherneva: “Government spending in sovereign currency systems is not limited to the ability of the state to “raise” revenue.In fact, as it will be explained below, sovereign governments face no operational financial constraints.” [Tcherneva, 2005, 14]  Per FMD on the contrary, there must be some type of constraints in the form of ratios not to be exceeded to prevent chaos and breakdown; otherwise it’s Welcome to Germany post WWI, Russian breadlines in the 1950s, Zimbabwe in this twenty-first century, and to Venezuela right now.  Have a nice day!
  • Per Tcherneva: “To fully grasp the logic of sovereign financing, one must make the analytic distinction between government and non-government sectors. For the private sector, spending is indeed restricted by its capacity to earn revenue or borrow.  This is not the case for the public sector, which ‘finances’ its expenditures in its own money.  This is a reflection of its single supplier (monopoly) status  For example, in the United states,  the dollar is not a ‘limited resource of the government’ (Mosler 1997-98: p. 169)  Rather it is a tax credit to the population, which is confronted with a dollar-denominated tax liability.  Thus, government spending provides to the population that which is necessary to pay taxes (dollars).  The government need not collect taxes in order to spend; rather it is the private sector, which must earn dollars to settle its tax debt.  The consolidated government (including the Treasury and the Central Bank) is never revenue-constrained in its own currency.” [Tcherneva, 2005, 14]Per FMD: First, the analysis must functional.  Both the private sector and the government sector purchase consumption items and capital products; both operate in the basic circuit and the surplus circuit. Any functional economic distinction between the two is false.  They both do the same things, one collectively, the other individually.  Second, it is good that MMT recognizes that limited liability companies must have a positive or balanced cash flow or go through bankruptcy; but the government, per MMT, has no such requirement; it is here to put out its tentacles, grow and do whatever it wants.  Borrowing and spending standards be damned!.

The excellence of the exchange solution becomes even more evident when contrasted with the defects of a bureaucratic solution.  The bureaucrat … (gives the people) what he thinks is good for them, and he gives it in the measure he finds possible or convenient; nor can he do otherwise, for the brains of a bureaucrat are not equal to the task of thinking of everything; only the brains of all men together can even approximate to that. … when a limited liability company has served its day, it goes to bankruptcy court; but when bureaucrats take over power, they intend to stay. … when the pressure of terrorism (by the goons of the bureaucrats) is needed to oil the wheels of enterprise, then the immediate effect is either an explosion or else servile degeneracy. [CWL 21, 34-35]

  • Per Tcherneva: “Borrowing, like taxation, does not fund government spending. Rather bond sales are monetary operations to hit the target interest rate, not fiscal operations to finance.  Borrowing allows the private sector to earn interest on hoards.  In reality, because of the reserve effect of deficit spending on interest rates, borrowing is necessaryto maintain interest rates. [Tcherneva, 2005, 17] As was stated above, Tcherneva is substituting the issuance and redemption of bonds by the Treasury for equivalent actions of the Fed. Per FMD, the normative interest rate is an internal relationship among dynamically changing production coefficients.  The responsibility of the money-issuing authorities is simply to issue enough money so that the overall functioning can exact its transactions without a lot of friction.  As Lonergan points out, manipulation of interest rates is ineffective and, often, counterproductive.   What is required is a shifting of rates of income within the strata of incomes.

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements.… [CWL 15, 140, ftnt. 197]

The purpose of this section is to inquire into the manner in which the rate of saving Wis adjusted to the phases of the pure cycle of the productive process. Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving, increase the income of the rich. … to decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.… However, this fundamental mode of adjustment is complemented by a further mechanism of automatic correctionthe movement of price levels… but its operation is conditioned. [CWL 15, 135-37]

  • Per Tcherneva: “All of the above completely reverses conventional wisdom. Governments do not need the public’s money to spend; rather the public needs the government’s money to pay taxes.” [Tcherneva, 2005, 17]  Per FMD again, Tcherneva seems to be saying that a government can print its own currency at will to pay whatever it wants to.  Note in Lonergan’s treatment of the superposed circuit and of government spending and taxing, there were no political value judgments. Loneran deals only in the objective laws of the process to which a psychological attitude must adapt; he keeps politics out of his economics.
  • Per Tcherneva: “… bond sales are necessary to drain excess reserves generated by fiscal operations in order to maintain a positive interest rate.” [Tcherneva, 2005, 17] Per FMD, bond sales to manipulate interest rates can be made by any entity empowered to do so –the central bureaucracy, the Treasury, the Fed, or some beneficent philosopher king. Tcherneva seems to be saying that the central bureaucracy can assume responsibility for manipulating interest rates as a monetary tool. But as was said above, the interest rate is an internal relationship among production coefficients.  It varies depending on circumstances.  The responsibility of the money-issuing authorities is simply to issue enough money so that the overall functioning can exact its transactions without a lot of friction.  Manipulation of interest rates is ineffective and, often counterproductive.  There are other actions which are prior to and more effective than manipulating interest rates.
  • Per Tcherneva: “What this means is that the state as a monopoly supplier of HPM (high powered money) has the power to exogenously set the price at which it will provide HPM, i.e. the price at which it buys assets, goods and services from the private sector. … As it will be discussed later, Chartalists recognize that the money monopolist need only set oneprice to anchor the value of its currency. [Tcherneva, 2005, 18]  FMD asks, how does the central bureaucracy negotiate quantities and prices with the private sector.  If the bureaucracy establishes a basic wage for its guaranteed-job program, is the private sector enjoined from raising prices in response? How does one price anchor all prices? What about the prices of materials, what about price responses to capacity constraints?  Does not every price mate with every other price?  … the exchange solution is a dynamic equilibrium resting on the equilibria of markets. “… every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. “

… the exchange solution is a dynamic equilibrium resting on the equilibria of markets. … every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value.  The generality of this equilibrium makes it indifferent to endless complexity and endless change; for it stands on a level above all particular products and all particular modes of production.  While these multiply and vary indefinitely, the general equilibrium of the exchange process continues to answer with precision the complex question, Who, among millions of persons, does what, among millions of tasks, in return for which, among millions of rewards?  Nor is the dynamic solution unaccompanied by a continuous stimulus to better efforts and more delicate ingenuity.  For the uniformity of prices means that the least efficient of those actually producing will at least subsist, while every step above the minimum efficiency yields a proportionately greater return. [CWL 21, 34-35]

  • Per Tcherneva: “After disclosing the nature of government finance, Chartalists argue that governments canand shouldimplement ‘functional finance’. The latter was proposed by Abba Lerner, who vigorously objected to any conventional ideas about what constitutes ‘sound’ finance. … Functional finance can be subsumed under the Chartalist approach, because it appropriately recognizes money as a creature of the state and attributes two important policy roles to government.  Lerner argued that the state by virtue of its discretionary power to create and destroy money, has the obligation to keep its spending at a rate that maintains 1) the value of the currency and 2) the full employment level of demand for current output (Lerner 1947).” [Tcherneva, 2005, 20] Per FMD, the state should not have discretionary power to disobey the laws of the economic process.  Also, nowhere do we see in MMT any understanding of a major expansion constituted by a series of phases, each with its own money requirements, limiting productive capacities, limited material resources, etc.  Without such understanding the state cannot identify purely relational indexes of explanation.
  • Per Tcherneva: “Lerner proposed two principles of functional finance, which inform decisions on the requisite amount of government spending and the manner of financing it. More specifically, the first principle provides that total government spending should be neither greater nor less than that rate which the current prices would buy all the goods that it is possible to produce’ (Lerner 1943: p. 39).  Spending below this level results in unemployment, while spending above it causes inflation. The goal is to keep spending always at the ‘right’ level in order to ensure full employment and price stability. The second principle states that government spending should be ‘financed’ through the issue of new currency. This second ‘law’ of functional finance is based on Lerner’s recognition that taxation does not finance spending but instead reduces private sector money hoards (ibid.: pp. 40-41).” [Tcherneva, 2005, 20]  Lerner and Tcherneva sem to be advocating government according to  the Phillips Curve, but the Phillips Curve was invalidated by the stagflation in the 1980s.

… the U.S. economy was experiencing the phenomenon of ‘stagflation’ – a clearly discernible overturning of the conventional economic wisdom about the tradeoff between inflation and unemployment so neatly expressed in the Phillips curve.  So-called ‘Keynesian fine tuning onto the neoclassical track’ was not working; and forms of socialist planning only promised to deepen rather than resolve the anomalies of welfare economics. … (Lonergan) believed he had an explanation for what, in a statement from the essay we are editing, he described as a “situation – sometimes thought mysterious – in which consumer prices continuously inflate, new enterprise is evaded, unemployment becomes chronic, and despite inflation the value of stocks declines.” [CWL 15, Editors Introduction, xli]

  • Per Tcherneva: “The ELR/Buffer Stock (Employer of Last Resort) approach recognizes that
  1. The government is the only institution that can divorce ‘the offer of labor from the profitability of hiring workers’ (Minsky 1986: p. 308) and can thus provide an infinitely elastic demand for labor, without concerns about financing.
  2. The government can formulate an anchor for the value of its currency by exogenously fixing the wage of ELR workers.” [Tcherneva, 2005, 21]

Per FMD,  MMT should not sever reward from effort and other contribution.  Also, does MMT really expect the intended anchor price to ramify through the entire economy?  And is the private sector prohibited from responding as it will?

7. Implementation of the basic expansion is necessary to achieve full employment

We are interested in the macroeconomic dynamics of the achievement of full employment.  The implementation of the basic expansion is critical to the realization of full employment.  We have treated that implementation elsewhere on this website; and Lonergan treats it at length in CWL 15, §26, “The Cycle of Basic Income,” pages 133-44.

The achievement of the basic expansion requires a shift in the distribution of income: from the anti-egalitarian shift required by the mounting investment of the surplus expansion to an egalitarian shift required by the mounting consumption of the basic expansion

The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment. In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

I’ = Σwiniyi

dI’ = Σ(widni+ nidwi)yi

Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving, increase the income of the rich. … to decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.… However, this fundamental mode of adjustment is complemented by a further mechanism of automatic correctionthe movement of price levels… but its operation is conditioned. [CWL 15, 135-37]

However, its operation is conditioned.  (in the case of an inadequate rate of saving) unless the quantity of money in circulation expands as rapidly as prices rise and, as well, as rapidly as the productive expansion of quantities requires, there will result a contraction of the process: then, instead of adjusting the rate of saving to the requirements of the productive cycle, the productive cycle is arrested to find adjustment to the rate of saving. [CWL 15, 137]

Banks are willing to increase the quantity of money as long as there is no appearance of uncontrolled inflation, but they curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system.  Thus the root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income. [CWL 15, 138]

8. The Nature of Money and the Expansion of Credit

Elsewhere on this website we have treated the financial problem of supplying money for transactions and the nature and purpose of money.  We refer the reader to those sections.  Click here and here.

9. Nuances and misinterpretations of price changes

Modern Monetary Theory pays lip service to controlling inflation, but does not reach and communicate a scientific macroeconomic dynamics of the different configurations of functional flows constituting inflation.  MMT simply decrees that inflation can occur only in the situation of full employment, and that it can be satisfactorily controlled by taxation and the issuance of bonds (which drain money out of the operative circuits so as to reduce what it assumes to be maladaptive activity).  MMT is not sufficiently profound and nuanced so as to explain, interpret, and properly act upon real and relative vs. monetary and absolute rises and falls of prices in different situations.

There are two crtitical monetary constituents in both the surplus phase and the basic phase of a long-term expansion: 1) the rate of functional savings vs. the rate of functional consumption, grounded in the rates of functional distribution of incomes, and 2) the mechanism of real and relative vs. the monetary and absolute rise or fall of prices. The early stage of the surplus expansion calls for the higher-paid participants to receive even more income to support the initially accelerating accelerative investment; the subsequent basic expansion mandates that lower-paid participants receive higher pay so as to purchase the greater bounty of basic goods and, thus, enjoy a higher standard of living.  The incomes directed to investment are called savings, or pure surplus income, or the social dividend.  The incomes directed to consumption are called basic income.

Let us rearrange one of Lonergan’s compact disquisitions:

As prices are in themselves relative, insofar as they express demand, so also they must be interpreted relatively with regard to expansion and contraction.  [CWL 15, 140]

… the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices; to allow them to stimulate production is to convert the surplus expansion into a boom. [CWL 15, 140]

When the prices both of and are falling, and i more than j, it may still be true that the production of both should be increasing, though with  production of j increasing more than the production of i.  [CWL 15, 140]

For the fall of prices may be general and absolute, as such it will result not from a change in demand but from a failure in income distribution to adjust the rate of saving to the phase of the productive process;  to allow such a general maladjustment to convert a basic expansion into a slump is to cut short the expansive cycle of the productive process because one has confused real and relative prices with monetary and absolute prices. [CWL 15, 140]

This, I believe, is the fundamental lack of adaptation to the productive cycle that our economies have to overcome.  The problem, however, has many ramifications of which the most important is the relativity of the significance of profits. [CWL 15, 140]

And,

At the root of the depression lies a misinterpretation of the significance of pure surplus income. In fact it is the monetary equivalent of the new fixed investment of an expansion…..our culture can not be accused of mistaken ideas on pure surplus income as it has been defined…; for on that precise topic it has no ideas whatever………However the phenomena referred to by …”pure surplus income” are well known.  … pure surplus income may be identified best by calling it net aggregate savings and viewing them as functionally related to the rate of new fixed investment [CWL 15 152-53]

The proponents of MMT cherish its psycho-ideological tenets (previously listed) and proclaim that these tenets constitute a scientific explanation of the always current, purely functional, purely relational velocitous flows constituting the economic process.  They accept MMT as sophisticated monetary “theory”.  However, MMT fails to pursue any understanding of a) an expansionary cycle composed naturally of nuanced phases [CWL 15, 113-28], and b) the nature of capital expansion’s monetary correlate,

MMT is condemned by its own tenets to be vulnerable to a mistaken interpretation of both inflation and deflation in phases of the cycle.  In a surplus expansion ultimately redounding to the greater benefit of all, if inflation occurred, MMT would take the inflation as  a signal to

  • contract the money supply,
  • tax the savings vital to support the expansion,
  • thus, deprive society of the benefits of the expansion.

Also, the problem of insufficient demand in what should be the basic expansion, is misinterpreted by all. The totalitarian central bureaucracy might simply print money and scatter it carelessly through guaranteed but unproductive jobs to effect the required egalitarian shift in incomes, but only for the time being.

MMT would also tend to desire at all times, regardless of the phase, to overtax higher-income inventors, organizers, and doers, reduce taxes to the lower income levels, and thus to cause stagflation by draining the surplus circuit in favor of the basic circuit; and thus it would upset the balance of the circuits.

MMT would misinterpret and resent the so-called savings for investment indicated by the basic price spread; in its resentment and naivete, MMT would tax such savings as a sign of the exploitation of labor rather than as money needed for beneficial investment.

(The remainder of this subsection amounts to a mandate to the reader to open CWL 15 and study pages 133-62.)

Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving, increase the income of the rich; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  To decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction.  (price changes) [CWL 15, 133-134]

However, (the operation of the further mechanism is conditioned.  (In the case of an inadequate rate of saving) unless the quantity of money in circulation expands as rapidly as prices rise and, as well, as rapidly as the productive expansion of quantities requires, there will result a contraction of the process: then, instead of adjusting the rate of saving to the requirements of the productive cycle, the productive cycle is arrested to find adjustment to the rate of saving. [CWL 15, 137]

This fundamental mode of adjustment (antiegalitarian and egalitarian shifts of incomes) is complemented by a further mechanism of automatic correction,  When savings are insufficient, too much money is moving to the basic final market, and so the basic selling-price level rises; inversely, when saving is excessive, insufficient money moves to the basic final market, and so the basic selling-price level falls.  This movement of price levels has a double effect: it contracts or expands the purchasing power of monetary income; and it shifts the distribution of monetary income to the higher or to the lower income brackets. The latter effect is less apparent but essential, for without it there results the upward or downward price spiral. [CWL 15, 135-36]

Now the greater the rise in prices, the greater the increase in monetary income, the greater the increase in surplus income, and the greater the reduction of purchasing power of monetary income.  Hence a sufficient rise in prices will always succeed in adjusting the rate of saving to the requirements of the productive phase … as prices rise, real saving is forced upon each lower group; on the other hand, as prices rise, the consequent increment in speculative profits and so of surplus income is far greater than any greater spending effected by the small numbers in the higher brackets. [CWL 15, 136-37]

In the case of a failure by the government-entrepreneurs combination to cooperate to implement the basic expansion, demand is insufficient and the process contracts in a downward spiral of quantities and prices, characterized by associated contractions, liquidations, and unemployment.  And

until the position of the strong1is undermined by the general and prolonged contracting, the requirement2for the rate of losses continues, and with it the depression. … [CWL 15, 155-56]

In the case of overexpansion colloquially called a boom, there arises a systematic necessity for a correction.

This boom suffers no restrictions from a limited potential for short-term acceleration since both stages are now expanding in long-term style.  Both acceleration factors can mount to maxima and remain at the summits with da’ and da” both zero.  Further variations of the price spread thus depend exclusively upon dR, and this becomes negative as the surplus expansion gives place to a basic expansion.  When the prices begin to fall to effect the continual reduction of the price spread, there follows sooner or later the final crash.  Speculative embarrassment makes both da’ and da” negative, to augment the rate of contraction of the price spread and intensify the embarrassment. Assets are frozen and then liquidated in a great drop of prices.  Worse, there is no recovery; for the remainder of the cycle should be a basic expansion which our ill-adapted economies transform into a depression. [CWL 15, 161]

10. Nuances of the double-edged manipulation of interest rates

The present availability in the money supply, the present rate of usage of the money supply by both government and private parties, and the normative interest rate are unitary.  The rate of flow supply and the rate of flow of demand meet in a rental rate.

Whereas the Fed admits that it buys and sells bonds in its money market operations to raise or reduce the money supply in the operative circuits, and sometimes to reduce or raise the interest rate, MMT claims that its sale or redemption of the bonds associated with its deficit is, not to finance deficit operations, but rather to hit a target interest rate. It claims that running a fiscal deficit by overspending is a monetary operation which effectively injects money into the system so as to directly stimulate the economy and/or to lower interest rates. MMT fails to understand a) how money gets justified so as not to swindle, and b) that the manipulation of interest rates is double edged.

FMD mandates that, to tackle the problem of insufficient basic demand, rather than using the roundabout and inept procedure of manipulating double-edged interest rates by either MMT’s deficit spending or by the Fed’s use of its monetary tools, the monetary, fiscal, and entrepreneurial authorities should employ “factors that are prior to changing[1]interest rates and more effective.” However, in order to be willing to comply with FMD’s precepts regarding “factors that are prior to changing[2] interest rates and more effective”, the authorities must first gain an understanding of how the process works. They must dispel their own ignorance.

A general operation upon the supply of money seems to be a rather roundabout and inept procedure to correct an error in (the) distribution (of incomes). [CWL15, 143]

It is discouraging to hear winners of the Prize in Economic Sciences[3]advocate the manipulation of interest rates as though a change in the interest rate were single-edged and cutting in only one direction.  Their arguments are internally self-contradictory, and full of oversights and omissions.

we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

When savings are needed for a surplus expansion, increasing interest rates to encourage saving is not the answer.

Rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion.  What is needed is a contraction of purchasing power that will direct spending from the basic market of the poor to the surplus market of the rich. The surplus phase is anti-egalitarian… [CWL 15, 141 ftnt 198]

When more spending on consumer goods is needed for a basic expansion, decreasing interest rates to discourage saving is not the answer.

… a lowering of interest rates may (discourage saving and increase consumption, and it may) encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc.  What is needed (rather than lower interest rates) is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.   [CWL 15, 141 ftnt 198]

The manipulation of interest rates can be counterproductive.

When the rate of savings is insufficient, increasing interest rates effect an adjustment.  This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving … it does not deserve the name adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements.[CWL 15, 144]

11. Further excerpts and comments indicating that macroeconomic theory is a science, not a set of wishful psychopolitical assertions:

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii]

operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process.  [CWL 21, 135]

Thus we define the financial problem as the problem of working out and applying the view that money is public bookkeeping.[1]  The grounds for this position may be summarized as follows. … Money is an instrument invented by man to make possible a large and intricate exchange process.  While there is no simple and even perhaps no ascertainable correlation between the quantity of money and the volume of exchange activity,[2]it remains true that variations in the volume, if not to result in inflation or deflation, postulate some variations in the quantity.  Now in the long run these variations in quantity can be had only by the introduction of a money of account,[CWL 21, 104]

… when we say that the idea of money as a system of public bookkeeping has to be worked out and applied, we mean above all the necessity of a money whose laws (of issuance from the Redistributive Function to the justifying Supply Function and of circular flows within the two real circuits connected by crossovers) coincide with the laws of the economic process, so that instead of conflict between real (productive) possibility and financial possibility[3]we shall have harmony, [CWL 21, 105]

Money is a “dummy” invented by man to overcome the friction and inefficiency of barter.

every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. [CWL 21, 34-35]

If barteris replaced by the divided exchange, selling here and buying there, the economic process can attain a vastly greater magnitude and intricacy.  [CWL 21, 37-39]

But the divided exchange postulates a dummy that will bridge the intervals, short or long, between contribution to the process and sharing in its products.  Further, if this dummy is to work satisfactorily, if it is to bridge the intervals fairly and adequately, then it must fulfill certain conditions.   Divisibilityhomogeneityconstant in exchange valueuniversally acceptable… [CWL 21, 37-39]

money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  One has to place first human society which is served by the economic process, and second the economic process which is to be served by money.  Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. [CWL 21, 101]

Barter is impractical in an advanced exchange economy.  Baked goods cannot be exchanged for an automobile.  Money enables divided transactions.

The modern exchange economy depends upon the equilibria of markets to achieve constant exchange value.

… the exchange solution is a dynamic equilibrium resting on the equilibria of markets. … every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value.  The generality of this equilibrium makes it indifferent to endless complexity and endless change; for it stands on a level above all particular products and all particular modes of production.  While these multiply and vary indefinitely, the general equilibrium of the exchange process continues to answer with precision the complex question, Who, among millions of persons, does what, among millions of tasks, in return for which, among millions of rewards? Nor is the dynamic solution unaccompanied by a continuous stimulus to better efforts and more delicate ingenuity. For the uniformity of prices means that the least efficient of those actually producing will at least subsist, while every step above the minimum efficiency yields a proportionately greater return. [CWL 21, 34-35]

12. How additional money should enter the expanding economic process? 

(Click here for The Norms Guiding the Creation of Money)  Can money just be printed in any quantity and scattered around aimlessly?  Or are there rules of issuance grounded in the structure of the economic process?  How much money, called monetary circulating capital, is required as the economy accelerates?

Essentially the financial problem consists in finding a stable and permanent solution for the monetary requirements of a long-term expansion. [CWL 21, 100]

the scarcity of the dummy is attended to by the technicians of the technical rules governing its issuance. [CWL 21, 37-39]

Lonergan formulates the law of the addition of money to the basic circuit, and by a change of superscripts from (‘) to (“) in the surplus circuit.

 ΔM’ = (S’-s’O’) = ΔT’ + (O’ – R’) + ΔR’ [CWL 15, 65-67]

First, the money should enter through the supply function (through (S’ – s’O’)), wherein outlays are made to people making productive contributions and, thus the additional money is justified by the productive contribution.

But also, for legitimate government services including a safety net to those in need, money should be circulated as transfer payments back by taxation into the redistributive function and back out as support payments.

Outlays are justified by a corresponding beneficial product or service on the general principle that an individual or a nation earns what he/she or it produces.  While honest mistakes will be made, compensation for foreordained boondoggles and other nonbeneficial services are not justified.

Second [CWL 15, 65-67], the amount of money to be added over an interval depends upon

  • ΔT’, the change in the turnover magnitude of basic transitional payments at the beginning and end of the interval;
  • ΔR’, the change in the turnover magnitude of basic final payments at the beginning and end of the interval; and
  • (O’-R’), the difference between initial payments and final payments.

the supposition that circuit acceleration to some extent postulates increments in the quantity of money in the circuits … points to excess transfers to supply, to (S’-s’O’) and (S”-s”O”), as the mode in which increments in quantities of money enter the circuits. [CWL 15, 61]

One cannot identify a reduction of basic income with an increase in the supply of money (for investment), – (such a reduction is a redirection, not an increase) – for a reduction of basic income is only one source of such supply; moreover, it is neither the normal nor the principal source of such supply; … principally the increase in the supply of money is due to the expansion of bank credit, which is necessary to provide the positive , (S’-s’O’) and (S”-s”O”) needed interval after interval to enable the circuits to keep pace with the expanding productive process. [CWL 15, 142]

[Burley, 1992-2; Evolutionary von Neumann Models, p. 272]  Equations (4a) and (3a) are mathematically similar.  They then give us a simple model of how all exchange money enters and leaves the system as credit money in a single circulation each period.

On the other hand, given an initially stable situation and excepting reasonable time-swap installment or mortgage loans, the release of (large sums of additional) money directly into the hands of consumers (as MMT would have it) through (D’-s’I’), which money has not been or will not be justified by a producing of (new) real goods, is in principle then and there intrinsically inflationary.  Whether of noticeable and detectable effect or not, such an excess release of money is identically a non-normative, unnatural, distortive boom, while an excess contraction of the money supply is identically a non-normative, unnatural, distortive slump.  We say identically because such changes in the money supply and their use in the real circuits are the explanation of the boom or the slump.  That is, such changes verily constitute a boom or slump, whatever its extent.

With at zero, positive or negative transfers to basic demand (D’ – s’I’) and consequent similar transfers to surplus demand (D” – s”I”) belong to the theory of booms and slumps.  They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds).  The immediate effect is on price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy.  [CWL 15, 64]

Nor, by the way, should an injection of money by the Central Bank be used to manipulate what are internally-justified interest rates.  The issuing authority must ask a) In what phase of an expansion are we, b) Is the issuing authority alone, or is an enlightened private sector, or is a We-the-people combination of government and private sector responsible for properly satisfying the monetary and employment requirements of the surplus expansion or the basic expansion?  Contrary to conventional wisdom, Functional Macroeconomic Dynamics mandates that the enlightened private sector – as responsible for enlightening itself and holding the re-presentatives it elects responsible for their enlightenment – is primarily responsible.

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

Burley points out that a.) the credit money equation, which states that outputs and their prices are conditioned upon quantities of credit in an earlier instance to producers and the rate of interest charged, and b.) the equation of exchange, which states that end-of-period expenditures are made possible only by earlier intraperiod outlays, both indicate that all exchange money enters and leaves the system as credit money through the supply function to perform a circuit of work.

Equations (4a) and (3a) are mathematically similar. They then give us a simple model of how all exchange money enters and leaves the system as credit money … . Burley, Evolutionary von Neumann Models, p. 272

The banking system governs the issuance of money.  Money serves the process of real production and exchange of real goods and services.  Again,

operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process.  [CWL 21, 135]

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii]

13. Historical Research into What Goes Wrong;  Documentary or Fantasy?  Four countries

Others have done extensive research into the history of runaway inflation and sovereign defaults; we have not.  But we invite the reader to research, and perhaps verify, our understanding of the possible extremely negative effects of disproportionate flows of money vs. goods causing disastrous inflation and social chaos in national economies. Carmen Reinhart and Kenneth Rogoff provide useful statistics and commentary on historical government defaults; their book, This Time is Different, is well worth reading.  Consider as possible examples:

  • Government of Germany after World War I – couldn’t pay its domestic and foreign bills; simply printed money to pay them; flow of deutschmarks in the system continually outstripped the flow of goods; rampant and ruinous inflation; i.e. debased currency; economic chaos; civic disorder and breakdown followed by dictatorship
  • Government of Zimbabwe recently – couldn’t pay its domestic and foreign bills; simply printed money to pay them; flow of money in the system continually outstripped the flow of goods; rampant and ruinous inflation; i.e. debased currency; financial chaos; civic disorder and breakdown
  • Government of Venezuela today – can’t pay its domestic and foreign bills; simply prints money to pay them; flow of money in the system continually outstrips the flow of goods; rampant and ruinous inflation; i.e. debased currency; financial chaos; massive corruption; civic disorder and breakdown, dictatorship
  • Government of United States after Modern Monetary Theory has taken effect – politicians pass laws mandating new and ever larger and costly government-run programs; programs turn into boondoggles with cost overruns and produce little social benefit or exchange value; some portion of the uselessly spent money winds up circulating in basic demand unjustified by any worthwhile production; rampant and ruinous inflation, i.e. debased currency; consequently prohibitively high interest rate; government can’t meet its principle-plus-interest obligations on existing debt; the central bureaucracy simply prints more money as suggested by Modern Monetary Theory to pay the nation’s bills; domestic and international lenders both cease to lend to the government, except at high interest rates; philanthropic contributions to education, medical care, the arts, the sciences, civic and religious institutions, and community spirit cease; institutions shut down or are taken over by the government; purchasing power is destroyed; financial chaos and civil disorder; bankruptcies, and breakdown; loss of personal freedoms under totalitarianism

Thus it is that in the history of human societies there are halcyon periods of easy peace and tranquility  that alternate with times of crisis and trouble.  In the periods of relaxed tension, the good of order has come to terms with the intersubjective groups.  It commands their esteem by its palpable benefits; it has explained its intricate demands in some approximate yet sufficient fashion; it has adapted to its own requirements the play of imagination, the resonance of sentiment, the strength of habit, the ease of familiarity, the impetus of enthusiasm, the power of agreement and consent.  Then a man’s interest is in happy coincidence with his work; his country is also his homeland; its ways are the obviously right ways; its glory and peril are his own. [CWL 3, 216/241]

14. A normative theoretical framework is required.

A systematic explanation, then, requires a normative theoretical framework.  The basic terms and relations of such a framework would specify the distinctions and correlations that articulate the causes, which are not necessarily visible, of events that are apparent to all.  The framework would thus stand to the ordinary apprehension of the booms and slumps of the trade cycle in much the same way that the explanatory grasp of acceleration as the second derivative of a continuous function of distance and time stands to the ordinary, commonsense grasp of what it is to be going faster.  [CWL 15, Editors’ Introduction, lv]

the supposition that circuit acceleration to some extent postulates increments in the quantity of money in the circuits … points to excess transfers to supply, to (S’-s’O’) and (S”-s”O”), as the mode in which increments in quantities of money enter the circuits. [CWL 15, 61]

15. The entire populace is responsible for The Concrete Good of Order

The entire populace – whether in person or in re-presentative government – is responsible for the implementation of the basic expansion and for The Concrete Good of Order.

Thus it is that in the history of human societies there are halcyon periods of easy peace and tranquility  that alternate with times of crisis and trouble.  In the periods of relaxed tension, the good of orderhas come to terms with the intersubjective groups.  It commands their esteem by its palpable benefits; it has explained its intricate demands in some approximate yet sufficient fashion; it has adapted to its own requirements the play of imagination, the resonance of sentiment, the strength of habit, the ease of familiarity, the impetus of enthusiasm, the power of agreement and consent.  Then a man’s interest is in happy coincidence with his work; his country is also his homeland; its ways are the obviously right ways; its glory and peril are his own. [CWL 3, 216/241]

16. Elsewhere on this website:

Elements of this topic previously treated on this website have been incorporated by reference.  We have treated money, credit, interest rates, interest payments, Federal Reserve policy, and Why the Basic Expansion Fails to be Implemented.  For the reader’s convenience, we again list some of the important references.

Click here for Lonergan’s Goal; Generalization and Practical Precepts for Free People

Click here for Money: Notes on the Nature and Purpose of Money

Click here for Interest Rates and Payments

Click here for Notes Regarding FRB Monetary Policy and a Theoretic of Credit

Click here for Revision of the NIPA into Explanatory Form

Click here for Why and How the Basic Expansion Fails to be Implemented

Click here for Functions, Velocities, and the Achievement of Scientific Economics

Click here for Pure Surplus Income; Capital Expansion’s Monetary Correlate

Click here for Why Analyze the Rhythmic Pattern of the Productive Process First?

Click here for Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers

Click here for Edifice of Formulae

Click here for Lonergan, Marx, and Liberty

Click here for Insight into the Baseball Diamond; Discovery and Implementation

For treatment of Superposed Circuits, the Balance of Foreign Trade, and Deficit spending and Taxes, read CWL 15, pp 162-76

 

17. Paul Krugman re MMT

Some preliminaries regarding the interest-rate manipulation espoused by New Keynesians:  Both traditional and new theory is incorrect about the effectiveness of the manipulation of the interest rates.  The managers – fiscal, monetary, and private-sector – of the process should be concerned with factors that are prior to changing interest rates and more effective.

traditional (and contemporary) theory (has) looked to shifting interest rates to provide suitable adjustment (of) the rate of saving … to the phases of the pure cycle of the productive process.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

The conventional meanings of interest and inflation, monetary aspects of economic dynamics, distract from the needed economic analysis.

The most famous instance of such distraction( i.e,. the use of conventional meanings of investingand interest, monetary aspects of economic dynamics that distract from the needed functional economic analysis) is John Hicks’ simplistic focus on interest –  in the financial sense  –  in 1937 which turned Keynes’ effort of 1936 into a simpler business of jollying along with IS/LM curves.  (On debates around the IS/LM muddlings, see my Pastkeynes Pastmodern Economics, 65-69 … [McShane 2016, 33]

The difficulty with (traditional) theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15,  141-144]

The double edge of manipulating interest rates forces economists into explicitly contradictory statements:  Raising the interest rates among all maturities, so as to increase savings to finance greater investment, makes long-term investment more costly, and, thus, it undermines the activity it intends to support. Conversely, reducing interest rates among all maturities, in order to damp savings and investment, would reduce the cost of long-term investment and, so, stimulate poorly thought out and unjustified investment, thus sowing the seeds of failures and bankruptcies in the longer term.

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

(in a surplus expansion, initially requiring increasing rates of saving) it would take enormous interest rates backed by all propaganda techniques at our disposal to effect the negative values of dw(symbolizes the propensity to consume rather than to save of an income stratum i) that are required interval after interval as the surplus expansion proceeds; what is needed is something in the order of ‘incentives to save’ that is as rapid and as effective as the reduction of purchasing power by rising prices. … [CWL 15,  141-144]

To increase the rate of saving (in a capital-goods-expansion phase), increase the income of the rich (who have a lower average propensity-to-consume). … to decrease the rate of saving (in a consumer-goods-expansion phase), increase the income of the poor (who have a higher average propensity-to-consume). … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.  It reveals that the surplus expansion is anti-egalitarian, … but it also reveals the basic expansion to be egalitarian, for that expansion postulates that increments go to low incomes … [CWL 15, 135-37]

Increasing the compensation of the lower-income group is effected through the compensations to contributors of the provision of a single product, qijk; so, incomes, pijkqijk, where represents the velocitous application of factors of production and represents the series of contributors toa single product.  The reader should now consult CWL 15, 134, and, in particular grasp the implications of the following formula for basic income per interval:

I’ = Σwiniyi  (CWL 15, 134)

In his article, “Running on MMT (Wonkish)” Paul Krugman states some key propositions of his debate with Stephanie Kelton regarding Modern Monetary Theory – so-called:

Krugman: “When monetary policy is constrained by the zero lower bound, (Kelton’s contention that the appropriate size of the budget deficit can be determined by how big it needs to be to insure full employment) it isn’t true when the central bank has room to move interest rates.” [Krugman, 2019, page 1, lines 18-20] Krugman’s statement assumes that the relation of the level of the deficit to the level of unemployment is easily discernible. MMT, on one hand, would provide guaranteed jobs to the unemployed at a certain wage to sustain demands until things picked up in the private sector.  Krugman, on the other hand, would reduce interest rates to discourage saving and induce spending.  In short, MMT would guarantee jobs; neo Keynesians would set everything right through the magic wand or electric prod of lower interest rates.  In contrast, Lonergan’s prescription is to pay lower-paid contributors enough to buy what they produce, especially after a surplus expansion when capacity has been increased and more can be produced.

Krugman: “Suppose that the Fed or its equivalent in another country can set interest rates, and that a lower interest rate leads, other things equal, to higher aggregate demand.” [Krugman, 2019, page 1, lines121-23]  Krugman refers to the familiar AS-AD model of the interest rate against GDP:  “Suppose that the current aggregate demand schedule is IS3. Then the central bank can set the interest rate so as to achieve full employment, getting the economy to point C.” [Krugman, 2019, page 2, lines 1-2]  What does Krugman mean by “other things equal”? The interdependence and mutual conditioning of functional activities necessitate that other things are never equal. If distinct functionings constituting the overall economic functioning are connected, mutually conditioning, and implicitly defined, a change in one would necessitate a change in the other. Lower interest rates reduce the corporate or personal outlay of borrower Smith but reduce the corporate or personal income of lender Jones. But in what income stratum is Smith, and in what income stratum is Jones; and what are their propensities?  By how much and at what speed would spending, saving, consuming, and investing each change?

We repeat for emphasis:

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

(in a surplus expansion initially requiring increasing rates of saving,) it would take enormous interest rates backed by all propaganda techniques at our disposal to effect the negative values of dw(symbolizes the propensity to consume rather than save of an income stratum i) that are required interval after interval as the surplus expansion proceeds; what is needed is something in the order of ‘incentives to save’ that is as rapid and as effective as the reduction of purchasing power by rising prices. … [CWL 15,  141-144]

Referring to another line on the same AS-AD model, Krugman argues: “Now suppose that the government were to cut spending, shifting the aggregate demand schedule down to IS2.  Need this create unemployment?  No: the central bank can still get us there by cutting interest rates, getting the economy to point B.” [Krugman, 2019, page 2, lines18-20] Would that manipulation of interest were so single-edged and magically effective!  If, in the first instance, the government cut spending (and presumably laid off employees), then, in the absence of the private sector increasing outlays and incomes so as to offset the government’s reduced demand, the government’s activity would cause unemployment!  But, if in the second instance, the private productive order increased the income of lower paid workers, such would increase demand and sustain full employment.  Cutting interest rates after a surplus expansion will not significantly increase basic demand, much less encourage investment. And, keep in mind, what is inflow to Jones is outflow to Smith, and vice versa.

Krugman continues: “So we’ve just refuted the claim that the required size of the budget deficit can be determined by the need to achieve full employment; as long as monetary policy is available, there is a range of possible deficits consistent with that goal.  The question then becomes one of tradeoffs: would the things the government could buy with a higher deficit be worth the lost private investment due to a higher interest rate? Often the answer will be yes.  But there is a tradeoff.” [Krugman, 2019, page 2, lines 6-10] 1) Krugman’s supposed refutation is nothing of the sort.  He lacks understanding of a) the functional interdependencies constituting the overall economic functioning, and b) the nature of and the extent of the effect of monetary policy. The amount needed to avoid contraction and layoffs is the amount of the needed migrations – primarily in the private sector – among the strata of incomes. (CWL 15, 134),  2) It would be difficult to trust a central bureaucracy to be economically efficient in buying something useful. The prior, more fundamental, and more effective course is a) for entrepreneurs to adjust compensation according to the requirements of the phase of the process, and b) be content with a going concern.

A vast educational process must be undertaken.  New crtiteria must be adapted.

The first difficulty is psychological.  The static phase is a sombre world for men brought up on the strong drink of expansion. They have to be cured of their appetite for making more and more money that they may have more money to invest and so make more money and have more money to invest.  They have to be fitted out with a mentality that will aim at and with a going concern and a standard of living.  It is not so easy to effect this change, for as the Wise Man saith, the number of fools is infinite. [CWL 21, 97-98]

Krugman insists: “All we need is that the central bank be able to move rates, and that these rates affect overall spending.” [Krugman, 2019, page 3, lines 6-7] Assumptions, but wrong.

And Krugman: “So, let’s be clear:  Are the MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy?”  [Krugman, 2019, page 3, lines 21-23]  Despite Krugman’s imaginings, monetary policy would be ineffective, if not long-run counterproductive.

“Are they (the MMTers) claiming that expansionary fiscal policy actually reduces interest rates?” [Krugman, 2019, page 3, lines 21-23]  If a fiscal deficit is effected, and if investment prospects are not good and the demand for money is weak, then the MMTers, contrary to Krugman’s contention, may actually reduce interest rates and, of course, increase asset values in the secondary markets.

18. Lonergan, Marx, and Liberty

Click here.

19. Appendix: Alignment of the phases of the major expansion

We hope the reader will come to understand and appreciate, deep in his brain, how a normative expansion would play out over time.  Towards this goal, we encourage the reader to, first, copy from CWL 15 the diagrams listed below; then, by cutting and pasting, align them downward a series of 8 1/2 x 11 sheets in the order of the listing; then draw lines vertically down through all the diagrams to demarcate each of the phases of the major expansion.

The reader will then be able to read both across and down to see how a functioning or an aspect of the process may play out “horizontally” over the phases of the major expansion, and how the different levels and features of the process relate to one another”vertically” at any time.

Here is the list:

Figure 24-3, page 122

Figure 24-4, page 122

Figure 24-5, page 123

Figure 24-6, page 124

Figure 24-7, page 125

Figure 27-1, page 150

Here is a snippet showing part of what your finished work might look like.  We’re confident you will benefit from this exercise.

 

[1]Which is not to be identified with corporate or conventional National Income accounting

[2]Because of the rapidity of turnover, as contrasted with the efficiency of the use of money in transactions

[3]ruled once upon a time by a fickle quantity of gold and a fixed exchange rate for a certain quantity of gold

[1]transitive verb

[2]transitive verb

[3]CWL 15, 134-35

[3]often mistakenly called The Nobel Prize in Economic Science.

[1]See Strang for the mathematics and technical meaning of divergence.