Saturday, 9 February 2013

Musings on MMT - Firming Up The Soft Bits

070804 Many moons ago I did a post about the soft bits of MMT - those where it wasn't 100% clear precisely what happens. I've had a few people mention these points recently and this post brings my thoughts up to date.

It's important to realise that you can never understand the current system completely, and you certainly can't be 100% sure what will happen when you change it. It's always a balance of probabilities game.

In systems design this leads to the classic barrier to change - knowns as 'analysis paralysis'.

You spend ever increasing amounts of time studying the current way of doing things because fundamentally you're frightened of proposing a change and getting it wrong. So nothing ever happens, or things change underneath you rendering your studies obsolete.

So you can only ever get to a point where you know enough so that you can manage the risks. Then you've got to try something and see if it works - backing out if it doesn't. Otherwise nothing every changes.

I think we're at that point now where we know enough about the current model that we can get on and build solid proposals for a brave new world.

We're ready to try something.

So let's see where the state of the art suggests we are at the moment.

Quantity vs. Price Expansion

I've read around quite a lot on this point and when combined with my own experience of how businesses and customers actually work in the field I think its pretty clear that an economy that is depressed will tend to quantity expand first. And in service led economies that will be even more marked. It's rare to find a hairdresser who can't squeeze in another head of hair.

You have to believe in unique equilibrium fantasies to think that it can do anything else. Once you understand that businesses always have a degree of spare capacity the current 'productivity conundrums' go away and instead you have a rich field ripe for quantity expansion of output. Output that is there for the taking if you can just get enough monetary flow through the system.

Essentially the reason nobody gets rich speculating in socks, because there is almost always going to be capacity to make more socks.

The key here is to design policies that allow as much quantity expansion as possible to occur and to guide production towards needed elements within society. Which is one of the many things the Job Guarantee does.

That is not to say that the supply side isn't important. I feel that relying on demand side or supply side exclusively is a mistake. The system will feel tightness from both sides on occasions and policy needs to be able to deal flexibly with both issues.

Effect on the Exchange Rate

The problem here I think is a matter of viewpoint. The world is a closed system. Each individual monetary area operates within that closed system. So if you press in one area, the results of that will pop up somewhere else in the world.

The world can be modelled as an interacting set of non-convertible floating rate monetary systems (with pegged nations treated as part of the currency area they are pegged to). So that means for your currency to go down all the others have to go up. It only takes the central bank of one of the other areas to start buying your currency to halt that decline.

And if a currency area has an export led policy, then they will intervene to assist their exporters by providing liquidity in the currency the exporters actually want - their own. This is pretty much what the Swiss did against the Euro, and frankly as the Chinese central bank does against pretty much everything.

So I think the driver is not so much demand for your currency, as desire to access your market by foreign exporters. And that is obviously linked to how wealthy your country is perceived by export-led nations.

So if somebody suggests that your currency will collapse if your local government intervenes in the economy, they will need to explain why the export nations that are responsible for your trade deficit would allow that to happen.

What exchange rates do is difficult to predict (they will 'fluctuate' - to borrow a phrase). There is no overarching theory of exchange rates in economics that stacks up with the empirical data.

But certainly the idea of a sudden unstoppable collapse because you're trying to improve the lot of poor people is just another example of playing the fear card.

Cost Push Inflation

As I mentioned in the previous post this is essentially down to demand for goods and services from outside of your currency area. Demand your policies are unlikely to affect.

So I think the previous suggestion of strategic buffer stocks to smooth out rapid fluctuations is as good as any. Certainly the idea that you can leave it to the futures market is likely to be a mistake. You need to have the physical product in hand.

In case of extreme supply shortage you can use a system that is know to work very well indeed - rationing. It got us through the Second World War.

Wealth Concentration

Money is power and I think our current situation demonstrates that in spades. The question is how to fix it.

It's important that we defend the principle of one person one vote. And that very likely means we have to pay our politicians very well indeed.

Because if we don't, then somebody else will.

The problem with that is that most people thing paying politicians out in buttons would be too much. They are held in such low esteem. So its not an easy problem to fix.

Beyond that I think it is imperative that we make the game harder to play. It should be more of a challenge to get wealthy. Think of it as going to Level 2 on a video game.

So build the equality into the distribution system as far as you can, starting with reversing the decline in the wage share and preventing the excess build up of ponzi private debt by getting the banks into line.

Cheetahs would tell you that they'd love their gazelle meat on tap. But indulging that just makes them fat and lazy. Really cheetahs like chasing gazelle and the faster the gazelle the more enjoyment there is in the catch.

The limits of MMT

It's important to remember that MMT is a macro monetary theory. It is not a universal solution to life's problems. It can only make sure there is sufficient monetary flow to ensure that real production is as much as it can and try to stop build up of problems in debt and wage distribution.

Addressing the other problems, like the limits to growth and measures to stop us boiling the planet, are a whole separate debate.

Those are my thoughts. Feel free to add yours below.

8 comments:

Elwood Anderson said...

MMT illustrates the limitations of neoliberalism and the lack of understanding of the current monetary system, but doesn't get at the heart of what's wrong with a debt based economies, which is tied up in the real differences between social capital and money capital. Debt based economies inevitably lead to an economic treadmill where the primary variable used to judge the economy, GDP doesn't reflect social values, and the perpetual growth requirement leads to short term thinking. For a complete understanding of the problem read this book: http://www.amazon.com/s/ref=nb_sb_noss_1?url=search-alias%3Daps&field-keywords=rethinking+money

BT London said...

JP Koning seems to like the accounting side of MMT, but not the job guarantee or policy recommendations.

http://jpkoning.blogspot.ca/2013/01/meandering-from-mmt-and-platinum-coin.html

Meanwhile, Palley goes on the attack against MMT, saying it's just a crap version of new keynesianism that fails to appreciate the Phillips curve and IS/LM:

http://www.thomaspalley.com/?p=322

Personally, I think their moniker 'MMT' has helped them become well known, but is hindering the integration of their ideas into economics.

Tom Hickey said...

"JP Koning seems to like the accounting side of MMT, but not the job guarantee or policy recommendations."

Conservatives are unmoved by unemployment and don't like policy that makes full employment a priority, even when the inflation objection is removed, as MMT does. So it's just moralizing.

"crap version of new keynesianism that fails to appreciate the Phillips curve and IS/LM"

First, New Keynesianism and the rest of the neoclassical-Keynesian synthesis is untenable at least because it is based on Samuelson's acceptance of ergodicity in a field that is non-ergodic. Secondly, the originator of ISLM, John Hicks, later repudiated it. It's not applicable in a monetary economy.

Acorn said...

Thanks for firming up the soft bits. As one of the kids at the back of the class, trying to catch up on 55 MMT posts, I have hit a wall; namely:- http://www.3spoken.co.uk/2012/04/fixed-exchange-rate-system-at-heart-of.html .

You mention "liabilities" circa 32 times. Is this "cash"; keystrokes or what?

Neil Wilson said...

All of the above.

We settle our debts by swapping somebody else's liabilities with each other.

Because somebody else's liabilities in your hands is an asset to you.

So when you pay for something with cash what you are doing is swapping the debt that you owe the store for a debt that the central bank owes you.

Takes a bit of getting your head around, but once you realise that a fiat money system means that we're permanently owed then it frees your mind for the other possibilities of the system.

Acorn said...

Neil; regarding firming up the soft bits, Quantity vs. Price Expansion.

Listened to the BoE Governor today saying inflation will remain high with little growth. What we used to call stagflation (is this word in the MMT glossary). Has the UK economy already run out of capacity to expand the quantity? Have our producers settled for price expansion, any time they can get it? Are we just importing inflation? Is there something basically wrong with the UK structure, that makes it prone to inflation?

Neil Wilson said...

There's more than one type of price change. Neo-classical conflate it all into one.

There is no demand pull inflation in the system. It's all cost push - caused by terms of trade and lack of competition.

It's not really inflation in the classic sense. It's a deliberate reduction in the standard of living for wage earners, while protecting creditors.

If the independent central bank hypothesis had any credibility they would jump on this price change and cause the necessary level of bankruptcy and capital destruction to eliminate it.

But that would involve some of their banker mates taking a cold bath. So it doesn't happen.

Bubbles and Busts:Exchange Rate Intervention Is Gaining Popularity, Again said...

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