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MMT is inarguably the most visible heterdox economic framework. One of its foundational speakers, Randy Wray, spoke at the second (I think) Capital as Power conference. Unfortunately, I did not fully grasp his argument at the time.
I have since engaged more with MMT writings, in part because of the prominence of MMT and its proponents on social media. It opened my eyes to some pretty central functions of fiscal and monetary operations. It strikes me that the creation of money is vital to the processes of differential accumulation. Further, the process of DA is the central dynamic of capitalism, and therefore important to processes of money-creation.
I think that engagement between the framework and concepts of MMT and that of CasP could be fruitful, even if the two cannot fully concord. Doing science being eschewed loyalty to an analytical toolbox. Bringing MMT and CasP together should leave us with more insights and better analytical tools.
Two immediate questions and considerations have come to me: inflation & equity as money.
Inflation & Redistribution
CasP and MMT have converging and diverging insights is inflation. Both view price movements as institutional rather than mechanical. I know that some MMT proponents are familiar with Means important work on administered prices, as well as the work of Hall & Hitch.
MMT focuses on aggregate level inflation, because it talks about the tools of money creation and destruction as means to manage inflation. N&B have twisted Friedman’s famous comment to observe that inflation is everyone, and always, redistributionary, which emphasizes sub-aggregate price changes. One policy prescription that has come out of MMT is to create enough money to push up inflation, perhaps even beyond the 2% target of most central banks. It is well-known that higher inflation benefits debtors at the expense of creditors. N&B, however, have shown that higher inflation has tended to differentially benefit dominant capital. Can this seeming conflict be resolved? Perhaps it is the difference between aggregate and differential (i.e. sub-aggregate) analysis.
There is not actually any such thing as aggregate inflation. We have invented aggregate measures to inform macroeconomic analysis and management, for better or worse. Of course, those measures have been reified with the emphasis on so-called ‘real’ measures of the economy. However, it seems that MMTers are well aware of the problems with real measures, so their use of aggregate inflation measures seems to be done with full awareness that they are manufactured and inherently problematic. What insights might be added to MMT if its analytical lens was trained on the use of prices as part of a redistributionary struggle?
Are corporate equities money?
One of the threads of MMT is where money comes from. It focuses on currency sovereign governments ability to spend money into existence. A criticism has been that it downplays, or even ignores, the money-creation ability of private banks. One recent part of this argument is that private banks are effectively franchisees of the central bank, which is analytically rolled into the government. However, a question that has emerged for me is: Are corporate equities money? I posed the question on Twitter to some MMT folks. Their offhand response was ‘no.’ My inclination is ‘yes.’ An important part of my effort to understand equities as money is the marginal process of equity valuation. If a company has one million shares, valued at $100/share, for a total valuation of $100 million, and then a single share sells for $200, that means the valuation jumps to $200 million. Has the total amount of money in the economy doubled? It seems that equities are not the same bank deposits. But they also don’t seem to be NOT money. If I were more skilled at using Godley Tables, which are another key part of MMT, I might be better able to resolve this matter.
What are other folks thoughts about MMT and its potential to work together with, or potentially against, CasP?
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Regarding the connection between corporate equity and money, this paragraph, taken from pp. 240-241 of my 1992 PhD dissertation “Inflation as Restructuring”, may be relevant:
“It is fairly clear, then, that the accumulation of corporate assets creates ‘new funds.’ Much like bank deposits — corporate bonds, stocks, bank loans, accounts payable and other records of ownership are all pecuniary magnitudes and, when they expand, they inflate the aggregate sum of money values existing in the economy. Furthermore, since the accumulation of capital is ‘forward-looking,’ the inflation of pecuniary values occurs without a concurrent change in the congeries of goods and services, or in the capacity to produce them. It is like diluting water with water. As we argue below, the accumulation of capital may or may not lead to changes in industrial conditions, but if it does, the change will occur after accumulation has taken place. Following Veblen, we can hence argue that, ceteris paribus, capital accumulation is a purely inflationary process. The meaning of this statement must be interpreted with caution. We do not claim here that accumulation raises or will raise the average price paid for goods and services (although that may very well happen). Instead, we simply state that, at the moment of accumulation, there is an inflation of the aggregate sum of pecuniary values without any change in the existing quantity of goods and services.”
I also added the following footnote to this paragraph:
“Bank deposits are records of ownership. They cover part of the capitalized earning capacity of a corporation (the bank) and are hence capital for all intent and purposes. There is nevertheless a difference between the creation of bank money, which is sometimes restricted by reserve requirements, and the expansion of non-bank liabilities, which is potentially limitless. To illustrate that there is no technical ceiling on the expansion of such ‘new funds,’ consider a hypothetical scenario with only two corporations — AAA Inc. which has $1 million worth of machines capitalized in the form of shares, and BBB Inc. which has $1 million in cash, also capitalized in the form of shares. The owners of AAA Inc. could use their assets as collateral to borrow $1 million in cash from BBB Inc. Following the transaction, the total assets of BBB Inc. remain unchanged, but those of AAA Inc. now stand at $2 million. In the second stage, BBB Inc. could generate expectations for new profits and use them to sell $1 million worth of shares to AAA Inc., thereby increasing its own assets to $2 billion. In the third step, AAA could create expectations for further increases in future profits and use them to sell $1 million in bonds or shares to BBB Inc., raising its assets to $3 million, and so on. Since there is no required reserve ratio preventing non-financial corporations from having all their assets invested in financial papers, this kind of expansion could (at least in principle) go on for ever.”
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Why Is Modern Capitalism Inflationary?
By Shimshon Bichler & Jonathan Nitzan
Ever wondered why inflation over the past century is so different than it was beforehand?
The enclosed figure, taken from our 2009 book Capital as Power, shows prices in the U.K. since the 13th century (note the vertical log scale). The chart indicates that, until very recently, prices tended to zigzag up as well as down. Many people don’t know it, but the 19th century, for instance, was largely deflationary rather than inflationary. (Immanuel Wallerstein told us that he had always suspected that much, but hadn’t seen the evidence until we presented it in a conference he attended.)
In any event, since 1900, and particular after the Great Depression, commodity prices have tended to increase continuously and uninterruptedly.
So the early 20th century marks some sort of ‘structural change’, as economists like to call it. And in our view, one reason for this important change was the emergence of large-scale, forward-looking capitalization.
When capital accumulates as rising credit and/or rising equity, it increases the sum of money values in society. And because this expansion is forward-looking – and this point is critical – it occurs before (and often without) a comparable increase in the ‘volume’ of goods and services. So right off the bat, rising capitalization increases the ratio of money values to commodities, or what economists call ‘liquidity’. In this monetary sense, rising capitalization is inherently inflationary.
Moreover – and in our view crucially – increases in capitalization and commodity prices tend to be differential: they redistribute assets and incomes in favour of those who own the inflated assets and more expensive goods and services. In other words, asset and price inflations are almost always redistributional. And since, according to CasP, redistribution is the key driver of modern capitalism, inflation tends to be one of its permanent features.
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I think it helps clarify to talk about “money” as just one type of asset, or financial instrument, with a particular defining characteristic: these assets’ prices are institutionally pegged to the unit of account.* I call them M assets. (Institutions also make it easy to transfer them between accounts for payments. They can do so because they’re fixed price. Imagine ACH, Fedwire, or Paypal trying to settle payments by transferring variable-priced assets.)
That price-pegging also makes M assets perfectly fungible; deposits at all (US) banks and MM funds are interchangeable.
I think this eliminates a widespread confusion of language that’s well epitomized in John Hicks’ Value and Capital. Some instruments, he says, are “usually not reckoned as securities, but included as types of money itself” (p. 163 in the 1962 reprint edition of the 1946 second edition) — as if they can’t be, and aren’t, both.
M assets, by way, only comprise about 15% of total US wealth/assets.
So speaking of assets (a clearly defined and understood term) rather than money or “funds” or “money values,” a couple of slight edits:
“the accumulation of corporate assets creates new assets.”
“when they expand, they inflate the aggregate sum of assets”
* That price-pegging is guaranteed and enforced by multiple private and public institutions, notably including but not limited to deposit insurance for bank accounts. When the $65-billion money market Reserve Fund/Primary Fund (not insured by the FDIC/FSLIC or any private bank-insurance institutions) “broke the buck” on September 15, 2008, redeeming shares at a 97-cent price instead of $1, the U.S. Treasury stepped in within 48 hours to guarantee and prop up the $1 share price of all money market funds. (The funds paid a fee for this temporary but mandatory insurance, dissolved in September 2009.) In practice, in normal times and even extraordinary ones, $1 in M assets always sells for $1 — by definition here, but more importantly by institutional enforcement. Fixed-price is M assets’ sine qua non — the thing that makes them what they are.
Hope this is useful…
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It seems to me that so-called M assets — M0, M1, M2, MZM — although different from other assets, should not have a special role in monetary explanations of inflation.
(1) It’s true that M assets have a ‘fixed price’ — the $ — but so do all other assets at any given point in time.
(2) The quantity of M assets isn’t really fixed — they are augmented by interest payments, and their volume expands and contracts with the ebb and flow of credit expansion and contraction.
(3) Ultimately, any asset can be converted to an M asset (cash or deposits), and once converted, it can be used for purchases.
(4) Payment vehicles change. In terms of ease of use, M0 is no longer the most ‘liquid’ — checking accounts and other deposits are often easier to use in purchases. Similarly, although the $ price of cryptocurrencies changes, some institutions accept them as means of payment. Another example is corporate mergers and acquisitions, where payment is often made by swapping non M-assets such as equities and debt.
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@Jonathan Nitzan:
>It seems to me that so-called M assets…should not have a special role in monetary explanations of inflation.
Could not agree more! In Joan Robinson’s words, “There is as an unearthly, mystical element in [Milton] Friedman’s thought. The mere existence of a stock of money somehow promotes expenditure.” (Which, when “excess” spending bangs against production capacity, causes inflation.)
>(1) It’s true that M assets have a ‘fixed price’ — the $ — but so do all other assets at any given point in time.
? The point of “fixed price” is that the price doesn’t change over time. The price of M assets is institutionally hard-pegged to the unit of account. Not true for other assets.
> (2) The quantity of M assets isn’t really fixed — they are augmented by interest payments,
But, an increase/decrease in interest paid doesn’t change M assets’ price ($s/unit). So there is no price/revaluation effect on the stock of M assets. In that sense, the Q is fixed. (Or changes very slowly and is not subject to portfolio-market effects on Q.)
>their volume expands and contracts with the ebb and flow of credit expansion and contraction.
Sure, but unlike variable-priced assets, markets can’t revalue M assets. The M stock can only vary via net new lending (volume change). Which is an order of magnitude smaller than change in total assets, or even just change due to price revaluation. (Which is a key reason why monetarists’ fixation with M assets is misplaced.) These series shows annual changes in $Bs. https://fred.stlouisfed.org/graph/?g=xFpK
(Accounting aside: the only measure we have of net new lending, borrowing minus paybacks, is change in the outstanding stock of commercial-bank loans. Thus we seem to have no available measure of gross new lending, which would seem to be an important measure in economic thinking that prioritizes the effects of lending for investment…)
This interest-rate/volume line of thinking is IMO where monetarists do their biggest linguistic/definitional bait-and-switch: calling interest rates the “price” of money (versus the cost of borrowing — a very different thing). And thus the whole “demand for money” construct: If the market portfolio is long cash eg (cuz portfolio preferences), traders can’t rebalance by bidding down M assets’ price hence total quantity/stock. (And reducing their net borrowing would take years.) They can only change the portfolio proportions by bidding up variable-priced assets — increasing those assets’ total stock and portfolio proportion, and total assets.
>(3) Ultimately, any asset can be converted to an M asset (cash or deposits), and once converted, it can be used for purchases.
Key I think: they are not “converted.” They’re just swapped. Error of composition. If X sells $1,000 in Apple shares to Y for $1,000, there’s still $2,000 in assets out there, just in different hands. Contra the second law of thermodynamics: Financial instruments can only be created, destroyed, and transferred between holders (and repriced!); never changed in form.
>(4) Payment vehicles change.
I’m not sure how this relates, but just to say: Almost all transactions — spending on new goods or asset swaps — involve account transfers of M assets because they’re fixed price. Sellers demand them because they know exactly what they’re getting, at least relative to the unit of account. Ditto transfer institutions; imagine Fedwire, ACH, or Paypal trying to settle nightly accounts if the transferred assets were variable-priced!
But sure, at the margins, a small Q of transactions involves direct swaps of variable-priced assets, without the buyer first having to swap equities or whatever for cash.
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Thank you Steve. A couple of small clarifications:
3. You are correct that the actual sale of an equity or a bond is a mere ownership swap against existing M-assets. But banks can meet demand for equities by increasing loans, and when these loans become deposits, the overall amount of M-assets increases.
4. My point here is that M-assets are not the only ‘means of payment’, so this is an insufficient reason to use only M-assets in money-based theorizing of inflation.
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>banks can meet demand for equities by increasing loans, and when these loans become deposits, the overall amount of M-assets increases.
Right. Loans create deposits. Back to this topic thread, that’s straight-up accurate MMT-think (not original to MMT, of course). Endogenous money and all that.
I’m mainly going after the monetarists’ nutty “demand for money” explanation of inflation. Borrowers for mortgages, education, consumer goods, and business investment (the huge bulk of borrowing; brokerage margin loans eg are a pittance) are not borrowing because they “desire” more “money” in their portfolios. In most cases the borrowed money goes straight to the seller, never goes near the borrowers’ accounts/balance sheet. They’re borrowing because they have a desire for (households) housing, or education, or consumer goods, or (firms) to produce long-lived productive goods that will yield a profit.
>4. My point here is that M-assets are not the only ‘means of payment’, so this is an insufficient reason to use only M-assets in money-based theorizing of inflation.
Totally agree, but I’d explain it differently: people don’t spend because they have a lot of M assets (nor do they rebalance M-asset proportion in their portfolios through borrowing and paybacks). People buy fancy cars because they have lots of assets (and/or hopes/expectations of accumulating them). Swapping variable-priced assets for M assets first is just a mechanical necessity because sellers demand M assets in payment.
I think talking about “M assets,” straightforwardly defined as fixed-price instruments, eliminates a whole raft of confusions in these conversations that arises from vague, gestural, and constantly shifting meanings of “money.”
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I admit that I really dont really know very well the details of ‘macroeconomics’ and things like ‘fiscal policy’–
but i think I get the basics.—which are
Govt –federal reserve —either creates or gives private banks the right to create ‘value’ (or ‘fiat money’)–its illegal to create value or fiat money at home using a printer. Then they give money in the form of debt to those who deserve it because they create more value–eg thery use the money to make a fire with coal they find to make diamonds. Then Banks and Govt ask in return–called taxes– a share of the diamonds.
This ‘macro/fiscal ‘ analyses is so far removed from the kind of ‘microeconomics ‘ (and theoretical ecology) i focus on its like trying to understand the economy by looking at what perfumes are sold in a store, or for ecology, what kinds of pets are sold in pet stores.
There are actually behavioral geneticists /ecologists who study pets (dogs) and basically claim they are experts in the theory of biological and social evolution. The grad students are aiming for careers in the dog industry with a focus on owner-pet communication. They teach the owners how to understand their dog. (I asked one grad student whether they had formalized the syntax of dog language using either one of Chomsky’s formalisms or the alternative ‘anti-chomskyian’ connectionist version. She didn’t respond but if she had would have said ‘I’m an expert’ and yoiur question doesn’t make any sense’. (This is the kind of answer Chomsky gives.)
They think they can go to a dog park and learn more than Darwin ever knew by traveling to Galapagos islands .
(I also dont really know the ‘identities ‘ of thermodynamics though those are first thing you learn. They are also the first things you forget once you learn statistical mechanics or physics .
You dont need thermodynamic identities once you know StatMech any more than you need to know the name of 50 brands of cigarettes to understand the world economy. (It is quite possible more professional economists know more about brand names than they do about microeconomics.)(Mechanics has a sort of ‘identity problem’or ‘labeling issue’. I think statistical, quantum classical, newtonian mechanics are all fine terms, but if you use them people think you are are talking about car repair or plumbing.
It is true that alot of people who do quantum mechanics try to repair quantum theory if its possible or even needed—some (eg Dirac) say if its not broke, dont fix it.
I personally am open to and consider the idea that numbers are actually mechanical pieces of a machine called th universe.Its not a new idea and there are quite a few (some high level) papers on this idea.
I actually add the idea that these number-machines also have personalities, preferences, tastes and emotions. So they sometimes prefer to be with certain other numbers. )———
While MMT in some ways is perfectly ‘valid’ ‘in the limit’, using the idea of ‘path dependence’ its not a ‘good path to take’ on its own . (Its like saying US ‘neoliberal captialism or market democracy’ or Chinese/Russian/African Marixst-Socialist-Communism is the optimal path to take.If you look at history of MMT it comes from 3 places–1st is Keynes .
1. MMT is just Keynesianism with a few parts of keynes deleted. (otgers have pinted this out and some MMTs dont deny it).
(Similarily libertarian capitalism is Adam Smith after you delete his book on ‘moral sentiments’—
you just keep ‘the invisible hand’ and ‘division of labor’.
Most current Marxism and Socialism is what you get when you delete Marx’s essay ‘on alienation’ and his last chapter of Capital.
You just get materialism, class struggle. dialectics, etc. (Some marxists claim marx derived quantum theory–they say Marx dervied heisenberg uncertainty principal before heisenberg.
There are theoretical papers that start wuith HUP and pretty much claim to get everything in physics from it.)
Like MMTs Keynes was not a mathematican (nor is say Soros)—
they may have written one equation and a few arithnatics statemenbts–billy mitchell has a lot of arithmatic…
(Many marxists do as well–still talking about the economy using examples like 2 corns for 1 gold and 1 iron etc.)
2. Most relevant is MMT is party from Arthur Laffer of Reagonomics and the Laffer curve or supply side economics.
3. Equally relevant is its funded by a hedge fund manager who offshores his wealth so he doesnt have to pay taxes.
This is why MMT people are amost virulentl opposed to icnome taxes, a Basic income, and for Guanteed Jobs for all who want an income, which they can have by guarantee–they have a choice between what they cal socially usefl jobs–
a sweatshop, slave plantation, in the army or religious crusade, or in the police or as a prison guard, or do security or bartending at the universities where MMTs work. (If they are young then appropriate jobs can be found–lawnmowing, lemonade stand, africulture, coltain mining…)4. MMT is essentially a trojan horse. Bernie Sanders did sort of defang this horse–never accepted the idea of ‘cut taxes on the wealthy people who fund MMTers’.
Many UBI proposals are trojan horses as well–
they are like the ‘knockoff drugs’ sold in USA which look life genuine ‘pain pills’ but are made from other things
(Fentanyl, which i gather is often imported from china and mexico and is responsible for 50,000 + overdose deaths a year in USA. However the makers of ‘pain pills’ are also being sued and forced to make billion dollar payments because they also illegally sold their pau pills before fentanyl was around. Local governments are saying big pharma has to pay for coronary, health, and police services caused by their pain pills. One well known town with about 300 residents was getting over a million pills a year from 1 drug store.-they did it for 5 years. ‘Coal mining is painful and even worse most coal mines are closed.’)
The trojan horse UBI proposals tend to come from Silicon valley billionaires, pro-businesss people (‘a UBI will let everyone buy my products whether they need them or not’) and ‘spiritual’, ‘god loving’, ‘compassionate-empathetic–sympathetic people’ –most of whom are vying to named a saint by the pope or proclaimed as the new messiah by their loving followers .
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The only reasonable UBI arguments are similar to those in Blair Fix’s articles and a few others of varying conceptual and mathematical complexity–the idea is simple but in a world of 7 billion people finding a ‘representative agent’ and then mazimizing utility gets complex.
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I’d also add that while i really havent read much on human capital theory —discssed in a recent RWER aricle by Fix–i’ not against the simplest formulation. If people develop their ‘human capital’–eg learn to read a map– they might realize if they need to go 1 mile down the street, they dont need to go catch 4 plane flights around the world to get there, even if they arrive at the same place.
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