MMT — the Wicksell connection

27 Apr, 2018 at 19:02 | Posted in Economics | 4 Comments

Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.

New? Cranks? How about reading one of the great founders of neoclassical economics — Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise):

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of ‘cash in advance’ – LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem since fiat money means that governments can always make more of them.

4 Comments

  1. More that *buying* becomes the prime mover. Spending is just settling debts caused by buying things. When you run out of things to buy at a price worth paying, the spending automatically stops.

  2. In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver).

    What Wicksell did not understand and that other, deeper thinkers have is that all currencies were always based on fiat. There is no other kind of money than fiat money, credit money and never was.”This purely imaginary case” was the only reality there ever was. Gold and silver were valuable because you could get “fiat” money, credit for them, not the other way around. It always was and is credit all the way down. And state fiat money is nothing but state credit.

    Neil, if you want to use “buying” and “spending” to mean different things, it is bad pedagogy to not define both. They are almost always used as synonyms, so most people would have difficulty with what you are saying. Used the way I think you do, government buying and government spending are still the same; the difference only appears with third parties who may buy on their own credit, but use government credit for settlement (spending).

  3. “What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts.”
    .
    Money is a unit of settlement, but the private sector makes lots of settlements without paying taxes. Money is a private creation, too. Taxes are not the only or most important reason that money is used for private settlement. Bitcoin is an example of a private currency that has value but cannot be used to pay taxes. Modern Monetary Theory is wrong to harp on chartalism.
    .
    Governments don’t have a monopoly on money creation; 90% or more of money comes from bank loans.
    .
    Bill Mitchell wrote that Net Financial Assets cannot be created by the private sector without transactions with the government sector. But derivatives are represented as assets on private balance sheets, without having to go through taxes or the Fed to create them. The Fed ended up accepting toxic assets as collateral in 2008 and after, thus validating the private sector money creation by backstopping it with created dollars.
    .
    MMT implies the opposite, that the private sector has to get Fed or Treasury bills first before creating credit. In fact the banks create derivative assets in the hundreds of trillions first, then the government creates money to backstop them.
    .
    Spending by the private sector is largely independent of government …

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