From Wicksell to Le Bourva and MMT

3 June, 2018 at 12:24 | Posted in Economics | 5 Comments

MMT Comparing the limited work of Wicksell, Le Bourva, and MMT, we find that they share many similarities. Obviously, the institutions and issues being discussed have changed during the decades these scholars were writing, yet all three views agree on some fundamental issues. The methodology is quite similar, with a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to: the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.

Some minor differences occur when it comes to the question of why banks do not expand unlimited credit if they can. While Wicksell believes that the interbank-market debt of banks expanding their loan books relatively faster than other banks should stop further bank loan creation, Le Bourva agrees with Kalecki and sees rising risk as the major factor. In Wray (2012), it is creditworthiness and access to reserves at low costs that limit the extension of loans.

Dirk Ehnts & Nicolas Barberoux

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? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:

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.

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5 Comments »

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  1. The remarks by Dirk Ehnts and Nicholas Barberoux about economic models not being the same as the balancing of accounts is simply incorrect. Today there is every reason to find that a good model for our social system is based on the trend to balance two sides of the incoming and outgoing values for many of the entities or agents. In my model in particular this is one significant aspect of it really consists–a compound balancing machine as illustrated in my SSNR 2600103 “A Mechanical Model for Teaching Macroeconomics”.

  2. “Budget deficits are not the major problem since fiat money means that governments can always make more of them.”

    That may how things should be, but here in the US of A things are not done that way, at l east not to any significant degree, for the simple reason that the Federal Reserve is privately owned and, for all practical intents and purposes, run for the benefit of the Wall Street banks. Who, incidentally, collect much of the interest on the money the government borrows rather than creates by fiat, even though the constitution certainly gives it that power. And it would take a revolution to change that!

  3. “[…] a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work.”
    .
    The problem is that Modern Monetary Theory still maintains a “circular flow of money” model that ignores the ability of the private sector to create Net Financial Assets without having to wait for government to expand its balance sheet first.
    .
    “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.”
    .
    I see currency as supported much more by a private consensus to accept units of the currency for private settlements that do not need to involve the government. This private sector preference for currencies far outweighs the ability of governments to tax. International firms prefer dollar units for settlement of contracts that no one need pay US taxes on.

  4. In Wray (2012), it is creditworthiness … Dirk Ehnts & Nicolas Barberoux

    Who is worthy of the PUBLIC’S CREDIT but for PRIVATE GAIN? Yet because of extensive privileges from government for the banks, credit unions, etc., it is largely the public’s credit that banks, credit unions extend, not their own, especially as the cartel they are in fact.

    and access to reserves at low costs that limit the extension of loans. Dirk Ehnts & Nicolas Barberoux

    The reason reserves may be had at low cost is because ONLY banks, credit unions, etc. in the private sector may use our Nation’s fiat in the form of inherently risk-free account balances at the Central Bank, being limited to unsafe, totally inadequate for modern commerce physical fiat, a.k.a. “cash.” Thus the demand for fiat is artificially low because of special privileges for the banks.

    • being limited to unsafe, totally inadequate for modern commerce physical fiat, a.k.a. “cash.” aa

      Make that “while the non-bank private sector is limited to unsafe, totally inadequate for modern commerce physical fiat, a.k.a. “cash.” , please.


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