The main insight of MMT

19 Apr, 2022 at 11:05 | Posted in Economics | 44 Comments

Understanding Modern Monetary Theory: Part 1 - EconlibMMT is, first and foremost, a balance sheet approach to macroeconomics. At its very core lie reserve accounting, then deposit accounting, and then sectoral balances accounting. There is very little behaviour in any of this. Equilibrium rules as all balances balance – in both flows and stocks – and there are no assumptions apart from the existence of a central bank, a Treasury, a banking system and some households and firms. MMT can only be learned by mastering its balance sheet approach. It can only be engaged by discussing the balance sheet operations it puts forward. It is here where value is added …

First of all, the main insight of MMT is that the mainstream has the sequence wrong. Whereas they assume that government expenditure is financed by taxes, MMT assumes that government spending is financed by money creation. MMT stresses that the central bank, empowered by the law and serving the state, is the monopoly issuer of currency … This logically means that the state has to spend before taxes can be paid … When taxpayers pay their taxes (or banks buy government bonds on the primary market), they first need to have state money.

Dirk Ehnts

Fiscal deficits always lead to an increase in the supply of financial assets held in the nongovernmental sector of the economy. This real-world fact, of course, constitutes a huge problem for mainstream (textbook) macroeconomic theory with its models building on ‘money multipliers’ and ‘loanable funds.’

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”

In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate.

As argued by Kelton, there are many problems with the standard presentation and formalization of the loanable funds theory. And more can be added to the list:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization.

2 As is typical of most mainstream macroeconomic formalizations and models, there is pretty little mention of real-world​ phenomena, like e. g. real money, credit rationing and the existence of multiple interest rates, in the loanable funds theory. Loanable funds theory essentially reduces modern monetary economies to something akin to barter systems — something they definitely are not. As emphasized especially by Minsky, to understand and explain how much investment/loaning/crediting is going on in an economy, it’s much more important to focus on the working of financial markets than staring at accounting identities like S = Y – C – G. The problems we meet on modern markets today have more to do with inadequate financial institutions than with the size of loanable-funds-savings.

3 The loanable funds theory in the “New Keynesian” approach means that the interest rate is endogenized by assuming that Central Banks can (try to) adjust it in response to an eventual output gap. This, of course, is essentially nothing but an assumption of Walras’ law being valid and applicable, and that a fortiori the attainment of equilibrium is secured by the Central Banks’ interest rate adjustments. From a realist Keynes-Minsky point of view, this can’t be considered anything else than a belief resting on nothing but sheer hope. [Not to mention that more and more Central Banks actually choose not to follow Taylor-like policy rules.] The age-old belief that Central Banks control the money supply has more and more come to be questioned and replaced by an “endogenous” money view, and I think the same will happen to the view that Central Banks determine “the” rate of interest.

4 A further problem in the traditional loanable funds theory is that it assumes that saving and investment can be treated as independent entities. To Keynes this was seriously wrong:

gtThe classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shifts​, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts to an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium —  is not always compatible with the macroeconomic outcome. The fallacy of composition (the “atomistic fallacy” of Keynes) has many faces — loanable funds is one of them.

5 Contrary to the loanable funds theory, finance in the world of Keynes and Minsky precedes investment and saving. Highlighting the loanable funds fallacy, Keynes wrote in “The Process of Capital Formation” (1939):

Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.

What is “forgotten” in the loanable funds theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities nowadays depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling​ money/savings/credit — are more or less left in the dark in modern formalizations of the loanable funds theory.

kaleckiIt should be emphasized that the equality between savings and investment … will be valid under all circumstances. In particular, it will be independent of the level of the rate of interest which was customarily considered in economic theory to be the factor equilibrating the demand for and supply of new capital. In the present conception investment, once carried out, automatically provides the savings necessary to finance it. Indeed, in our simplified model, profits in a given period are the direct outcome of capitalists’ consumption and investment in that period. If investment increases by a certain amount, savings out of profits are pro tanto higher …

One important consequence of the above is that the rate of interest cannot be determined by the demand for and supply of new capital because investment ‘finances itself.’


  1. Do MMT enthusiasts (such as Charles in these comments) not realize that balance sheets balance to Net Worth, not zero? Despite claiming to have learned from Mehrling, do MMT supporters ignore his key insight that money is a hybrid public-private system that allows private agents to create vast amounts of money as private IOUs?
    As for behavioral connotations, when hundreds of trillions in new private sector Net Financial Assets came under psychological, panicked selling pressure in 2008 and 2020, did the Fed demonstrate the behavior of creating new savings by keystroke to backstop all the new private money creation, a behavior that they arbitrarily failed to exhibit in 1929, say?

    • Henry, are the behavioral implications of S=I that you can’t behave as if you have new privately-created Net Financial Assets, yet a glance at the FRED series for “Households and Nonprofit Organizations; Net Worth, Level  (TNWBSHNO)” shows that net financial saving is very large (much larger than the US national debt)? What behavioral implications does the lack of an export warrant to MMT’s sectoral balance sheet account theory have on financial firms’ ability to create new Net Financial Assets that are hidden from NIPA figures?

    • RSS Thanks. Not an MMTer. Net Financial Saving = zero is actually in some 1960s texts so not a new concept e.g. Lawrence Ritter. Yes, of course, net worth is not zero. Over $100T of net worth for US private sector. However, aggregate financial net worth, including the gov. sector, is still zero. NIPA reports net financial saving for every quarter. The number is always zero.

      What this means is that aggregate net worth is represented by non-financial assets only.

      Yes, I found this relationship strange when I first encountered. But, after investigation, I found it to be true. I even contacted Michael Woodford, considered the leading monetary economist in the US. He told me, yes, financially it all adds up to zero.

    • Charles, why does NIPA ignore financial markets, as if stock portfolios do not represent wealth? Did Musk just buy Twitter using purely financial assets that do not show up in NIPA?
      In other words, if you look at “B.101.h Balance Sheet of Households” on the FRED site, why are saying that ~$114 trillion in financial assets (including $42.5 trillion in Corporate Equities and Mutual Fund shares, and $15 trillion in Equity in noncorporate — business) really net to zero? Do the owners of those assets consider them zero?
      Is the focus on NIPA and ignorance of real-world financial market balance sheets yet another indication of how orthodox MMT is? Just because a blackboard drawing shows the private sector balance sheet netting out to zero, does that mean actual finance firms can’t exhibit behavior that figures out how to hide vast new Net Financial Assets from NIPA?

      • rsm, Thanks. Good question. Equity securities represent a claim on the assets of a company, after all liabilities are accounted for. The vast majority of these assets are real, i.e., non-financial – plant, equipment, software, etc. For example, Starbucks has value because of the economic value of its stores and the rest of its infrastructure. Yes, many companies have cash and cash equivalents on their balance sheet, but these financial assets are offset by financial liabilities of another entity so, as always, financial assets net to zero.

        Short and strange story – stocks, for the most part, are a non-financial asset. Yes, they can be converted to cash. Maybe a poor analogy, but you can sell your car for cash.
        That, of course, does not mean the car is a financial asset.

        Weirdos like me also find it interesting that apparently the value of equities do not enter the net flow of spending, saving, etc. If anyone sells their security to get cash, another entity must buy the security and reduce their cash. So the value of equities apparently never enters the actual economy. Yes, Musk bought Twitter with financial assets. But the other side of the transaction received financial assets – the cash from Musk. So the financial side, as always, netted to zero. NIPA would report this as no change in financial assets. Musk’s cash would show up on NIPA accounts. Of course, it would also be a liability of another entity, such as a bank.

        So that’s the explanation. Let me know if it makes any sense to you.

        • I think that is a very good explanation.

          • Jerry,

            Thanks! Very few explain equity securities in this matter so good to get comments. Any criticism is especially useful, as it allows you to see if you really know what you are talking about.

    • Charles, and Jerry, why not look at Starbucks’ actual balance sheet (
      When you say the cash equivalents net to zero because they show up as a liability on some other agent’s balance sheet, are you neglecting time? If I spend money today and the receiving bank is willing to hold a correspondent bank balance with my bank, can’t balance sheets remain extended, indefinitely? Have you ever floated a check? Can banks do that on a scale of trillions of dollars? And in a panic when everyone wants to cash their floated checks, has the Fed shown it will step in to supply liquidity as needed, essentially buying the privately floated checks for new savings created by keystroke?
      《Equity securities represent a claim on the assets of a company, after all liabilities are accounted for. 》
      Don’t you mean debt securities? Are stocks created out of thin air, and once sold in an IPO are no longer a liability of Starbucks?
      May I suggest you read the footnotes to Starbucks’s balance sheet?
      《When quoted prices in active markets for identical assets are not available, we determine the fair value of our available-for-sale securities and our over-the-counter forward contracts, collars and swaps based upon factors such as the quoted market price of similar assets or a discounted cash flow model using readily observable market data, which may include interest rate curves and forward and spot prices for currencies and commodities, depending on the nature of the investment. The fair value of our long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.》
      In other words, is there a lot of leeway to create IOUs that get rolled over until, if needed, the Fed buys them for newly-created reserves?

      • rsm
        Yes, You are correct that it would have more precise to say debt securities instead of all liabilities.

        I apologize, but, more generally, I have a hard time tying in your points with the subject of financial saving = zero, etc. You mention “time”. Yes, I guess there could be momentary lapses with this relationship when floating a check but it would quickly tie together (if I understand your point).

        Yes, the central bank can create new private savings e.g. when buying mortgage securities at more than their market value. But this action creates the offsetting Fed liability of bank reserves (negative government saving) – so the net is still zero..

        Not sure if that is helpful.


    • Charles: what export warrants do you have that “it would quickly tie together”?
      Was Bernie Madoff able to keep checks floating (so to speak) for decades, and could he have kept it going indefinitely if he hadn’t been forcibly restrained? And aren’t banks doing essentially the same thing, through legal channels Madoff never bothered to pursue, on a much larger scale?
      Is MMT myopically tied to a mathematical equation which says net financial saving must equal zero, without providing an export warrant to the real world where on the contrary empirical measures of financial net saving such as contained in the “B.101.e Balance Sheet of Households and Nonprofit Organizations with Equity Detail” page on FRED show financial assets of $118 trillion?
      Sorry if you don’t understand why I’m asking this, but how can you reduce Musk’s purchase of Twitter for Tesla stock as a non-transaction because net financial savings equals zero? Can you see that Tesla’s stock takes on a money-like value, with an implicit Fed backstop?
      Charles said: “But this action creates the offsetting Fed liability of bank reserves (negative government saving) – so the net is still zero..”
      Didn’t the “negative government saving” come from thin air, not from anyone else’s savings? Who was debited, to pay for Quantitative Easing? Can you see that saying the net is still zero obscures the fact that the Fed created new IOUs to itself out of thin air, and has this ability at any time, and doing so has definite effects that would not have happened if the net was still zero because the Fed didn’t create an IOU to itself out of thin air to pay for assets that no market agent wanted?

      • RSM thanks. Don’t have the time for all your points right now but will get back. Let me start with Madoff. Still not sure what your point is. Yes, he could have continued indefinitely had circumstances been different. While he engaged in these activities, his clients had less financial saving than they thought they had. This lower financial saving resulted in higher financial saving for Bernie and family. So, as always, it was a wash. Not sure if that addresses your point? but I’m trying to address within the context of the financial saving = zero concept. .

      • Yes, you could say “negative government saving” comes from thin air. As I understand it, that is MMT’s point: When the government spends more than it earns (negative saving or a deficit), the private sector receives more than sends back in taxes. But, as you say, no one cares about the government negative saving. So private sector financial saving goes up, a good thing – even though, from an accounting standpoint, financial saving overall nets to zero. As I understand it, that is MMT’s “free lunch”.

    • Charles, may I spin a tale where private agents create IOUs at will, using complex financial instruments that obscure the similarity to Madoff’s simple scheme? In other words, the private sector benefits as much from a free lunch as MMT’s government sector, because as Hicks noted in A Market Theory of Money (reference provided on request) privately-created “pseudo-money” circulates until it becomes reserves?

      So can we tell a story where many leveraged investors got paid at first by Madoff, who drew on sales proceeds to other levered-up new investors, then when Madoff’s scheme failed because of a classic bank run brought on by the Fed’s failing to rescue Lehman’s, the victims were made pretty whole thanks to new leverage, relying ultimately on the Fed’s policy reversal when they started rescuing everyone through “cash for trash” liquidity programs?

      Thus, at the end of the day, don’t we see obvious evidence in FRED net worth measures that the private sector has grown its new Net Financial Assets, with an implicit Fed backstop to monetize those new private NFAs in financial panics?

      What export warrant can you present that firms actually have zero net privately created financial assets? If you consider the Goodwill asset line item on Starbucks’ balance sheet, where was that debited from? Can Starbucks simply declare it then borrow money against it and keep rolling it until, if needed, the Fed will monetize the IOU thus backstopping a privately-created NFA after it was created?

      • rsm . Yes, useful to go the “facts” of the FRED data. Thanks. The major components of financial assets are shown as (a) various deposits (that are liabilities of financial institutions such as banks) (b) pension obligations (that are liabilities of the business sector) and (c) equities – directly held, mutual fund shares, and ownership of private businesses. As I have noted, equities
        represent a claim on primarily non-financial assets and hence the convention of listing equity ownership as a financial asset is misleading. Businesses do have some financial assets but they are relatively minor and are offset by liabilities anyway.

        For example, say you have a dry cleaning business that pays you $50000 each year after all the bills have been paid – which you withdraw as your income. You value the business at $500000. You then sell the business for $500000. The new owner receives the building, the equipment, etc.- no cash. Hence you can see your equity ownership represented non-financial assets.

        So as much as I might try, I don’t see an example than undermines the identity: net financial saving = zero. Do you have a specific example of a financial asset that doesn’t have a corresponding liability? I would be very interested.

        Goodwill is an intangible asset, not a financial asset. So don’t see its relevance.


    • Charles, may I take your dry cleaner example, and ask, what if the buyer got the cash from a bank, which expanded its balance sheet, and may never have to contract it to withdraw the money (especially as the Fed will backstop banks in financial panics)?
      Charles, you asked if I have “a specific example of a financial asset that doesn’t have a corresponding liability”? May I protest your quick dismissal of Goodwill as an intangible asset? Does Goodwill not appear on Starbucks’ balance sheet, contributing to its assets, and probably being balanced by equity for shareholders on the liability side? So Starbucks equity owners can withdraw money against the Goodwill collateral? Do you see how balance sheets kept expanded indefinitely can easily violate the “Net Financial Assets = 0” mathematical deduction?
      What export warrant can you provide that the private sector is not creating money willy-nilly, that is backstopped after the fact by the Fed, in panics? Why wouldn’t they?

      • rsm dry cleaner example: Buyer borrows $500000 from bank and buys the company. The seller has gained $500000 in financial assets. The buyer now has a financial liability of $500000 – the loan. The buyer’s financial assets are a negative $500000. Hence, the overall change in net financial assets is zero.

        In addition, the buyer has a non-financial asset of $500000 – the dry cleaning business.

        The bank now has a new financial asset – the loan – and a new financial liability – the deposits created by the loan. So also a wash.

        So, yes, new money was created – in this example, the seller of the business ends up with $500000 of financial assets that didn’t previously exist – as the bank created them out of thin air. But the buyer of the business has a new financial liability of $500000 that didn’t previously exist – the loan. So the net is , as always, zero.

        So I don’t see any violation of the identity.

        Will try to get back to you on other points. BTW, I don’t know what “export warrant” means. Thanks.

  2. One thing that troubles me is that the classical loanable funds theory is an ex ante theory of the interest rate, i.e. it has behavioural implications. Whereas, the Keynesian S=I equation is an ex post relationship and is not comparable on this basis.

  3. Ehnts and many others are right in saying that “the main insight of MMT is that government spending is financed by money creation”. For sovereign governments with their own fiat currencies this insight is is an extremely important extension and clarification of Abba Lerner’s principles of functional finance.
    However, this valuable insight does not validate MMTas a school of thought.
    Sadly MMT is polluted by fallacious dogmas which are held as sacrosanct by its founding fathers. The latter consist of approximately a dozen individuals headed by the triumvirate Warren Mosler, William Mitchell, and L. Randall Wray.
    This “1990s MMT clan” (Mitchell’s phrase) invented the term “Modern Monetary Theory”. They claim that they alone have the authority to define what MMT is.
    They insist that that a buffer stock Job Guarantee scheme (JG) is “a central aspect” and “integral part” of MMT.
    It is claimed that a JG scheme is “the only logical way of providing jobs for everyone with guaranteed price stability”, “a tool for controlling the general price level”, “obviates the need for minimum wage legislation”, and “flattens the Phillips curve”.
    These claims are based on two fallacies:
    – Fallacy A. The government can control inflation if it fixes just one market price because all relative prices in a market economy adjust to a pattern set by competitive and other social forces.
    – Fallacy B. With a JG scheme the government would fix an important market price (the wage rate for unskilled/low paid labour). This would be set by fixed wage paid to JG workers.
    Regarding Fallacy A, MMT claims that relative prices are determined by a combination of:
    – Market supply and demand forces which reflect technology and tastes.
    – Class conflicts and power relations between different groups of workers and between capital and labour.
    However, even if a single equilibrium set of relative prices exists in the long term (which may be doubted), price changes towards such an equilibrium would be a slow secular tendency.
    In the short and medium term inflation is far more strongly influenced by short term shocks (natural disasters, wars, changes in taxes and legislation, commodity prices, technological innovations, etc).
    Regarding Fallacy B:
    1. MMT propose that the wage paid to JG workers would be “a living wage”, ie a wage which would meet some arbitrary definition of the needs of workers. This implies that the JG wage would not be fixed – would have to be changed periodically in line with the general price level. This is the reverse of the theoretical MMT claim that the JG wage would determine the general price level.

    2. The JG scheme would increase wage inflation in periods of high demand.
    Unless the JG wage were very low, some workers with non-JG jobs would be attracted by the relative ease of JG work, reduced transport costs required for commuting to work, job security, child care facilities, training opportunities and other promised benefits. This would make it more difficult for private and other public sector employers to find low paid workers.
    Consequently even a fixed JG wage would increase increase pressures to offer higher wages when there is a tight labour market.

    3. Contrary to the assertions of MMT, a JG scheme is very different to commodity buffer stock schemes.
    (i) A JG scheme does not own a durable stock of labour. Labour services are consumed immediately when they are provided, so there is never any stock.
    (ii) With a commodity buffer stock scheme the scheme sets a ceiling to the market price by selling stock at that price.
    In contrast, because of (i), a JG scheme can’t sell labour and can’t restrain the wages available to JG workers in the private sector market.
    In tight labour markets firms can offer workers whatever is necessary and profitable to attract workers.
    Thus the JG wage is largely irrelevant. It could not fix even the price of unskilled labour, certainly not the general levels and rates of inflation if wages and prices in the whole economy.
    4. MMTers sometimes try to counter the above points by emphasising that a JG scheme might increase the supply and quality of labour available to the economy by retraining the workforce and reducing the tendency for the long-term unemployed to become unemployable due to lack of skills and good work habits. However:
    (i) Any such effects would produce a structural shift in the Phillips curve, not a slope change.
    (ii) Any such effects would only occur in the few years following the introduction of a JG scheme.
    (iii) Any such effects are likely to be quite small, and more than cancelled out by the effects on labour supply mentioned in point 2 above.
    In addition to the above Fallacies A and B, MMT’s arguments for a JG scheme involve two unproven assumptions:
    – Possible or Likely Fallacy C.
    The assumption that a sufficient number of temporary socially worthwhile public sector jobs can be found or created to employ all the unemployed when aggregate demand slumps.
    – Possible or Likely Fallacy D.
    The assumption that a public sector bureaucracy has the imagination and flexibility to efficiently manage the nationwide employment of perhaps 1 to 10% of the adult population.
    Excellent comments by Henry!

    • Kingsley,
      “Excellent comments by Henry!”
      I’m not so sure that you are clear about what I am saying.
      Firstly, I’m a Keynesian and believe most of mainstream economics is off the track.
      Second, my comments about Keynes and the theory of the interest rate does not necessarily disparage his liquidity preference theory. I am merely pointing out that Keynes believed his schema applied at levels of output below full employment and the classical theory applied at full employment.
      His duplicity needs to be understood and reconciled.
      Lars’ piece above delves into the several issues at the heart of the controversies surrounding macroeconomics which need a great deal more examination and clarification.

      • “I am merely pointing out that Keynes believed his schema applied at levels of output below full employment and the classical theory applied at full employment.”

        Did he identify an historical episode when classical conditions actually did apply and if not if they ever could? Or was it just a case that in the long run…”

      • “Did he identify an historical episode when classical conditions actually did apply and if not if they ever could? Or was it just a case that in the long run…””
        I’m not sure about the former but I don’t believe he provided a particular exemplar but happy to be corrected.
        Regarding the latter, two points.
        The classical theory assumed that full employment (always) pertained. Of course, that is its undoing from Keynes’ point of view.
        However, there are times when the economy is at full employment (let’s put aside the definitional problems). A generation need not fear its demise pending the emergence of a fully employed economy. It does happen periodically.

    • Kingsley,
      Re your MMT comments.
      I’m a little confused with some of your commentary around your fallacies. We probably agree on a few things.
      It seems to me MMT’s reliance on the JGS to control inflation is problematic. In fact, Bill Mitchell himself seems to be now admitting the same. In a recent blog he wrote the following:
      “In the real world then, there are many influences on the price level and a full understanding of MMT requires us to recognise them and how they interact and the way in which government policy can militate against them.
      It is not just a case of having a Job Guarantee in place.”
      He also said this:
      “A Job Guarantee works by the government creating unemployment in the non-government sector which is undergoing inflationary pressures, and, transferring the workers into the Job Guarantee pool, which is a fixed price job offer.”
      It appears the JGS is not as benign as it sounds.
      To my mind, his comments in his blog show a degree of contradiction.
      Mitchell has said he developed the JGS from his study of the Australian government’s wool price stabilization scheme. What he has always failed to say is that this scheme eventually failed, as have most commodity price stabilization schemes.
      He came close to explaining this failure in a prior post:
      “I want to discuss in the next post on this topic – how developing the buffer stock employment framework in 1978 (which we now call the Job Guarantee) brought me to understand that if the government spends on a price rule, it can condition the overall price level.
      But even then, real world complications about market power and supply constraints etc can interfere with the adjustment process governing that rule.”

      • “What he has always failed to say is that this scheme eventually failed, as have most commodity price stabilization schemes.”

        Is there an alternative? Commodity markets are highly volatile for a whole host of reasons (as we are about to see again). Really price stabilisation schemes are really a matter of life and death in many countries, especially in very poor countries who do not have bargaining power on international markets and need a stable supply of affordable basic foods.

        The Japanese I think generally support agricultural price stabilisation over free markets because it protects small farmers. Many also remember when they were cut off from world markets: that was a major contributing factor to the rise of fascism.

        In Britain there is concerns about the impact of the withdrawal of EU stabilisation schemes on its agricultural sector for environmental reasons. (The EU system though is bad: it subsidises more the larger the farm.) Nevertheless there is concern in Britain about the disappearance of smaller more sustainable farms with the end of CAP in Britain.

      • Someone has to pay for the stabilization.
        Production that would be otherwise unsustainable will flourish, which from a societal point of view, might be a good thing.
        In the case of the Australian wool price stabilization scheme, the scheme was financed by the government. The higher prices allowed less viable production to continue which unbalanced the market. The scheme had to finance the acquisition and storage of huge stocks of wool. In the end this was untenable and the scheme collapsed.

        • I would think the JG has some advantages over the wool scheme. For one, the government doesn’t need to ‘store’ the workers, although it may ‘store’ or preserve some of their ability to remain in the labor force. And allowing less ‘viable’ employees (from the employer perspective) to be able to work is probably a really good thing for society. It is not like society is likely to suffer a misallocation of resources devoted to producing an excess supply of future workers, such as it might from misallocating resources towards producing more wool rather than other goods. Although maybe happier people have more sex, who knows about the causation chain there. And a JG would set a de-facto wage-price floor while not much attempting to limit higher wages, should private employers bid them up. Perhaps it would make less people ‘unemployable’ in the eyes of private employers. So that is a little different than the wool price stabilization scheme.

          “Someone has to pay for the stabilization”. Maybe so. But many countries already pay to support those with low incomes. In the US, it is at least debatable that government provided benefits (often only provided with a requirement to work) allow low wage employers to continue to attract and employ people at below subsistence wages. ‘Someone’ is already paying for that. Would a JG be worse than subsidizing companies that pay such low wages?

          • Jerry,
            I agree that “a JG would … not [do] much attempting to limit higher wages, should private employers bid them up.”
            I also agree that a JG scheme might be justified in order to to improve social welfare and alleviate poverty. These are the claims of the 2018 JG proposal for the USA of Wray et al in ‘Public Service Employment: A Path To Full Employment’ –
            This proposal wisely makes none of MMT’s fallacious claims about “anchoring” inflation.
            In contrast Mosler’s 2017 proposal to the European Central Bank claims that:
            “with a labor buffer stock policy, the ECB would set the wage of the transitional job, with the presumption that market forces would subsequently determine all other prices as they express their value relative to the set price of transitional job labor. The employed buffer stock wage therefore functions as the price anchor for the currency, as an instrument of price stability, and, in practice, the source of the definition of the value of the euro in the euro area.

            Click to access wp_864.pdf

            and likewise his paper:

        • Jerry,
          I am interested in understanding the rationale behind the JGS as a means of stabilizing inflation.
          MMTers seem to put great store on saying inflation is of prime concern yet they also seem to want to keep up the spending. MMTers use the JGS as a way of offsetting the profligacy of government spending, another easy panacea. That’s the way it seems to me.
          Bill Mitchell, has in some recent blogs, cast the problem in terms I had not read before (I’ve been reading his blog for 7 years), so this was novel. In so doing, he has also raised the possible reasons why a JGS might not be an effective price stabilization scheme.
          I have always had my doubts and I look forward to see how he develops these new twists in the JGS tale.

          • From an article on today’s zerohedge page: “Another model that seems to hold is that highly intelligent economists and central bankers generally believe they understand inflation, as if it is a mathematical equation. And even though inflation appears when they least expect it, and fails to manifest when they most anticipate it, they remain remarkably confident in their ability to predict it.”

  4. The problem with citing the above Keynes’ Chapter 14 passage (“The classical theory of the rate of interest seems to suppose that,…”) is that it is preceded by the following passage a couple of paragraphs up:
    “All these points of agreement can be summed up in a proposition which the classical school would accept and I should not dispute; namely, that, if the level of income is assumed to be given, we can infer that the current rate of interest must lie at the point where the demand curve for capital corresponding to different rates of interest cuts the curve of the amounts saved out of the given income corresponding to different rates of interest.”
    The critical line is: “if the level of income is assumed to be given”.
    In the final chapter of the GT he writes:
    “But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.”
    At full employment, the level of real output cannot change. So what this implies is that Keynes seems to be saying that, at full employment output, the classical theory of the interest rate is valid.

  5. This area of macroeconomics is fraught.
    The S=I equation is an ex post relationship.
    It has no behavioural connotations.

  6. Charles said:
    “As previously noted, the Saving in the Saving=Investment identity is a stock (not a flow) representing the value of the investment.”
    I would disagree with this.
    The saving in the S=I equation is a flow.

    • Henry, thanks for comment! My (more complete) understanding is that the saving in the S=I identity can be a stock or a flow. Consider:

      In flow terms:
      The entity making the investment spends X amount of money (dissaves). The entity selling the investment receives (saves at that moment) X amount of money. Net financial saving = zero. That is, in flow terms the action of investment results in a zero net financial flow which equals the net savings of zero. So, yes:

      S= I as zero = zero Causality from right to left

      In stock terms:

      The entity making the investment now owns, say, a machine (which I think is correct to think of as a stock). This results in this entity having real saving – the machine. Assume the machine is worth $1000. So the “stock” of Investment = $1000 and the resultant real saving – also a stock = $1000

      S= I causality from right to left.
      Since I didn’t want to make the subject complex, I avoided mentioning the more subtle flow relationship where zero = zero. That would likely confuse readers.
      Of course, the big picture point is that all the statements from economists about needing to financially save in order for investment to occur are nonsense.

      I think this is correct. However, to my knowledge, no one has clearly explained the relationship in this manner. So I don’t want to be presumptuous. Hope clear and interesting. Criticisms, questions are most welcome..

      • Charles,
        Some terminology: the flow variable is SAVING and the stock variable is SAVINGS. I believe this is the convention.
        “The entity making the investment spends X amount of money (dissaves)..etc…”
        I would agree this passage deals with the movements in SAVINGS – this is a financing and asset transfer operation. However, there is no new spending involved which creates a new investment good. An existing investment good is exchanged for money. There are no implications for income flows because no new goods are created. I=S does not apply in the income flow sense. Causality does not enter the matter.
        If there was a profit made on the sale of the asset, this would be counted in income flow.
        That’s my understanding.

        • Henry, Thanks for the reminder on terminology!
          I think you meant “I would agree this passage deals with the movement is SAVING”.
          You then make the important point that no new goods were created. You are correct. I believe to make my point accurate you need to assume that another machine was reordered and made such that inventory levels are left unchanged. In that case, net financial flows related to reordering, etc. will still be a wash – so SAVING = zero. However, SAVINGS (and Investment) will now be represented by the value of the new machine.

          Thus I think the point still stands: The SAVING = Investment identity holds because zero = zero. . The SAVINGS=Investment identity holds as each side represents the value of the machine, etc. That’s the way the NIPA accounts in the US treat these items as well

          Does this now make more sense to you? Thanks, very helpful as I always benefit from criticism.
          The big picture point is that the Saving in the Saving = Investment identity is usually explained as a net financial flow equal to the value of the investment. Instead, I’m explaining that such flows always net to zero and therefore can’t equal the value of the investment. Only by differentiating between SAVING and SAVINGS do we really understand the identity.

        • Charles,
          “I think you meant “I would agree this passage deals with the movement is SAVING”.”
          No, I meant what I wrote.
          The transactions you discuss relate to balance sheet movements. There are no income flow implications.

          • Henry,
            Really appreciate the comment. Allow me to ponder it. Separately, do you agree that net financial saving (a flow) always nets to zero? Thx.

          • Charles,
            “Allow me to ponder it. ”
            What I wrote above is my understanding. I am certainly as fallible as any other.
            “Separately, do you agree that net financial saving (a flow) always nets to zero?”
            I don’t entirely understand what you mean by this.
            In a two sector economy, the total production of goods can be divided into consumption goods and investment goods and changes in inventory.
            What is not consumption goods (i.e., that which is saving) equals investment goods and changes in inventory (i.e. any goods not sold).
            This is an ex post relationship, i.e it is a matter of record, an accounting record.

            • Henry yes, as you explain: Saving = Income minus Consumption.
              Saving = Investment goods and changes in Inventory.

              By financial saving I mean the saving of financial assets, not saving that
              represents the production of investment goods.

              My understanding is that: All spending = All income and that financial saving = Income minus Spending. Therefore, financial saving must be zero.

              Another way to think about it: For every financial asset there is a corresponding financial liability. Hence, financial assets net to zero.

              In the NIPA accounts for the US, overall net financial saving is always reported as zero.

              My point is that if one realizes that financial saving = zero, it clarifies the discussion of the saving = investment relationship. That’s why I asked. Does this relationship (financial saving = zero) now make sense to you? Thanks.

            • Charles,
              “My point is that if one realizes that financial saving = zero, it clarifies the discussion of the saving = investment relationship.”
              Yes, the distinction is important and in that sense it clarifies the discussion.

              • Henry thanks. Appreciate previous comments. As you noted, it is the production of investment goods that creates savings – not the transactions involving the investment. You are correct and I’m still sorting it all out. .

  7. 《There is very little behaviour in any of this.》

    How about fraud? How sure are you that balance sheets are accurate? Since a lot of huge balance sheets include items valued based on the empirically unsupported expectations hypothesis, where is the export warrant that balance sheets in the real world match MMT theory?

  8. Many of these “problems” in economics are simply lying there in the open, waiting for some one talented in descriptive analytics to observe the actual political economy. And there have been more than a few, who have studied this piece or that aspect. But, still the commanding heights of the economics profession are dominated by folks for whom speculating on how many angels can dance on the head of a pin would be an advance toward scientific realism.
    . .
    “Loanable funds” are not something anyone could observe or measure. Even conceiving of such a viscous concatenation of available idle resources and forgone consumption defies the power of ordinary imagination.
    The National Accounts are predicated on a double-entry bookkeeping where every sale is a purchase and every expense, someone’s income. In the economy’s circular flow, the only transactions that can be accounted for involve the spending of money and the reflected receipt of that spending as revenue and income. There can be no “saving” in the sense of simply refraining from consumption or of hoarding currency, because no transaction takes place to be recorded by dual entries. If someone, somewhere is stuffing greenbacks into mattresses, the only effect is to spin the circular flow down, drawing off the hydraulic pressure of money circulating as spending.

    • Great explanation. As you point out, all spending=all income. Since financial saving=income minus spending – net financial saving must equal zero. Even if you believed in “loanable funds” as a concept, financial saving would not increase these funds. As previously noted, the Saving in the Saving=Investment identity is a stock (not a flow) representing the value of the investment. This is real saving.

      So the simple summary is that: net financial saving = zero, so it does not play a role in the saving = investment identity. Make sense?

  9. Excellent article. Thanks. However, on the savings/investment identity, I believe there is still a misunderstanding.

    Yes, the level of investment represents the amount of money spent on investment.

    The financial saving related to investment is zero. That is, the buyer of, say, a machine dissaves financially while the seller of the machine receives the money and saves financially.

    The saving related to the investment is the machine – real saving (in contrast to financial saving).

    That is:

    Saving = Investment

    Causality is from right to left. The investment creates real (non-financial) saving.
    As explained, Keynes and Kalecki are close on this point. However, they explain that investment creates financial saving (such as profits). But they are overlooking that the buyer of the investment is dissaving by an equivalent amount. Hence, net financial saving = zero.

    Since financial saving always = zero, the Saving in the Saving = Investment identity has nothing to do with financial saving. In this example, it represents the value of the machine. This insight has apparently been largely overlooked for a century or so.

    Hope interesting and helpful. Questions, criticisms welcome.


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