Over the past month, I’ve been trying to pin down exactly what’s wrong with Modern Monetary Theory. Or perhaps a less presumptuous way of putting it is that I’ve been trying to figure out what mainstream economists believe is wrong with MMT.
Here I’ll list 6 MMT ideas. I’ll first explain the kernel of truth in each claim. Then I’ll explain the mistaken way that MMTers interpret these claims. Finally, I’ll explain how and why these claims don’t mean what MMTers think they mean. I’ve taken this approach because I believe that MMT is based on a series of basic misunderstandings:
1. Banks don’t loan out reserves.
2. There is no money multiplier.
3. Money is endogenous.
4. Interest rates are an exogenous monetary policy instrument.
5. Investment is not very responsive to interest rates.
6. In a closed economy, net saving equals the budget deficit.
1. Banks don’t loan out reserves.
It’s true that most bank loans are executed by crediting the borrower with a new bank account, and thus the reserves usually don’t immediately leave the banking system. BTW, for any given monetary base, the only way that reserves can leave the banking system is as currency notes.
From this mostly valid claim, MMTers wrongly conclude that an injection of new reserves into the banking system does not boost bank lending.
As I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of price and quantity changes that has the effect of boosting bank lending.
2. There is no money multiplier.
It’s true that the money multiplier is not a constant, a point well understood by mainstream economists.
From this valid claim, MMTers wrongly conclude that a permanent and exogenous injection of new base money by the Fed does not have an expansionary effect on the monetary aggregates.
As I explained in this recent post, the injection of new base money has a multiplier effect on all nominal variables in the economy.
3. Money is endogenous.
When there is no interest paid on bank reserves, it’s true that pegging rates makes the money supply is endogenous, which means it cannot be changed at the discretion of a central bank.
From this valid claim, MMTers wrongly conclude that under an interest rate targeting regime the central bank cannot adjust the money supply to control inflation.
In fact, even under interest rate targeting, central banks can and do adjust the money supply to target inflation, as during the period from 1983 to 2007. To adjust the money supply appropriately they must frequently adjust the interest rate target, but they are quite willing to do so as required to stabilize inflation. They didn’t target the money supply during 1983-2007, but they used OMOs to adjust the monetary base as required to control inflation.
4. Interest rates are an exogenous monetary policy instrument.
On a day-to-day basis, it’s true that central banks can and do target short-term interest rates.
From this valid claim, MMTers wrongly conclude that changes in short-term interest rates reflect changes in monetary policy.
In fact, over any meaningful period of time, short-term interest rates are mostly endogenous, determined by factors such as the income and Fisher effects. The Fed merely follows along to prevent an economic disaster. As an analogy, at any given moment in time the path of a bus going over a mountain range is determined by the driver’s handling of the steering wheel, but over any meaningful span of time the path of the bus is determined by the layout of the road, combined with the bus driver’s desire not to go over the edge of a cliff. In this analogy, the twisting road is like the fluctuating natural rate of interest. As I pointed out in this recent post, MMTers don’t understand that if the central bank targets inflation then interest rates become endogenous, and positive IS shocks cause higher interest rates.
5. Investment is not very responsive to interest rates.
It is true that a decline in interest rates does not usually do much to boost investment, and vice versa.
From this valid claim, MMTers wrongly conclude that a decline in interest rates induced by an expansionary monetary policy does little to boost investment. I.e. they conclude that monetary policy has little impact on aggregate demand.
This is reasoning from a price change. Most declines in interest rates are due to the income and/or Fisher effects, not easy money. Those sorts of declines are not expansionary. A fall in output or inflation reduces the natural rate of interest, in which case the central bank must cut the target interest rate even faster to stimulate investment. Because MMTers mostly ignore the income and Fisher effects, and view the natural interest rate as being zero, they miss the fact that most changes in interest rates do not reflect shifts in monetary policy.
6. In a closed economy, net saving equals the budget deficit.
The MMTers define private net saving as the budget deficit plus the current account surplus. Thus it’s true (by definition) that net saving equals the budget deficit in a closed economy.
From this valid claim, MMTers wrong conclude that if the public wishes to engage in more net saving, the government needs to run a larger budget deficit.
Actually, the central bank should respond to this scenario with a more expansionary monetary policy, which will push the public’s desire to net save back into equilibrium with the budget deficit at full employment. Conversely, when there is an exogenous change in the budget deficit, the Fed needs to adjust policy so that net savings moves appropriately, without impacting the Fed’s targets. The Fed did this fairly well in response to the sharp reduction in the budget deficit during 2013, and again in response to the sharp increase in the deficit during 2016-18.
These MMT errors are all interrelated. Because MMTers misinterpret the supposed “endogeneity” of money and the supposed “exogeniety” of interest rates, they get monetary policy wrong, greatly underestimating its potency (at least when interest rates are positive). This leads them to miss the importance of monetary offset, and that leads them to greatly overrate the importance of fiscal policy.
At a deeper level, MMTers seem to draw invalid causal implications from a series of accounting relationships. Those accounting identities don’t mean what MMTers think they mean.
READER COMMENTS
Jerry Brown
Dec 11 2020 at 4:56pm
This is a fairly accurate portrayal of some of what MMT says. But obviously MMT does not agree with your conclusions about why they don’t apply.
I would add a number seven to your list.
7. MMT does not believe the ‘loanable funds theory’ applies in our present monetary system. They conclude from that- There is no prior stock of savings, or pool of money, that must be available to ‘fund’ borrowing or investment. Increasing government deficits does not put upward pressure on interest rates- actually the opposite happens unless the central bank takes steps to defend its interest rate target. Economic theories that are in part based on ‘loanable funds’ are therefore compromised.
Scott Sumner
Dec 12 2020 at 1:10am
You said:
“But obviously MMT does not agree with your conclusions about why they don’t apply.”
It’s interesting that over the past month no MMTers has refuted my arguments, and almost none have even tried. What implications should I draw from that fact?
Jerry Brown
Dec 12 2020 at 2:29am
I don’t know. You are doing your criticisms the right way- actually reading what the authors have published and responding to that. That is kind of rare all by itself. And praiseworthy considering the plethora of critics that have not done that. I hope you do get a response from one of the authors of the MMT textbook.
I note that Brian Romanchuk did write two blog posts in response to your criticisms and I believe he put links to them in your comment section at Money Illusion. And Ahmed Fares has quite ably represented the MMT viewpoint on much of your criticism here in comments. And I have tried also.
What I would say is that ten years ago finding an economist that really recognized, as you do now, that your MMT points 1 thru 6 are even nominally correct and worthy of discussion would have been much more difficult. And some of what you say- well how can you refute the ‘natural’ rate of interest except by saying there is no evidence there is such a thing?
Scott Sumner
Dec 12 2020 at 1:26pm
You said:
“What I would say is that ten years ago finding an economist that really recognized, as you do now, that your MMT points 1 thru 6 are even nominally correct and worthy of discussion would have been much more difficult.”
That’s not correct. All of those points were well understood by myself and other mainstream economists decades ago. For instance, they understood that the money multiplier is not a constant. All except point #6, as prior to MMT no economist had ever contemplated “net saving” that way, and hence no economist had given the issue any thought.
Again, those claims don’t mean what MMTers think they mean.
As far as Ahmed Fares, I certainly appreciate the attempt to respond. But the Stephanie Kelton piece he linked to is NOT something you want to show a mainstream economist to convince them that MMT has merit. The seeming inability of MMTers to respond adequately does not help their cause. She simply doesn’t understand what Krugman is asking, whereas any mainstream economist would immediately understand what Krugman was asking. You need to know the views of the other side if you have any hope of convincing them.
Jerry Brown
Dec 12 2020 at 5:49pm
This is a common reaction among economists. ‘We’ve known this for years and dismissed it because it is not important- there’s really nothing new here in MMT’.
Well knowing something is actually possible or correct and discounting why it matters is not the same as knowing it is correct and important and incorporating it into your ideas about how things actually work. I mean there is a huge difference between knowing that if you split an atom you will release energy and actually building and having an atomic bomb like in 1945. Do you think the physicists were going around saying we knew this all along so it doesn’t matter? It matters a great deal what importance you place on facts that you recognize to be true and how you use them.
Would it be fair to say you are asking of MMT why do those six points really matter?
Scott Sumner
Dec 13 2020 at 5:49pm
No, I’m not asking them what they think those points matter. I’m telling them that they are wrong about why they think they matter.
Thomas Sewell
Dec 11 2020 at 7:26pm
I’ll add one I’ve seen a lot of, although it hopefully just applies to MMTers who aren’t economists:
8. Accounting entities represent a claim on wealth, but they aren’t actually wealth.
I’ve seen a lot of claims along the lines of governments can just print as much money as they want to pay off any spending/debts as long as it’s denominated in their currency, but little understanding that doesn’t increase the underlying wealth represented by the accounting entities/currency.
Jerry Brown
Dec 11 2020 at 8:32pm
Not sure what accounting ‘entities’ are or what wealth has to do with it. But MMT does claim that the government can always bring idle resources (read unemployed workers) into the usually more productive state of employment through spending. It is probable that employed people are more likely to produce things that add to wealth than unemployed people.
Thomas Sewell
Dec 11 2020 at 8:53pm
What precisely is the government spending, in that situation? What are these idle workers ultimately given in order to enable them to be no longer idle?
Is the government giving them actual wealth, i.e. something extracted from someone else in the economy which was built/mined/labored to create (among other things)? Or is it just giving them a piece of paper or an entry in a database stating they are allowed to spend X amount of money?
It turns out that at any given time, there is a finite supply of the first, but an effectively infinite supply of the second. The mistake seems to be in confusing one for the other. The second has the potential to be exchanged for the first, but it doesn’t produce more of the first and it turns out that per supply/demand the more you have of the second chasing the first, the more of the second you must exchange to get the first.
Jerry Brown
Dec 11 2020 at 10:01pm
“What precisely is the government spending, in that situation? What are these idle workers ultimately given in order to enable them to be no longer idle?”
MMT would say that the government is giving them a financial asset (money in the currency the government issues) in exchange for their labor. That financial asset always has at least some value if the government is able to impose and enforce tax payment in that currency. The argument goes that others having a tax liability in the currency will value the currency at least to the extent they need it to keep the government from putting them in jail. Government is not always a nice guy in MMT.
“It turns out that at any given time, there is a finite supply of the first [wealth], but an effectively infinite supply of the second [money].”
That is true. MMT says that while there is theoretically an infinite supply of money, in actuality there are a lot of people who very much want money but are not able to exchange their labor for it. And that while wealth is at any one time finite, money via employment of idle resources can increase the stock of wealth a society holds. This part isn’t much different than what a market monetarist would say even though they would recommend different policies to try to get to fuller employment. But wealth isn’t the right word to use here- ‘production’ would be better I think.
Thomas Sewell
Dec 13 2020 at 2:53am
So then as I said originally, some MMT proponents are confused about the functions of accounting entities/currency and how it ties to actual existing wealth.
BTW, “value”, “wealth”, and “production” aren’t the same things. Let’s define Value as what someone is willing to pay for something else. Production is how much someone is able to create. Wealth is the stock of useful stuff which has already been created by someone.
Money can have zero value, while still being used legally to pay nominal taxes. Imagine that the government declared a special tax of one meter squared of air. Does anyone imagine air would suddenly take on a value which it didn’t have before? When there is an effectively limitless supply out there of air freely available to anyone with which to pay the tax?
The amount of money anyone has doesn’t represent wealth, except so far as it has a value in wealth. Adding more money to the system doesn’t increase the supply of wealth, it just changes the ratio of money to wealth.
Production increases the supply of wealth, but to get more production it’s not sufficient to supply money, you have to supply wealth to the producers. That wealth comes from the existing stock, one way or another (in this case, taxation, or inflation, or redistribution, or some similar governmental/central bank method). It’s highly likely (almost a truism) that the wealth involved was already performing a more useful/wealth building function than that to which the MMTer plans to force it to be used for. This is because market forces and the related prices literally exist to ensure scarce resources are used for their most economically efficient purpose. Thus, taking them for something else is almost assured to be an overall loss of wealth production.
Perhaps in some cases (preventing theft of citizen’s wealth by others would be an obvious one) it can be argued that loss is worth it, but it’s not something to take lightly and MMT can’t just handwave it away.
Ahmed Fares
Dec 11 2020 at 8:48pm
As regards point #6 and expansionary monetary policy, this from Stephanie Kelton in response to Paul Krugman:
Short answer here:
#2: Is there no ability to substitute monetary for fiscal policy? Answer: Little to none. In a slump, cutting interest rates is weak tea against depressed expectations of profits. In a boom, raising interest rates does little to quell new activity, and higher rates could even support the expansion via the interest income channel.
Long answer here:
Is there no ability to substitute monetary for fiscal policy? Not much. Krugman sees MMT as saying that fiscal policy can always deliver the “right size” deficit to maintain full employment. He’s challenging that by asserting that you can have any size deficit and still have full employment because the central bank can always establish the “right size” interest rate to get you there. I disagree.
It is true that the Fed can pursue any rate policy it desires. It does not follow, however, that cutting interest rates will work to induce enough spending to maintain full employment. You can’t simply assume borrowers will always have the appetite for more private debt, even if you make it really cheap to borrow. Businesses borrow and invest when they’re swamped with customers (or expect to be). They don’t passively take on more debt simply because the central bank has dangled cheaper credit before them.
The evidence suggests that interest rates don’t matter much at all when it comes to private investment: J.P. Morgan (here and here), the Reserve Bank of Australia (here), the Federal Reserve (here) and the Bank of England (here). It is even possible, as MMT has shown, that cutting rates could further slow the economy because lowering rates cuts government expenditures (interest payments), thereby exacerbating contractionary fiscal policy.
source: Paul Krugman Asked Me About Modern Monetary Theory. Here Are 4 Answers.
link: https://stephaniekelton.com/paul-krugman-asked-me-about-modern-monetary-theory-here-are-4-answers/
Scott Sumner
Dec 12 2020 at 1:08am
Her answer to Krugman’s first question indicates that she doesn’t understand what Krugman is asking. She starts by saying “no”, but her answer indicates that she actually believes the answer is “yes”.
And as for her third answer, Krugman asks about fiscal policy and she responds by discussing monetary policy.
There’s a reason why mainstream economists are kind of exasperated with MMTers, and those Kelton answers are exhibit A.
You said:
“The evidence suggests that interest rates don’t matter much at all when it comes to private investment: J.P. Morgan (here and here), the Reserve Bank of Australia (here), the Federal Reserve (here) and the Bank of England (here).”
So it’s not clear to me if you are just ignoring what I said in the post and not responding, or if you didn’t understand my points about never reasoning from an interest rate change. And the links don’t work.
What if you read a study that indicated that output of a particular good doesn’t respond to price changes. What would you think of that study?
Ahmed Fares
Dec 12 2020 at 1:18am
“And the links don’t work.”
The links are in the article I linked to. I figured you or others would read the article there.
Scott Sumner
Dec 12 2020 at 1:34pm
Much of that research involves asking the opinion of business executives. But their answers are likely to be biased by the standard “never reason from a price change” problem.
Market Fiscalist
Dec 12 2020 at 1:44pm
I think you are being unfair on the quality of Kelton answers which are among the clearest statements on MMT that I have read.
Why do you say she doesn’t understand Krugman’s question #1? Her answer is that there a lot of factor determining the deficit size that will produce full employment (including possibly monetary and exchange rate policy).
And with her third answer (‘Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.’) I think she is in fact talking about fiscal policy. It is fiscal deficits that are doing the pumping that are reducing interest rates in her view.
Scott Sumner
Dec 13 2020 at 5:54pm
On the first question, Krugman is very clearly asking if for any given macro shock, monetary policy can be substituted for a lack of response from fiscal policy. And she responds by talking about how the macro shocks can vary in size. That’s not relevant!
On question three, she is talking about the effect of an increase in the money supply when Krugman is talking about fiscal policy.
I’m not going to tell MMTers what to do; but if they want to have any influence among mainstream economists then those sorts of responses simply won’t do.
Market Fiscalist
Dec 14 2020 at 10:53am
OK, fair enough on Q1 – I agree upon re-reading that she does not address the intent of Krugman’s point.
On Q3: You say ‘she is talking about the effect of an increase in the money supply when Krugman is talking about fiscal policy.’. I am sure she is talking about an increase in the money supply that comes about through fiscal policy. Remember that MMTers see the deficit as creating new money and monetary policy as merely adjusting the balance between bonds and money after the event. MMTers think that an increased deficit will push interest rates down unless bonds are sold to raise them back up again to the target level.
Her definition of fiscal policy is different from Krugman’s and yours who see the deficit and bond sales combined as fiscal policy while she sees the deficit alone as fiscal and the bonds sales as monetary policy. I agree that MMT makes things confusing by adopting non-standard definitions such as these but if we are to fail them for this alone we are not making much of an attempt to understand the theory.
Overall she is pretty clear in her answer to Krugman’s big picture question: No, there is not much scope to mix and match fiscal and monetary policy so as to choose the size of the deficit. Monetary policy is ‘weak tea’ and fiscal policy must be the real driver of ‘stimulus’ (and she shows her work).
Scott Sumner
Dec 15 2020 at 5:39pm
It’s silly to claim that fiscal policy increases the money supply. Yes, it’s a free country and MMTers are entitled to define terms however they wish. But if she wants to influence Krugman she ought to answer the question in a way that Krugman can understand.
My second point is that MMTers often tell me that I have to assume the Fed is targeting interest rates, and hence can’t assume the Fed controls the money supply. So then how can fiscal policy affect interest rates?
And why don’t IS shocks affect interest rates?
Market Fiscalist
Dec 15 2020 at 8:04pm
‘how can fiscal policy affect interest rates?’
That one is easy. If the deficit expands people’s bank accounts get debited with new money as the government spends it and this (without bond sales) would push the interbank rate lower. This seem correct to me, at least until other effects kick in.
‘ why don’t IS shocks affect interest rates?’
Is there evidence that they don’t ? If the government was not targeting interest rates and if the government did not adjust the size of the deficit in response to a IS/LM shock I think they might agree that interest rates would be affected by such a shock (though they might think the direction was indeterminate!) . However they fixate on interest rates being an exogenous variable set by the government so much that it is hard to see what they think would happen to interest rates if they were allowed to float apart from their view that the interbank rate is apparently set by supply and demand on that particular market.
Market Fiscalist
Dec 15 2020 at 8:15pm
Also I think defining fiscal policy as just the deficit and not bond sales is not just a quirky definition but is at the heart of the theory.
If one just assumes that the deficit affects the price level (and NGDP) and bond policy just affects interest rates then MMT makes sense. Its just monetarism where one has to count both money and government bonds as money !
In my view where they fall down is that they handwave a lot as to why they think monetary policy doesn’t also affect the price level (and NGDP).
Scott Sumner
Dec 16 2020 at 4:28pm
MMTers claim that IS shocks don’t affect interest rates because the Fed targets interest rates. Why doesn’t that argument apply to deficits?
Market Fiscalist
Dec 16 2020 at 9:24pm
I agree there is an inconsistency.
I have been trying my best to make sense of MMT and I think the reason it is hard is because of such inconsistencies mostly around interest rates.
KevinDC
Dec 12 2020 at 7:46am
Interestingly, as soon as you posted this, I was reminded of the fact that Scott had already read that very article from Stephanie Kelton and responded to it here.
Danny
Dec 11 2020 at 9:28pm
Is there any particular reason you’ve taken on this task right now? Do you see MMT gaining in influence?
Scott Sumner
Dec 12 2020 at 1:14am
I’m working on reviving monetarism, and MMT is as far from monetarism as one can get. So it’s a good place to start.
AFAIK, MMT has almost no appeal among academic economists, for obvious reasons. But it does get mentioned in the media quite often as a sort of up and coming theory.
I doubt it will have influence at central banks, as it provides no guidance as to how the Fed can best hit its 2% inflation target.
As for fiscal policy, Congress pays no attention to ANY academic theories.
Radford Neal
Dec 12 2020 at 1:40pm
MMT sounds to me very much like the economic ideas of the Social Credit movement that originated between the world wars. They thought that the central bank could just create money and distribute it as a dividend to the people, solving the problems of depressions, poverty, etc.
It seems to me that there’s nothing wrong with the idea that wouldn’t be solved by admitting that the amount of the dividend they envisioned was a factor of ten or so bigger than what is actually possible from the central bank’s gains from “seignorage”.
Ahmed Fares
Dec 13 2020 at 4:16pm
Radford,
“that the central bank could just create money”
If you’re asking whether the government should run deficits, you’re still not grasping MMT. This from Chris Dillow:
One task here is to convey the concept of emergence. If you’ve max out your credit card, it’s because you’ve been profligate. But the govt does not have such control over its borrowing: it is instead the result of private sector decisions.
This from Lyall Taylor (The LT3000 Blog), go also gets it:
Because consumers have generally been reducing their debt burdens in the post-GFC years, and corporates have not needed to borrow to finance investment, it has generally fallen on the government to do the borrowing. In the absence of this ‘borrower of last resort’, the economy would enter a downward spiral leading eventually to depression. The latter would ultimately achieve the same thing – balancing net savings and investment – but through a much more painful route: crushing savings by hammering corporate profitability – a key source of savings – and mass unemployment, which thwarts consumers’ ability to save, while forcing the government into deficit anyway by having their tax income crater. This is precisely what happened during the Great Depression.
What MMT says is that since you have to run deficits anyway, at least make them of the good kind and not the bad kind.
Radford Neal
Dec 13 2020 at 6:08pm
I’m not clear on what you’re saying.
At present, central banks tend to create money through the process of buying (“monetizing”) government debt. So there could be a “shortage” of government debt if the central bank wants to create money but there is no government debt to buy. But I think this situation has not arisen in recent memory, given the propensity of governments to go into debt for other reasons. And if there really weren’t any government debt to buy, central banks could create money by buying other assets.
But maybe that’s not really your point. Instead you seem to be saying that people have a certain propensity to save, which has to be satisfied somehow, and if there is no private demand for these savings, then for the government to not absorb them with government debt would have bad consequences. But I don’t see it. When people decide to save, they prefer to earn a return on their savings, but if savings exceeds actual investment opportunities, this return will decline. This might discourage savings, or might just lead to people saving despite getting little or no return, but neither of those seem like disastrous outcomes. It would be unfortunate if there were few good investment opportunities, but that is a real situation in the economy, not solvable by just monetary or fiscal policy change.
Ahmed Fares
Dec 13 2020 at 8:12pm
Radford,
“and if there is no private demand for these savings…”
Savings do not fund investment. Investment is funded by credit creation, and brings forth its own saving.
The problem occurs when the non-government sector desires to net save, i.e., save in excess of the amount of investment that is taking place in an economy. While not initially disastrous, it can become so over time as a rise in unemployment leads to reduced spending due to fear of job loss, which in turn leads to increased unemployment, and so on. Welfare payments rise while taxes fall and the government deficit rises that way.
The alternative is for the government to buy up idle resources, or enable the private sector to do so, by tax cuts or wealth transfers.
Either way, the government will run a deficit.
Radford Neal
Dec 13 2020 at 11:00pm
I still don’t understand what you’re saying. While some investment is funded by credit, lots of investment is instead funded by equity.
Perhaps it would help to imagine an economy with no banks, and no government, at least no government that borrows or prints money. People use gold as money, accepting only actual pieces of gold metal in payment (they don’t trust anything else). People who want to save, put gold under a mattress. If they want to invest, they use gold to buy shares in an enterprise. This is obviously not close to the current situation. But still, there is saving and investment. And there’s no particular reason for this economy to have any serious problems. What is different about the current economy that makes you think government debt is necessary to avoid serious problems from a mismatch of savings and investment?
Ahmed Fares
Dec 13 2020 at 11:50pm
Radford,
“What is different about the current economy that makes you think government debt is necessary to avoid serious problems from a mismatch of savings and investment?”
MMT tells us that state money introduces the possibility of unemployment. There is no unemployment in non-monetary economies.
This train of logic also explains why mass unemployment arises. It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. For aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).
Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn’t desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending. —Bill Mitchell
Because it is the government that creates involuntary unemployment by the introduction of state money, it is only the government that can solve the problem.
More on this here:
“… one wants to explain the empirical fact that involuntary unemployment is only associated with money-using contractual economies. In other words, real economies that do not use money and money labor contracts to organize production (e.g., feudalism, slave economies, South Sea Islanders discovered by Margaret Meed, etc) may possess important nonlinearities and even an uncertain future — but there is never an important involuntary unemployment problem. Slaves are always fully employed as well as are serfs in feudalism…….Finally it should be noted that herds of animals, schools of fish, etc organize together to solve the economic problems of What? How? For Whom? Without using money, contracts or markets, these animals still face complex nonlinear problems in their search for food and interaction with other herds. Yet animals never suffer from involuntary unemployment! —Professor Paul Davidson (University of Tennessee)
Philip George
Dec 13 2020 at 10:50am
About your point 2 that there is no multiplier. The first chapter of my book “Macroeconomics Redefined” (ebook on Amazon) proves that the money multiplier ranges between 0 and 1. It can never be greater than 1, which I suppose is another way of saying that there is no “multiplier”.
Scott Sumner
Dec 13 2020 at 5:55pm
Well, that’s clearly wrong.
Comments are closed.