Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
On August 6, 2018, British tax expert Richard Murphy who is becoming increasingly sympathetic to the principles of Modern Monetary Theory (MMT) published a blog post, which recorded an exchange with one James Meadway, who is the economics advisor to the Shadow Chancellor John McDonnell in Britain. The exchange took place on the social media page of a Labour Party insider who has long advocated a Land Tax, which McDonnell is on the public record as saying will “raise the funds we need” to help local government. He called it a “radical solution” (Source). An aside, but not an irrelevant one. It reflects the mindset of the inner economics camp in the British Labour Party, a mindset that is essentially in lockstep with the neoliberal narrative about fiscal policy. Anyway, his chief advisor evidently openly attacked MMT as “just plain old bad economics” and called it a “regression in left economic thinking” which would ultimately render the currency “entirely worthless” if applied. He also mused that any application of MMT would be “catastrophic” for Britain. Apparently, only the US can apply MMT principles. Well, the exchange was illustrative. First, the advisor, and which I guess means the person being advised, do not really understand what MMT is. Second, the Labour Party are claiming to be a “radical and transformative” force in British politics, yet hang on basic neoliberal myths about the monetary system, which is at the core of government policy implementation. Astounding really. This is Part 1 of a two-part series on this topic, most of it will be summarising past analysis. The focus here is on conceptual issues. Part 2 will focus more specifically on Balance of Payments issues.
The British Labour Party has not crowned itself in glory in the last few weeks by proposing to consider adding a UBI to its policy platform.
As many commentators have pointed out the problem with this proposal can be summarised by just considering the party’s own title – Labour Party. A party that is concerned for the welfare and aspirations of workers who work and their dependents.
Why would a progressive ‘Labour’ party want to introduce a UBI to solve unemployment when in government it could always ensure that all idle labour is productively employed?
Why would a progressive Labour Party want to surrender to the neoliberal idea that there will never be enough jobs to go round when there is patently millions of jobs that can be created to serve community and environment if the government funds them?
I dealt with that issue in the following five-part blog post series (among other posts I have published on the topic over the years):
1. Is there a case for a basic income guarantee – Part 1 (September 19, 2016).
2. Is there a case for a basic income guarantee – Part 2 (September 21 2016).
3. Is there a case for a basic income guarantee – Part 3 (September 22, 2016).
4. Is there a case for a basic income guarantee – Part 4 – robot edition (September 26, 2016).
5. Is there a case for a basic income guarantee – Part 5 (September 27, 2016).
See also the Job Guarantee Category on the right-hand side menu.
So I won’t go back into that debate here.
But the fact that the Labour Party is going down this road is no surprise really given the sort of advice it seems to be getting.
As noted in the Introduction, the main advisor to the Shadow Chancellor has been involved in a rather revealing public spat with other economists and commentators in the last week about MMT.
The short social media debate seemed to smoke out the underlying views of the advisor (James Meadway) into the public domain.
I was aware of his views previously and addressed them when I spoke at the British Labour Party Annual Conference in Brighton last September.
I provided a video of presentation and Q&A in these blog posts:
1. Video of Reclaiming the State presentation, Brighton, UK September 25, 2017 (October 4, 2017).
2. Q&A from British Labour Party Annual Conference Event, September 2017 (November 3, 2017).
One of the questions in the Q&A section covers MMT and international capital and currencies, which I was told was motivated by the concerns expressed to the questioner by the Shadow Chancellor’s advisor.
Whether that is true is not something I know but the latest offering in the social media debate by that advisor sits squarely with the concerns expressed in the question I answered last year and have written about in many fora – blog posts, refereed academic journal articles, and published books – over many years.
We dealt with the issue of currency and global financial markets in detail in our latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
There was a lengthy section on international finance and balance of payments in that book.
I also dealt with these issues in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in the context of what might happen to a Eurozone Member State that chose to exit and reintroduce its own currency.
The issues have been around as long as we have been working on the MMT project (early 1990s) and we have considered them in depth. But still they arise and the same errors in reasoning are always behind the claims by MMT critics.
There are those on the progressive side of politics that still seem to believe that global financial markets have exclusive power over a sovereign state that issues its own currency, which means that such a state has to ensure its economic policy position is supported by these market players.
Cap in hand is the expression.
In British Labour Party circles, that view goes back to the disastrous second Wilson government when Denis Healey fell prey to Monetarism and lied to the British people about having to borrow money from the IMF to keep the nation afloat.
I don’t wish to make this blog post a personal attack on the Shadow Chancellor’s advisor though. There are enough people doing that and I don’t consider that to be particularly helpful at this stage.
But the point is that he represents a very strong current that flows through the progressive side of the debate and continually reverts back to neoliberal (by which I mean in this context mainstream macroeconomics) precepts and misconceptions.
Those misconceptions then hinder the scope for thinking. I consider MMT has to some extent liberated thought because it exposes the ideological veil that these misconceptions are used to create.
So, inasmuch as I have quoted the Shadow Chancellor’s advisor, those quotes are just representative of the problem the Left has in comprehending macroeconomics and being able to distance itself from the neoliberal surrender that has seen social democratic parties crumble in electoral support and monsters like Tony Blair in charge of workers’ parties.
There is a lineage in the Shadow Chancellor’s advisor’s comments.
The Shadow Chancellor’s advisor was formerly working with the New Economics Foundation, which has made a habit of releasing, what to many look like rather progressive policy proposals, such as their proposal to solve unemployment by cutting the working week.
I dealt with that idea in this blog post – Britain needs more hours of work not less (January 10, 2012) – and demonstrated that the NEF was operating in a neo-liberal macroeconomic paradigm which distorted the options that they proposed.
They were worried that government could not expand “tax revenues to invest in health, education, social care, and other essential services” so other solutions to mass unemployment had to be sought.
In other words, fiscal policy is constrained so supply-side shifts have to be manipulated. That is a core neoliberal position to take no matter how progressive the policies that are being proposed might appear.
So there is no surprise that in the recent period the same advisor claimed that:
MMT is just plain old bad economics, unfortunately, and a regression of left economic thinking. An economy “with its own currency” may never “run out of money”: but that money can become entirely worthless.
Okay, lets think about that for a while.
Modern Monetary Theory (MMT) is just plain old bad economics
When I read that I wondered what plain new good economics might be.
By inference from the second sentence in the quote above it suggested some body of work that was about ‘money’ holding its value. Perhaps.
But, of course, the core MMT group has never suggested a currency cannot become entirely worthless. Of course it can.
Hyperinflation will do that in a domestic sense if nominal aggregate spending from any source (government or non-government) increasingly outstrips the productive capacity of the economy to respond by producing real goods and services. Inflation accelerating into hyperinflation then becomes the adjustment mechanism to this increasing excess aggregate demand.
Further, an ever-plunging (depreciating) exchange rate towards some infinite asymptote will logically do that in an international context.
Thus, in that sense MMT is fully cognisant that a currency can become, under certain extreme conditions, worthless. But equally, MMT tells us that a government would have to be acting in a ridiculous way for these conditions to persist to the point that the extremes were reached. More about which later.
So, the question remains unanswered. What is plain new good economics?
The other inference is that the advisor has been previously associated with New Keynesian type analysis.
Presumably, the ‘New’ bit means it isn’t plain old, but then that would be a misconception, because New Keynesian economics really reverts back to many of the propositions of pre-Keynesian (neoclassical) economics, which were categorically refuted during the 1930s, by Keynes and others.
In fact, New Keynesian economics is not really macroeconomics at all given that it overcomes aggregation problems and heterogeneous agents by assuming representative agency. A ridiculous fudge for those who want it in simpler language.
I considered the New Keynesian approach in several blog posts but this one will do – Mainstream macroeconomic fads – just a waste of time (September 18, 2009).
Even Marx knew in the middle of the C19th that many of the propositions that remain embedded in the current, dominant New Keynesian approach were flawed to the point of being useless.
And prominent economist, Willem Buiter, who is hardly a radical economist or an MMT proponent, was motivated to write in the Financial Times ((March 9, 2009 – now deleted but available here) – The unfortunate uselessness of most ‘state of the art’ academic monetary economics – that:
Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution … and the New Keynesian theorizing) … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck … the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling … excludes everything relevant to the pursuit of financial stability.
See also the blog post – ECB research provides a withering critique of mainstream macroeconomics (May 29, 2018) – which also provides further references along the same path.
So that seems to put the dominant mainstream approach to macroeconomics in the plain old bad camp.
Thus, the question remains unanswered. The most obvious conclusion is that the statement “MMT is just plain old bad economics” has no real foundation – it is just a put down to make the writer seem erudite.
In fact, as my MMT colleague Scott Fullwiler has captured in tweet form, there are several novel (that is, new) features that MMT has introduced into the economics literature that significantly improve our understanding of how monetary systems function.
These features are absent in the mainstream approach.
I expanded on that theme a bit (like a lot) in this series of blog posts:
1. Modern Monetary Theory – what is new about it? (August 22, 2016).
2. Modern Monetary Theory – what is new about it? – Part 2 (long) (August 22, 2016).
3. Modern Monetary Theory – what is new about it? – Part 3 (long) (August 25th, 2016).
The veracity of the arguments (both the tweet and the more detailed work mapping out the contribution of MMT) remains intact despite increasing attempts to criticise them by mainstream economists.
A logical conclusion is that MMT, in its current form, which clearly draws on many brilliant antecedents, and then adds new components, should be considered at the frontier of macroeconomics, while New Keynesian thinking is the degenerate paradigm (in the Lakatosian sense).
But there is a more important point and the Labour advisor reveals his ignorance when he talks about “MMT prescriptions” in the debate.
He wrote (see Richard Murphy’s blog post for verification):
Well, I disagree – in terms of what a genuinely radical and transformative Labour government would need to do on the economy, its prescriptions are close to catastrophic (for all that it has grasped some correct formal insights ahead of neoclassicism). Any country that isn’t the US trying to apply MMT’s prescriptions would find itself in the same position.
This appeared to be a poorly crafted paragraph. But the point we should focus on is the statement about the application of “MMT prescriptions”.
Exactly, what are those prescriptions?
Here we encounter a misconception that I have dealt with many times.
This short excerpt from a longer lecture I gave in New Zealand last year expresses the point succintly. The full lecture (54 minutes) is available – HERE – and traverses many of the issues that I am writing about now.
I have stated this point often but it still seems to escape the attention of many critics (and second-generation MMTers, for that matter).
MMT is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.
Rather, MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.
It helps us better understand the choices available to a currency-issuing government.
It is not a regime but an accurate perspective on reality.
It lifts the veil imposed by neo-liberal ideology and forces the real questions and choices out in the open.
In that sense, MMT is neither right-wing nor left-wing – liberal or non-liberal – or whatever other description of value-systems that you care to deploy.
I mean by that, that while MMT provides a clear lens for viewing the system, to advance specific policy platforms, one has impose a value system (an ideology) onto that understanding.
For the Labour advisor to talk about “MMT’s prescriptions” reveals he hasn’t fully understood that distinction.
The point is that MMT is what is. Britain’s monetary system is governed and operates under the principles outlined by MMT.
It is not a matter of moving to MMT.
By eschewing the discretionary use of fiscal policy and imposing fiscal rules one is not exercising ‘non-MMT’ policy options.
The MMT lens allows us to tease out and more accurately predict the consequences of such a policy choice.
But there are no ‘non-MMT’ policy options. That is not very well understood.
So when the Labour advisor talks about a state where MMT policy prescriptions are being chosen he is revealing his ignorance of these distinctions.
What he is actually referring to are specific policy proposals that have been advanced.
Which I can only deduce are related to the use of fiscal flexibility given that his supply-side agenda is hardly ‘tame’ – nationalisation, tightly controlled government procurement policies.
Clearly, British Labour have adopted the neoliberal position on fiscal rules and I will discuss this more in Part 2.
I have written extensively about why adopting such rules is poor policy and likely to be counterproductive and unworkable.
Just look what happened in the Eurozone when the GFC hit! The Stability and Growth Pact thresholds were blown out of the water just by the movement in the automatic stabilisers, much less any discretionary stimulus packages that governments might have considered or introduced.
Please see the following blog posts (among others):
1. Seeking zero fiscal deficits is not a progressive endeavour (June 18, 2015).
2. Jeremy Corbyn’s ‘New Politics’ must not include lying about fiscal deficits (September 15, 2015).
3. British Labour has to break out of the neo-liberal ‘cost’ framing trap (April 12, 2017).
4. British labour lost in a neo-liberal haze (May 4, 2017).
5. When neoliberals masquerade as progressives (November 9, 2017).
6. The lame progressive obsession with meaningless aggregates (November 23, 2017).
7. The New Keynesian fiscal rules that mislead British Labour – Part 1 (February 27, 2018).
8. The New Keynesian fiscal rules that mislead British Labour – Part 2 (February 28, 2018).
9. The New Keynesian fiscal rules that mislead British Labour – Part 3 (March 1, 2018).
But isn’t the Job Guarantee an ‘MMT prescription’?
Now, someone might pop up and claim that because I have argued extensively that the concept of a Job Guarantee is intrinsic to MMT then I am trying to have it both ways.
Isn’t the Job Guarantee an ‘MMT prescription’.
Which compromises the ‘lens’ bit, doesn’t it?
Again a deeper understanding of economic theory is required to understand the nuance here.
The employment buffer stock framework is intrinsic to MMT because it supercedes the various mainstream (including Keynesian) versions of the relationship between unemployment and inflation (the so-called Phillips curve), which historically was seen as the ‘missing equation’ in the standard macroeconomics, linking the product market to the labour market and the real economy (output and employment determination) to the nominal economy (price level determination).
I know that is a mouthful and probably meaningless for non-economists but it is for the record and if you are curious you will explore the idea further.
Then you will: (a) understand the intrinsic nature of the Job Guarantee to MMT, and; (b) you will never again say that the T in MMT is redundant.
Sure enough there are descriptive elements of MMT like any body of thought. So at one level, the sectoral balances framework is just an accounting record. But linking the elements within that record has to be theory in order of us to make sense of it and to use it in a diagnostic and predictive manner.
So, while the Job Guarantee superficially appears to be a policy prescription, which would suggest that MMT is more than just a superior lens through which you can understand how the monetary system actually works and better appreciate the capacities of the currency-issuing government, the reality is that if one establishes that ‘economy’ is about the elimination of inefficiencies, then the choice between the two price stabilising realities:
(a) a NAIRU unemployment buffer stock system; and
(b) a Job Guarantee employment buffer stock system, is a non-choice.
Only (b) is closer to being efficient, given the massive wastage of income and human potential that arises.
So the Job Guarantee is much more than a simple ‘policy prescription’.
It is an essential component of a macroeconomic stability framework, a point that is lost on many, who only construct it as a job creation program.
I discussed that aspect of MMT in the blog posts (cited above (3 part series ‘What is new in MMT’).
That macroeconomic stability device is the MMT answer to the Phillips curve, which no economist would say is not an intrinsic theoretical device in mainstream macroeconomics.
The fact that the Phillips curve, as a theoretical device, is then used to offer policy options (or not), is beside the point.
Theory typically has a praxis attached to it. Otherwise why would we bother.
And even if we take the view that an employment guarantee is a policy prescription rather than something more theoretically intrinsic, does the Labour advisor truly believe that a national government that introduced a Job Guarantee would see its currency dropped by speculators to the point of it becoming worthless?
Why would they do that?
Did they do that at the time of the GFC when fiscal deficits rose many multiples what they might do in the first year of a Job Guarantee?
He might be trying to claim that a Job Guarantee would alter the balance of power between capital and labour and thus represent a paradigmic challenge to the capacity of business to make profit.
He might in the same breath cite the great article by Michał Kalecki from 1943 which I examined in some detail in this blog post – Michał Kalecki – The Political Aspects of Full Employment (August 13, 2010).
This is a favourite of what we might call the neoliberal Left who, in their paranoid belief that global financial markets are all powerful and reduce currency-issuing, sovereign governments to mendicancy status, try to proffer ‘evidence’ that business will close down any government that dares aspire to attain full employment.
Well, historically, Kalecki was proven wrong in this regard. For three decades after his article was published governments successfully sustained true full employment despite the resistance from some quarters of the industrial capitalist community.
Where were the capital strikes? And all the rest of it.
Sure enough, in the 1960s, there was currency instability as the Bretton Woods fixed exchange rate system was finally giving in to its inherent inconsistencies – well summarised by Robert Triffen’s Paradox – where the US had to supply US dollars and thus run large current account deficits, which in turn, led to fears that the dollar would fall in value.
But that currency instability was linked to the exchange rate arrangements not the fact that most nations were running continuous fiscal deficits over this period to support income growth and satisfy the desires of the non-government sector (especially the private domestic sector) to save overall and thus sustain aggregate spending at levels consistent with full employment.
I also considered his claim that the full employment aspirations of a government would always be undermined by capitalist resistance in an article I published in the Journal of Economic Issues in 1998 – W.F. Mitchell (1998) ‘The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment’, Journal of Economic Issues, 32(2), 547-55 – Download.
There is no doubt that there was resistance from capital during the full employment decades following the Second World War.
But the thirst for social democracy was so powerful that governments were able to countervail that resistance. Politically, the idea that a nation could sustain vastly elevated levels of labour underutilisation just didn’t cut it in these periods.
Conservative and Labour governments alike were forced by public sentiment to prioritise full employment.
It was not until the Monetarists emerged and circumstances allowed the ideology associated with those economic ideas to begin its four or so decade domination that public sentiment changed.
But the change came from a massive misinformation campaign assisted in Britain by the Labour politicians that had become infested with neoliberal ideas, if not ideology. They were duped by the Monetarist claims into abandoning social democratic policy positions.
And then Thatcher, Major, Blair and so on followed in the same deceptive manner.
Capital resists impingement on their profits, it abhors the idea of sharing national income with workers, but it has to work through the legislative domain of the nations it operates (produces and/or sells) in.
Moreover, in the contemporary setting, when I explain the concept of a buffer stock of employment to hard core business types, who aren’t posturing for political purposes on the public stage, they are uniformly supportive.
They see it as a way to reduce hiring costs because the workers have not become dislocated from the labour market in the same way as the long-term unemployed become.
Teaser to Part 2 on Monday
Consider this graph, which shows the Australian dollar exchange rate against the US dollar from 1970 to 2018 (using left axis) and the Federal fiscal balance over the same period (using right axis).
For clarity I separated years that the Federal government was in deficit (red bars) and years it was surplus (gray bars). The other point to note is that the fiscal data is for fiscal years, while the exchange rate data is monthly.
To provide concordance I just assumed that the fiscal balance for each fiscal year (July-June) was the same in each month of the corresponding year to allow me to map annual data into monthly space. That is why the fiscal data is very block-like in appearance.
It doesn’t distort the general point however.
Australia is a small, open economy, which also has most of its trade defined by primary commodity exports and advanced manufacturing imports.
It is not like a nation that exports industrial goods, which tend to have more stable prices on international markets. Primary commodity prices fluctuate dramatically, often quickly and in unpredictable ways.
For example, Australia’s terms of trade fell by 13.3 per cent in the five quarters to the June-quarter 1986 (agricultural and mineral prices fell sharply). Australia’s GDP fell by around 10 per cent in the March-quarter 1986 as a result because export volumes were suddenly selling at much lower prices.
So Australia knows a lot about currency instability and shifts from an Australian dollar buying 50 cents US (or equivalent in other currencies) in one period to near parity in the next without any other major change in policy or economic structure being the cause.
The point of the graph is that you will see no particular relationship between our exchange rate movements, which are largely driven by the terms of trade movements in the primary commodity markets, and the fiscal position adopted by government.
You will see that in the period that the Federal government was running ever-increasing surpluses, the exchange rate fell to its lowest levels in the modern (fiat currency) era.
And at times when deficits were rising, the currency was appreciating and other times, when in fiscal deficit, the currency depreciated.
And you can see that for the vast majority of the period shown, the Federal government was in deficit.
I could extend the period if there was comparable data and the story would not alter.
If I used another nation, the story would not alter.
In fact, there has never been a statistically robust relationship found between the fiscal conduct of a currency-issuing government and the movements in exchange rates.
So why do the Left immediately rehearse their paranoia that a currency will be rendered worthless via exchange rate sell-offs by the speculators, when it is proposed that a nation runs a fiscal deficit and uses that net spending to support non-government saving desires, sustain full employment and build productive infrastructure?
On Monday, I will consider how currencies become worthless (or not).
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.