A response to Greg Mankiw – Part 2

In – A response to Greg Mankiw – Part 1 (December 23, 2019) – I provided the E-mail correspondence that preceded the publication of – A Skeptic’s Guide to Modern Monetary Theory (December 12, 2019) – by Greg Mankiw. In this blog post, I provide a response to the specific points made in that paper and conclude that if it aims to be a fair ‘guide’ to MMT (even from a critical perspective) then it fails badly. So let me explain why I hold that view. Today’s post is long and will take some reading. It could have been a lot longer. But I intend to take a break from writing the blog until next week (the Quiz will appear as usual though), so you have plenty of time to read this longer than usual post. Normally, I would have spread it out over 3 or 4 parts.


I will dispense with this issue quickly.

Some think that it is unfair to critique Modern Monetary Theory (MMT) by drawing on material in our textbook – Macroeconomics – which was published by leading textbook publisher Macmillan in March 2019.

That is the only reference Greg Mankiw draws upon and cites eight mainstream references as an alternative authority.

I don’t take exception to that.

First, our textbook purports to represent the body of work we have developed which is now referred to as MMT.

Second, as an undergraduate textbook it clearly simplifies the exposition and does not include all the work that has been published in scholarly books and journal articles.

So that should be understood.

But as it stands, if the textbook exposition simplifies to the point of misleading or creating fictions then it deserves to be criticised.

In my view, as one of the authors, the textbook faithfully conveys the principles of MMT as we know it.

Academic disdain

You get a feel for how Groupthink operates in the opening paragraph of the ‘Guide’ when Greg Mankiw refers to “top universities” where “prominent scholars” spend their time debating “the fine points of macroeconomic theory” and his reference to “a small corner of academia”.

There is implicit disdain being displayed here.

It is true that MMT has risen to public attention in a unique way.

First, we tried the usual academic route – writing papers, presenting at conferences and workshops etc. A lot of work was produced – many papers, books etc – and we were able to put down the major body of work in this manner.

Second, we didn’t cut through until we embraced social media first through my blog and then other blogs and then other social media tools.

This has allowed us to present quite complex economic ideas to a non-academic audience and given that audience a framework for understanding why their lives and their communities are being devastated by neoliberal policies that draw on the economics coming out of those “top universities”.

People instinctively know something is wrong and the that the predictions from those “prominent scholars” have failed to realise.

But they didn’t have a framework for assembling an understanding of those instinctive feelings.

Now they have.

Third, that grassroots development is now filtering upwards to the political space as Greg Mankiw notes.

Fourth, new paradigms rarely emerge out of debates on the “fine points” of the dominant theory. The history of scientific development describes quite a different process.

Groupthink, which is a group dynamic that resists change usually precludes radical developments arising from within the mainstream orthodoxy.

For example, think about the development of – Adult Neurogenesis – by – Joseph Altman – in 1962, which is a typical case of how a mainstream paradigm resists change but is finally usurped by an empirically more robust and logically-consistent alternative paradigm.

American biologist Joseph Altman was an outsider to the mainstream of his profession. He was a doctoral student in “a small laboratory … at the New York University Medical School”.

He specialised in neurobiology and discovered adult neurogenesis in the early 1960s. He showed that adult brains could create new neurons but the idea was fiercely denied by contemporary thought at the time.

Clinical practice was based on the dominant notion that there was no capacity for adult neurogenesis.

Altman’s work was “largely ignored” by the mainstream profession.

In his – Memoir: The Discovery of Adult Mammalian Neurogenesis – published in 2011, five years before his death, Joseph Altman notes that:

1. “I did have the proper academic credentials; I was known in the neuroscientific community; and most of the scientists who tried to stop my work were younger and many of them were less well established than I was.”

2. After receiving initial publicity for his research, including articles in the media, “things started to change in the late 1960s, although it took me several more years to realize that something was amiss. The first wake-up call came when I was supposed to be granted tenure at MIT and my promotion was denied.”

3. “there was a concerted attempt by some influential members of the neuroscientific community to marginalize us”.

4. “While he refers to several of our papers on adult neurogenesis, he misquotes them” – he, being a leading academic in the field of development neurobiology.

5. “Another introductory text on brain development (Lund 1978), makes no reference at all to adult neurogenesis and quotes none of our papers on that subject.”

6. “This neglect of our work continued during the 1980s.”

7. “Reference to our published evidence of postnatal neurogenesis was omitted not only by these widely circulated introductory textbooks (of course, I find textbooks that did refer to our work) but also in some more advanced publications.”

8. “There was obviously a movement afoot to marginalize us.”

9. “(a) by the early 1980s we were starting to have difficulties in getting our grant applications approved; (b) by the mid-1980s we lost all our grant support; and (c) by the early 1990s we had several of our submitted papers outright rejected.”

10. “Students and postdoctoral fellows quickly learned while they listened to popular speakers making their rounds, and dominating endless symposia and conferences, as to who was “in” and who was “out”; whom to quote or not quote in your bibliography to make it more likely that it will be reviewed by a peer sympathetic to your approach or findings; and what line of research to pursue in light of what is favored or not favored by the granting agencies at any given time.”

And on he went, describing in detail the way the mainstream suppressed his work.

But meanwhile, the evidence base was building which supported the work of his laboratory and creating dissonance for the mainstream paradigm, just as is happening in economics.

Joseph Altman writes:

Scientific theories-unlike political attitudes, religious faiths or aesthetic judgments- are not matters of personal or group preferences … Scientific theories must comply with the objective facts ascertained by empirical observations and research findings; they stand or fall as new data gathered confirm them or refute them … sooner or later the facts will prevail and no matter how powerful or prestigious the supporters of a refuted theory, the theory will eventually be abandoned.

And it wasn’t until the evidence was so strongly supporting the neurogenesis idea (Elizabeth Gould in 1999) that the proposition became fashionable.

Neurogenesis is now one of the most significant areas in neuroscience. The clinical practice changed radically in the light of the paradigm shift.

So people had had their lives blighted by the clinical practice they had received which reflected the failed views of the brain.

You can see strong resonance with the communities and people who are having their lives and vitality taken from them by economic policies that are based on the mainstream myths, that people like Greg Mankiw propagate.

Altman’s experience helps us understand how the mainstream economics profession sustains its position in the academy as its inability to explain anything important is increasingly exposed.

First, academic disciplines (such as, neurobiologists, economists etc.) work within organised ‘paradigms’, which philosopher – Thomas Kuhn – identified as “universally recognized scientific achievements that, for a time, provide model problems and solutions for a community of practitioners” in his 1966 book The Structure of Scientific Revolutions.

Typically, the body of knowledge that defines the paradigm are “recounted … by science textbooks, elementary and advanced” (Kuhn, 1996: 10).

Kuhn challenged the notion that ‘scientific’ activity is a linear process, whereby scholars add new empirically supported facts to the knowledge base to replace previously accepted notions.

Rather, Kuhn said that dominant viewpoints persist until they are confronted with insurmountable anomalies, whereupon a revolution (paradigm shift) occurs.

The new paradigm exposes the old theories as inapplicable, introduces new concepts, asks new questions and provides students with a new way of thinking with a new language and explanatory metaphors.

Once supplanted, the old theories are no longer considered valid knowledge. Kuhn also noted that there is a sort of mob rule among practitioners within a dominant paradigm and they vehemently hold onto their views even in the face of logical or empirical anomaly.

Altman’s work represented the potential for a paradigm shift and was resisted by the mob until change became ineluctable.

So paradigm change usually comes from an emerging body of work that comes out of a “small corner of academia”.

Alleged opaqueness of MMT

I often read mainstream economists claim, just before they launch into a dismissal of MMT, that our work is hard to grasp or even find in any coherent form.

It is usually because they have no interest in reading the body of work and often quote secondary sources (including prior flawed critiques) as their version of MMT.

A classic recent case of this is the paper published by the BIS (October 13, 2019) – Exiting low inflation traps by “consensus”: nominal wages and price stability – which attacks MMT as likely to cause hyperinflation, but, uses as its source Op Eds by Paul Krugman and Larry Summers.

None of the MMT literature is cited (or read presumably).

Arrant dishonesty from the central bank for the central banks.

It doesn’t even comprehend that MMT is not a policy regime but a way of understanding the monetary system and the capacities of the currency-issuer within that system.

Greg Mankiw plays the same card:

At the outset, I should admit that I found the task of figuring out MMT to be vexing. As I studied it, I was often puzzled about what precisely was being asserted. I hasten to add that the problems I had could have been of my own making. Perhaps after forty years in the profession, I am too steeped in mainstream macroeconomics to fully appreciate MMT. I raise this possibility because MMT proponents may say that I missed the nuances of their approach. But what follows is my honest reaction to MMT after a sincere effort to understand it.

Whether he has tried to understand our work in good faith is not something I can conclude on. His behaviour – sending an E-mail to discuss fine points then writing a paper without further correspondence or recognition of what went before – is not encouraging.

But that is a small issue in the bigger picture.

The other and more significant (telling) reason, mainstream economists find our “MMT to be vexing” is because they try to absorb some of the statements we make back into their own paradigmic structure, using their frames, language, concepts, causalities etc.

Quite clearly when an emerging paradigm comes along with new conceptual structures, new framing, new language, one cannot simply stay ‘thinking within the box’ and hope to make any sense of what they are coming into contact with.

Groupthink is a trap and a blinker.

I think that is what is going on here.

Turning to substance

Even the language, Greg Mankiw uses is loaded:

MMT begins with the government budget constraint under a system of fiat money.

MMT doesn’t begin with a GBC – we reject the concept outright.

Mainstream economics starts with the flawed analogy between the household and the sovereign government such that any excess in government spending over taxation receipts has to be ‘financed’ in two ways: (a) by borrowing from the public; and/or (b) by ‘printing money’.

Neither characterisation is remotely representative of what happens in the real world in terms of the operations that define transactions between the government and non-government sector.

The foundation of many mainstream macroeconomic arguments is the fallacious analogy they draw between the budget of a household/corporation and the government fiscal balance.

The basic analogy is flawed at its most elemental level.

In the real world (and in MMT), there is no parallel between the household (for example) whose spending is clearly revenue-constrained because it uses the currency in issue and the national government, which is the issuer of that same currency.

The choice (and constraint) sets facing a household and a sovereign government are not alike in any financial way.

Clearly, in real terms, both can only buy what is available for sale although the capacity of the government to make those purchases is financially unlimited. After that point, there is no similarity or analogy that can be exploited.

The evolution in the 1960s of the literature on the so-called ‘government budget constraint’ (GBC), was part of a deliberate strategy to argue that the microeconomic constraints facing the individual applied to a national government as well.

Accordingly, the literature claimed that just as the individual had to “finance” its spending and choose between competing spending opportunities, the same constraints applied to the national government.

The logical development was then to examine the ways in which this ‘financing’ was done and the alleged consequences of each.

The GBC says, in English, that a fiscal deficit equals Government spending + Government interest payments – Tax receipts and, must, in turn, be ‘financed’ (equal) by a change in outstanding bonds (issuing debt) and/or a change in high powered money (‘printing money’).

While the mainstream infer that this statement delivers causality from the financing side to the spending side (as if the currency-issuing government is like a household), in fact, it is merely an accounting statement that is of no particular importance in the MMT framework.

In a stock-flow consistent macroeconomics, as an accounting statement the relationship must always hold. That is, it has to be true if all the transactions between the government and non-government sector have been correctly added and subtracted.

So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.

But for the mainstream economist like Greg Mankiw, the GBC represents an ex ante (before the fact) financial constraint that the government is bound by.

The difference between these two conceptions is very significant and the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).

MMT exposes the voluntary nature of any such constraints and makes them a political issue rather than a binding law as is presented in the mainstream approach.

Further, in mainstream economics, money creation is erroneously depicted as the government asking the central bank to buy treasury bonds, which the central bank, in return, then ‘prints’ money so that the government can facilitate its spending.

Mainstream economists call this debt monetisation and you can find out why this is typically not, usually, a viable option for a central bank pursuing a positive policy rate target, by reading the blog posts in the Deficits 101 suite:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009).

3. Deficit spending 101 – Part 3 (March 2, 2009).

The point is that fiscal deficits increase bank reserves and hence the pressure on the overnight interest rate will be downward, all else equal.

The mainstream theory predicts the opposite, which was one of the ‘experiments’ I noted in my response to Greg Mankiw’s E-mail to us in October 2019 to differentiate the two approaches.

The central bank has two options in this case:

(a) conduct open market operations to drain the excess bank reserves and prevent competition in the Interbank market from driving them towards zero. So debt issuance is an interest-rate maintenance operation rather than a funding of government deficit spending operation.

(b) pay a competitive rate on the excess reserves.

If you think about it, there is no real operational difference between (a) and (b). The differences would be in which account the funds are located (government debt or reserves).

Mainstream theory completely misses out on all that.

Rather, it focuses on the ‘printing’ money aspect and claims that if governments increase the money growth rate (they erroneously call this “printing money”) the extra spending will cause accelerating inflation because there will be “too much money chasing too few goods”!

As a consequence, the least worst option for a mainstream economist is for the government to ‘fund’ its deficit spending by issuing bonds to the non-government sector, as if this reduces the inflation risk of the deficits.

Mainstream economists consider this to be the least worst option because in the GBC framework, the bond issuance pushes up interest rates (as the government is seen to be competing for a finite pool of savings) and ‘crowds out’ private investment expenditure.

Neither mainstream proposition bears scrutiny – you can read these blog posts for more detail:

1. Will we really pay higher taxes? (April 7, 2009).

2. Will we really pay higher interest rates? (April 8, 2009).

When I replied to Greg Mankiw’s E-mail (see A response to Greg Mankiw – Part 1 (December 23, 2019)) – I raised these essential facts about the real world.

He clearly chose to ignore these points of departure.

Further, the whole characterisation that governments only ‘print money’ if the central bank buys its debt is false.

All government spending involves new ‘money’ (liquidity) being created by dint of the digital changes to the banking system that the government facilitates. Nothing is ‘printed’.

The process is the same irrespective of whether tax revenue balances the spending, whether bond issues are made to match the spending, or whether the central bank just credited bank accounts on behalf of the treasury department.


1. MMT predicts that there is no difference in the inflation risk of the deficit spending arising from these ‘funding’ choices – noting that MMT does not consider the government to be financially constrained anyway.

2. Issuing debt does not reduce the inflation risk of the spending as the funds to purchase the debt were not being spent anyway.

3. Banks are not reserve-constrained so there is no sense to say that when governments issue debt they are increasing competition in the finite saving pool and pushing up interest rates as a consequence. Bank loans create deposits and banks will make those loans to any credit-worthy borrower who seeks funding, meaning that the whole premise of crowding out (which is central in the mainstream GBC story) is false.

I raised all those points in my response to Greg Mankiw.

It is clear he ignored them, and, instead wrote, in relation to the MMT observation that a sovereign government is never intrinsically revenue constrained”:

To be sure, a currency-issuing government can always print more money when a bill comes due. That ability might seem to release the government from any financial constraints. Certainly, if an individual were granted access to the monetary printing press, his or her financial constraints would become much less binding. But I am reluctant to reach a similar conclusion for a national government, for three reasons.

He goes on to juxtapose different options which he thinks justifies his inability to accept the simple MMT proposition.

First, Greg Mankiw writes:

… in our current monetary system with interest paid on reserves, any money the government prints to pay a bill will likely end up in the banking system as reserves, and the government (via the Fed) will need to pay interest on those reserves. That is, when the government prints money to pay a bill, it is, in effect, borrowing. The money can stay as reserves forever, but interest accrues over time. An MMT proponent will point out that the interest can be paid by printing yet more money. But the ever-expanding monetary base will have further ramifications. Aggregate demand will increase due to a wealth effect, eventually spurring inflation.

He understands that an open market operation (sale of debt by the central bank) is equivalent to paying interest on excess reserves. So step 1 is okay.

But, all government deficit spending ends up in the banking system as reserves. There is no “likely will end up” about it.

Government spending creates net financial assets (and reserves) in the currency of issue, taxation destroys those net financial assets (and reserves).

Clearly government spending adds to aggregate demand, which carries an inflation risk – that is core MMT.

But an “ever-expanding monetary base” does not increase that inflation risk. The banks can make loans whenever they like if there are credit-worthy customers coming in search of credit.

If the subsquent deposits (that are created by the loans) are then spent, then there is an inflation risk there.

All spending – whether government or non-government carries an inflation risk. That is core MMT.

Further, while rising stocks of financial wealth may lead to non-government sector entities feeling wealthier and thus increasing their expenditure, this is hardly a problem that will evade policy attenuation.

We just revert back to saying all expenditure whether derived from private income growth, wealth effects or sentiment changes in general carry an inflation risk.

If that risk manifests then policy changes are required.

And, if the goal of the fiscal deficit is to maintain full employment to fill the spending gap left by the non-government saving choices, then if the non-government sector chooses to spend more, then the government has a choice – either reduce its own net spending and/or reduce the non-government’s spending – a choice that will depend on political considerations such as the desired size of government relative to the economy, etc.

Second, Greg Mankiw writes:

… if sufficient interest is not paid on reserves, the expansion in the monetary base will increase bank lending and the money supply. Interest rates must then fall to induce people to hold the expanded money supply, again putting upward pressure on aggregate demand and inflation.

So we have a Japan-type situation.

The central bank leaves excess reserves in the system and allows the monetary base to expand.

In the mainstream framework, the money multiplier is a central mainstream proposition but is absent in MMT – in fact, we consider the causality runs in the reverse direction – broad to base.

In mainstream courses, students get taught that the central bank determines the supply of loans in the economy by controlling the quantity of base money (reserves).

They then learn that there is a (constant) ratio of broad money (money supply) to base money, and when the central bank adds reserves, they are multiplied up to create a greater change in bank loans and deposits.

The theory has two elements:

1. Reserves constrain lending – a supply-determined approach.

2. Central banks control reserves.

Again this was a point of departure by MMT from the mainstream that I noted for Greg Mankiw in my E-mail response to him. He clearly chose to ignore it. Whether he understood the distinction I do not know.

Please read these blog posts (among others) for further discussion:

1. Money multiplier and other myths (April 21, 2009).

2. Money multiplier – missing feared dead (July 16, 2010).

The important point to understand is that banks do not loan out reserves. A build-up of bank reserves doesn’t increase their capacity to make loans nor does it guarantee that there will be more loan activity.

The latter depends on the number of credit-worthy customers who seek credit.

The central bank will always ensure there are sufficient reserves in the system to maintain integrity of the payments system (cheque clearing etc).

It is an absolute error to think that leaving excess reserves in the system increases the inflation risk of government deficits.

And consider this graph (among others) which shows the M1 money multiplier for the US (calculated by the Federal Reserve Bank of St Louis).

Try justifying a theory that requires this aggregate (ratio) to be pretty much constant. There are many ways to compute the conceptual money multiplier that students find in their textbooks that link the money base to the broad money supply – but all deliver a similar story of variability.

Third, Greg Mankiw writes:

… the increase in inflation reduces the real quantity of money demanded. This fall in real money balances, in turn, reduces the real resources that the government can claim via money creation … Faced with these circumstances, a government may decide that defaulting on its debts is the best option, despite its ability to create more money. That is, government default may occur not because it is inevitable but because it is preferable to hyperinflation.

Note we are still operating within the GBC framework. He has not been able to free himself from that flow of reasoning.

A rising inflation rate does not alter the ability of a currency-issuing government to purchase real goods and services through government spending.

That ability is only constrained by what is available for sale in the currency the government issues.

Clearly, if the nation runs out of available real resources or if the government tries to aggressively seek to use a greater share of the existing productive resources by competing with the existing users through market bids, then an inflationary spiral will result.

That is the inflation constraint.

Whether there are excess reserves or not has no particular bearing on that real resource constraint.

Failing to differentiate the two concepts of contraints – GBC (financial), MMT (real) – and conflating the two as if they are intrinsically linked shows that Greg Mankiw cannot escape the straitjacket that he operates within.

That is a common problem for people trying to learn something new. They keep trying to absorb the new into the old and in many cases that is impossible.

So they conclude that trying to learn the new is a vexing task and blame the new for being opaque (as above).

I am currently learning Japanese. If I tried to understand the language in terms of English constructs I would not make much progress. The challenge is to avoid thinking like that. So I have to just flow with the new framework and it is then much easier to make progress.

Greg Mankiw continues:

This discussion brings us to the theory of inflation. I have been adopting the mainstream view, explained most simply by the quantity theory of money, that a high rate of money creation is inflationary. Proponents of MMT question that conclusion. They assert that “no simple proportionate relationship exists between rises in the money supply and rises in the general price level.”

Apparently, we overstate “the case against the mainstream view” because “the correlation between inflation and money growth is 0.79” for the US since 1870.

We can argue correlation coefficients until the cows come home.

They are lower, say for Japan.

But they remain statements of ‘correlation’ whereas the quantity theory of money is a view of causation. Elementary statistics classes are taught not to conflate the two – correlates with causes.

Further, MMT is about fiat currency monetary systems. In the US, that system really only began in 1971 after President Nixon suspended the convertibility under the Bretton Woods system.

Greg Mankiw also basically tells us that at any rate “mainstream macroeconomists also go beyond the most simplistic quantity theoretic reasoning.”

To the extent, apparently, that “central banks target interest rates in the short run and inflation in the longer run and that monetary aggregates play a small role”.

Which leaves me to wonder, exactly what is the inflation theory that Greg Mankiw is invoking when he simplistically says that expanding bank reserves will ultimately cause inflation.

All his prior reasoning suggests a pretty basic quantity theory approach.

The point is that if his critique of MMT was reasonable and carried empirical weight, then we should have seen:

(a) Accelerating inflation in Japan long ago given the scale of expansion of the Bank of Japan’s balance sheet, the extent of its ownership of outstanding Japanese government bonds, and the size of their continuous fiscal deficits.

(b) The ECB should have easily satisfied its price stability target of 2 per cent instead of running huge bond-buying programs and failing every year to go close the generating the inflation levels it desires.

(c) The US should have experienced accelerating inflation post Lehman’s given the US Federal Reserve’s bond-buying program.

As I outlined when I responded to his initial E-mail entreaty:

1. At the empirical level, mainstream macroeconomics struggles to explain why the broad monetary aggregates have not grown commensurately (as if multiplied) with the dramatic expansion of the asset side of central bank balance sheets.

2. Mainstream theory predicted inflationary consequences arising from Quantitative Easing (QE) because they considered the increase in base money would feed in, via the money multiplier, to broad money, which, via the Quantity Theory, would drive up prices as bank lending accelerated.

MMT predicted that bank lending would not accelerate as a result of QE because the sluggish lending was not due to a deficiency of reserves (banks do not loan out reserves) but, rather, a shortfall of creditworthy borrowers due to the uncertain conditions following the GFC.

There is no doubt which predictions were accurate.

Greg Mankiw then moves on to refine the discussion concerning inflation theory and it is hard to understand what point he is actually making in relation to being a ‘guide’ to MMT.

First, inflation arises from multiple causes emanating from the supply-side and the demand-side. As he notes, MMT fully explains the various ways in which a continuous price rise can occur.

A core idea in MMT is that, as Greg Mankiw quotes from our textbook: “all spending (private or public) is inflationary if it drives nominal aggregate demand above the real capacity of the economy to absorb it.”

From day one, we have emphasised this is how a demand-side inflation can occur.

But it is hard to see where Greg Mankiw gets the justification to make his next assertion that:

The advocates of MMT, however, make this possibility seem more hypothetical than real.

There is no diffidence in our statement that he had previously quoted.

If government spending drives nominal aggregate spending growth to fast relative to supply capacity then it is highly likely there will be inflationary pressures.

The basic accounting is obvious and fully explained in the textbook. GDP is equal to the value of final goods and services produced in a year. Value is computed as Price times Quantity.

At the aggregate level, if the economy is operating at full capacity so Quantity is unable to rise, then more spending will increase GDP but via the prices rises (to ration the excess demand).

Firms are typically quantity-adjusters below full employment (so absorb extra spending by increasing production and sales) and price-adjusters once full capacity is reached. Bottlenecks may appear in sectoral markets before other markets reach full capacity. It is not an exact science when the supply-side capacity is exhausted.

That is core MMT and we inherit that sort of reasoning from the Keynesian literature.

At this stage, his motivation appears to be to say that there is nothing new in MMT that cannot be explained by the New Keynesian literature, and he harks back to the 1970s and 1980s developments in disequilibrium theory and efficiency wages, which was all the rage in the 1980s.

So the reader is forced to wade through some ageing neoclassical literature where markets do not clear because firms are assumed to have market power and this causes unemployment which can be attenuated with government deficits.

This really just restates the argument that sticky wages and prices will generate unemployment in the short-run until market forces eventually cause prices to adjust towards their neoclassical optimum.

So if we construct this ‘neoclassical world’ where the market tendencies are in accord with competitive, profit maximisation and marginal productivity theory (real wages equal marginal products and prices equal marginal costs) then if we put rigidities into the price clearing process, we would get below full employment equilibria occurring.

Apparently, “(i)n that sense, MMT is akin to new Keynesian analysis”.

I asked myself, what “sense” exactly are we talking about?

That economies are rarely at full employment? Is this because the real wage outcome is excessive so labour demand is insufficient to fully employment people and the unemployment creates unsold goods in the product market?

This whole debate has been done to death many times (Marx, Keynes, and on into the 1970s and 1980) and the reasonable position to conclude is that cutting real wages will not reduce unemployment..

The mainstream claim that Mankiw supports is that if real wages were reduced, firms would offer more work, and unemployed workers will spend more – thus eliminating the dual excess supplies – labour and products.

But what the New Keynesian literature that Greg Mankiw suports never really came to terms with was the difference between nominal demands (desired) and effective demands for goods and services. The latter are backed by cash whereas the former reflect latent desires, which may be unlimited.

We discuss this important point at length in the textbook. There are pages devoted to the rejection of marginal productivity theory and the idea that ‘factors of production’ are rewarded according to their contribution to production.

It really takes us back to the debate in the C19th between Marx, Ricardo and Say. Marx clearly won that debate but it wasn’t until Keynes published the General Theory in 1936 that the western economists took heed and understood that mass unemployment cannot be explained by sticky prices.

In TSV (Vol II, Ch XVII, para 712) Marx anticipated the modern distinction between nominal and effective demand which lies in the understanding of the real contribution of Keynes.

Marx noted that in denying the possibility of a general glut, Ricardo appeals to unlimited needs of consumers for commodities and any particular saturation would be quickly overcome by increased demands for other commodities.

Marx (TSV, Vol II, Ch XVII, para 712) rhetorically asked for an explanation of the connection between ‘over-production’ and ‘absolute needs’ and quoted Ricardo’s denial of the “possibility of a general glut in the market”:

Too much of a particular commodity may he produced, of which there may he such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art. Some would consume more wine, if they had the ability to procure it. Others having enough of wine, would wish to increase the quantity or improve the quality of their furniture. Others might wish to ornament their grounds, or to enlarge their houses. The wish to do all or some of these is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means, but an increase of production …

Marx retorted:

Could there be a more childish argument? It runs like this: more of a particular commodity may be produced than can be consumed of it; but this cannot apply to all commodities at the same time. Because the needs, which the commodities satisfy, have no limits and all these needs are not satisfied at the same time. On the contrary. The fulfilment of one need makes another, so to speak, latent. Thus nothing is required, but the means to satisfy these wants, and these means can only be provided through an increase in production. Hence no general overproduction is possible.

What is the purpose of all this? In periods of over-production, a large part of the nation (especially the working class) is less well provided than ever with corn, shoes etc., not to speak of wine and furniture. If over-production could only occur when all the members of a nation had satisfied even their most urgent needs, there could never, in the history of bourgeois society up to now, have been a state of general over-production or even of partial over-production. When, for instance, the market is glutted by shoes or calicoes or wines or colonial products, does this perhaps mean that four-sixths of the nation have more than satisfied their needs in shoes, calicoes etc.? What after all has over-production to do with absolute needs? It is only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production-over-production as such in relation to the absolute need or the desire to possess commodities. In this sense there is neither partial nor general over-production; and the one is not opposed to the other.

Note the reference to the capitalist market being “only concerned with demand that is backed by ability to pay. It is not a question of absolute over-production – over-production as such in relation to the absolute need or the desire to possess commodities.”

This wisdom lies at the heart of the modern problem of high unemployment and stagnant growth. Keynes didn’t offer much more than you can find in this work by Marx.

The New Keynesians have nothing in common with this view.

The textbook also rejects the New Keynesian demand for labour concept. In Chapters 13 and 14, we present the alternative approach that bears no relationship to the New Keynesian approach.

There is no way MMT can be subsumed back into New Keynesian thinking as a special case, in the same way that Keynes’ General Theory was absorbed back into the ‘Neoclassical synthesis’ and lost the most important insights.

Firms create employment in response to demand for their products. They might be confronted by millions of desperately hungry workers who want to work but they still won’t put them on because there is insufficient effective demand to justify expanding production.

A latent or notional demand for a crust of bread is not a demand backed by cash!

Mainstream economists have never really understood that. Marx knew it. Keynes and Kalecki knew it. Clower and Leijonhufvud elaborated on it again in the 1960s but the conservative, free market types couldn’t see past Say’s Law!

At any rate, Greg Mankiw’s divergence into the core neoclassical literature only serves to highlight how different the mainstream approach is to the way MMT constructs the issue of inflation and unemployment.


Greg Mankiw’s track record is not a shining light of predictive accuracy.

In 2010, he wrote a paper based on a Presidential Address to the Eastern Economics Association – Spreading the Wealth Around: Reflections Inspired by Joe the Plumber.

The substance of his argument is interesting in itself but not germane to the topic here.

In the introduction, though, he wrote about the motivation for considering tax rises (in 2010) in the US:

Another, perhaps more important, reason is that the US federal government is running a large budget deficit and faces an ominous fiscal gap looming on the horizon. As the baby boom generation retires and starts claiming Social Security and Medicare, government spending will slowly and steadily continue to rise as a share of the economy. It is possible that Congress will suddenly read Milton Friedman’s book Capitalism and Freedom, become committed classical liberals (in the 19th century use the term), and decide to scale back the size and scope of government. But, more likely, Congress will find past entitlement promises hard to break, and so it will have little choice but to raise taxes to levels unprecedented in US history

An MMT economist would never make such statements.

And Greg Mankiw still hasn’t worked out why!

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 23 Comments

  1. You quote Mankiw in relation to increased Social Security commitments:

    ‘It is possible that Congress will suddenly read Milton Friedman’s book Capitalism and Freedom, become committed classical liberals (in the 19th century use the term), and decide to scale back the size and scope of government. But, more likely, Congress will find past entitlement promises hard to break, and so it will have little choice but to raise taxes to levels unprecedented in US history’

    You say in response ‘An MMT economist would never make such statements.’ , which I can accept is true. But given that Social Security commitments seem very likely to increase as predicted what (ignoring variations in AD, and assuming that the government wishes to keep inflation at relatively low-levels) would an MMT economists be saying if not that taxes will almost certainly have to rise to meet these additional commitments (if the ‘size and scope of government’ is not to be cut back in other ways)?

  2. Dear Bill, I hope you enjoy your break from the blog posting. You certainly deserve one if anyone does. I wish I could just read your posts in installments as you recommended but that just doesn’t happen that way. But I probably can write comments that way – so expect a few of them, especially on the Quiz 🙂

    As for Greg Mankiw’s little ‘explainer’ of MMT, well I’m in a hopeful mood, tomorrow being Christmas and the New Year coming. So I would say that because it is just such a poor ‘product’ , it is just more evidence that there really isn’t any real legitimate criticism of Modern Monetary Theory out there. In any event, I would be really ‘skeptical’ that anyone like Mankiw is going to come up with that legitimate criticism after reading his ‘skeptic’s guide’.

    Anyways, I hope you have a happy Christmas or holiday or whatever. And that goes for everyone else including Greg Mankiw. Peace.

  3. Hi Rob. I think an MMT economist might put it something like this- If the economy happened to be at full employment and excess spending was causing inflation, then the government would have to cut back on its total spending, or try to limit private sector spending (one method being taxation), or live with the inflation. I’m not sure anyone could honestly point to Social Security as the cause of the excess spending in almost any imaginable instance though.

  4. Bill wrote, “There is [ ] way MMT can be subsumed back into New Keynesian thinking as a special case, in the same way that Keynes’ General Theory was absorbed back into the ‘Neoclassical synthesis’ and lost the most important insights.”

    I think there is a word missing there where I put the brackets ‘= [ ]’. The missing word might be ‘no’ or it might be ‘a’.

    Can someone tell me which it should be? The resulting sentences have opposite meanings.

  5. Institutional resistance to the concept of adult neurogenesis has parallels in the long dominance of the diet heart hypothesis and the long refusal to accept the link between ulcers and bacteria. Groupthink is real, and really dangerous.

    It was precisely the failure of massive injections of money into the world financial system during the GFC to cause any inflation which led me on a long and winding investigation of the origins, purpose and operations of money. It eventually brought me to this blog and your work, Bill (by way of Mosler, Wray, Kelton, Hudson and Graeber), including the textbook — I’m about 2/3 the way through. The clarity of the MMT lens where fiat monetary operations are concerned has been very helpful in dispelling some noxious myths about policy space which allows me to put political decision making squarely back into its rightful position of prominence.

  6. Actually the household analogy underpinning the GBC (Government Budget Constraint) is flawed at a far more fundamental logical level. It is an excellent example of the Fallacy of Composition. This fact helps explain the Paradox of Thrift which Keynes described.

    Given the foundation of mathematics on logic, personally I think this an excellent way of framing the response, from the outset. It’s a knockout blow and if subsequent discussion happens it then has to take place on more meaningful terrain. (In theory anyway).

    So I say why not use it right from the get go wherever it crops up? Until everyone and his dog can repeat it!


  7. @Rob Rawlings 13:36
    “…would an MMT economists be saying if not that taxes will almost certainly have to rise to meet these additional commitments (if the ‘size and scope of government’ is not to be cut back in other ways)”

    In my Govt. “cut back’ could well be the wrong (neoliberal!) response.
    An MMT approach would rather be to examine where/why the spending of those social security pensions resulted in increased inflation. Given that the provision of secure, just retirement benefits is desirable to maintain the stability and prosperity of citizen/society, a progressive government would examine ways to bring additional resources on line to satisfy that demand.

    Targeted govt. investment may well be required to develop and release sufficient supply of those price inflating goods or services in demand – provided of course the necessary real resources were available/accessible to govt.

  8. Steve, add ‘no’ where your brackets are and remove ‘same’ further on and the sentence flows nicely and says what it appears it should say.

  9. “So in terms of MMT, the previous equation (GBC: currency user economics applied to a currency issuer) is just an ex post accounting identity that has to be true by definition and has no real economic importance. But for the mainstream economist like Greg Mankiw, the GBC represents an ex ante (before the fact) financial constraint that the government is bound by. The difference between these two conceptions is very significant and the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).” Precisely, Bill, and of course they currently do so or at least appear to do so. Not only are we now living with post-gold standard fiat money but also with archaic gold standard constraints imposed, also by fiat, on the creation and spending of that money, constraints which mask the otherwise ample availability of federal funds to serve public, as opposed to elite, interests. Increasingly, it appears that overcoming the household budget paradigm, ingrained in both the public and political mind, is the initial task. And I further submit that this task may be as much philosophical as economic; i.e., explaining in clear and convincing terms the non-intuitive concept of creation ex nihilo. In science in general, the big bang theory eventually undermined, then replaced, the idea of a steady-state universe. In “the dismal science” of economics, our hope as MMTers is that a similar phenomenon will occur–indeed, IS occurring, thanks to monumental educational efforts like yours.

  10. The so-called GBC is the other way round – spending creates an amount of tax and saving and there are unlimited intraday overdrafts as described here (in the UK Consolidated Fund):
    “Government bank accounts at the Bank of England are linked together in a system known as the Exchequer Pyramid, to ensure that any cash balances that remain at the end of each day are channelled into the main central government accounts to reduce the government’s cash borrowing needs to a minimum. If the Consolidated Fund has a surplus at the end of the daily operation this is automatically transferred to the NLF to reduce its borrowing needs. If, on the other hand, the Consolidated Fund is in deficit, for example through outflows on the day being greater than taxation receipts, this is automatically financed by a transfer from the NLF. The NLF will then borrow overnight any remaining cash deposits held in any government accounts at the Bank of England (including the accounts held by government departments at the OPG). The overall effect of this will be a net Exchequer Pyramid surplus or deficit in the NLF.
    18. The net surplus or deficit in the NLF is automatically balanced to zero each day by a transfer to or from the Debt Management Account operated by the Debt Management Office (DMO). The DMO’s cash management objective is each day to balance this remaining position on the NLF. It does this by issuing Treasury Bills and by borrowing or lending in the sterling money market during the day. To achieve this objective the DMO needs reliable forecasts of each day’s significant cash flows into and out of central government, and up to date monitoring information on actual cash flows as they occur. For cash management purposes the flows that matter are those which cross the boundary between the Exchequer Pyramid accounts at the Bank of England and accounts elsewhere (ie cross the outer black line of the chart annexed to this memorandum).
    19. When government is a net lender on a particular day because, for instance, tax receipts exceed spending, the DMO lends the cash back out into the market. The effect is to balance up cash holdings across the banking sector because, if government has received more cash on the day than it has spent, the commercial banking sector will have an equal and opposite deficit.
    20. The DMO has put arrangements in place with the Bank of England and the main settlement banks to ensure that its position is balanced at the end of each day, even when there have been very late changes in the forecast of government cash flows on the day. The DMO also maintains a small (£200 million) balance at the Bank which acts as a buffer, eg in the event of a change in the net government position following the final reconciliation of the government accounts in the Exchequer Pyramid after the end of each day.”

  11. Merry 25/12 to Bill and all.

    Two threshold questions about fiat currency sovereigns that have yes/no answers in readily accessible govt accounts:

    1. Is a govt financial receipt the transfer of a financial asset, yielding “funding”, or the redemption of a financial liability, netting to zero?

    2. Is bond issuance financial liability for financial asset (“borrowing” yielding “funding”) or financial liability for financial liability (affording an interest rate setting policy lever)?

    In that a “yes” can’t subsume a “no”, or vice versa, these questions are best asked sooner rather than later.

  12. The central problem which conventional economics needs to grapple with is its own false foundational ontology. This is where conventional and indeed Marxian economics fail to become, even partially, sciences. Also, in those areas where economics can never become a science, it must remain avowedly and openly a moral philosophy and not pretend to be a science. MMT as a theory is at least aware of the difference between the notional (the formal) and the real. Money is notional. Real people, real environments and real resources are real in the hard sciences sense of the term.

    In basic ontology we need first to delineate between formal systems and real systems. MMT at some point needs to fully investigate its own ontological underpinnings (if it has not already done so). This is something that conventional economics has consistently failed to do and indeed methodically avoids doing. Many errors commence in its unempirical foundational ontology; meaning in this context an ontology at variance with the discoveries of empirical science to date. The manner in which conventional economics ignores limits in real systems (real environments, real ecologies and real resources) and insists that economies are entirely free standing (not embedded in real systems) and thus able to sustain endless growth (while massive evidence of environmental and climate damage becomes endemic all around us) is proof positive of the unempirical nature of conventional economics.

    I would argue for the need to recommence economics with an ontological investigation. The key problem with Western metaphysics is its continued adherence to Cartesian Dualism. A great many mistakes about relations and interactions between the formal and the real proceed from this Cartesian error of dualism (of dual substances in substance philosophy terms).

    I won’t proceed further unless I pique interest with this post. It is initially more of a philosophic discussion (philosophy of empiricism and science) than an economics discussion. However, this discussion needs to be had first and the thorough renovation of economics, with the correct assigning of its components to science and moral philosophy as appropriate, needs to commence with a reappraisal of the ontology of economics.

  13. While criticising Prof Mankiw’s macroeconomic views I would like to acknowledge his positive role in attempts to introduce carbon tax in the US. Since a significant segment of American society are anti-collectivists strongly supporting individual liberty, his conservative framing of the possible solution may turn out to be more palatable than what the “progressives” are advocating for. “it doesn’t matter if a cat is black or white so long as it catches mice” (Deng Xiaoping)

    Regarding “ex-post” and “ex-ante” the same applies to bank lending. We need to find a way to convincingly debunk Loanable Funds Theory in all existing forms:

    classical ver 1.0 “banks lend out savings / banks lend out reserves” (this is easy),

    Wicksellian ver 1.5 (Robinson / Ohlin) ” the rate of interest is simply the price of credit, and that it is therefore governed by the supply of and demand for credit.” (Keynes himself debunked it but he did not convince everyone)

    and Wicksellian – New Keynesian ver 2.0 “The central bank sets a rate of interest such that desired investment at potential output equals desired national saving at potential output” (as expressed by Nick Rowe in his debate with Lars Syl). The value of interest rate set by central bank is tracking the unobservable “natural rate of interest” corresponding to stable price level and according to Wicksell this will correspond to a situation in which capital is lent “in kind”.

    What brings us back to the debate about the existence of “natural rate of interest” and its evil twin, the “natural rate of unemployment”.

    The trouble is that debates with New Keynesians look like a whack-a-mole game. In fact they intuitively think in terms of LFT ver 1.0 (banks act as intermediaries between savers and borrowers) but if we go after this view by demonstrating that banks create loans out of thin air, investment precedes saving and the government (+cb) spends before levying taxes, they instantly switch to LFT ver 2.0 (“every child knows that money is endogenous but in the long run inflation blah blah blah”).

    So they will say that obviously GBC can be interpreted in the MMT way in the short run but in the long run money is neutral, “there is no free lunch” and effectively the government has to acquire pre-existing monetary assets in order to spend.

    I think that going after pressure points would require demonstrating that:

    1. Changes in interest rates have very week and confusing impact on the GDP within the “normal” range (real interest rate below the hurdle rate level) but there are other parameters which strongly affect the GDP. There is no stable “natural rate”

    2. Inflation is an emergent phenomenon related to the interaction between workers, firms and the foreign sector (via the exchange rates). Quantity of money has direct impact on price level only in the situation when inflation is already high, real interest rate close to or below zero and there is no saving in local currency. In this “Zimbabwean” mode of operation local money is held only to satisfy transactional needs and V == const in P*V==M*Q Otherwise in a “non-Zimbo” mode V !=const (there is no stable velocity of money) and inflation is not a monetary phenomenon.

    3. Lending of capital “in kind” or not “in kind” has nothing to do with price stability if workers demand higher wages and firms defend their markups – what relates to 2

    This would demonstrate that there is no such a thing as a “natural rate of interest”, the New Keynesian framework is invalid and therefore money may be not neutral in the long run. This implies that the trajectory of GDP can be path dependent regardless of the behaviour of the CB

    The results from SFC modelling strongly support these views.

    Until the “debugging / debunking” is done in a convincing and overwhelming way, it’s a “whack-a-mole”.

  14. Great references from Bill to Marx. It’s always stunning to be struck by the extraordinary nature of his incites. he should be studied and not only for the economic content but also the clarity of thought and rich literary style as well has virtuosic use of savage irony. When I first read Capital Volume 1, I didn’t expect to laugh out loud so many times at the amazingly sharp wit at work and the richness of language that even comes through in English translation.

  15. Bill wrote:-
    “But it is hard to see where Greg Mankiw gets the justification to make his next assertion that:
    ‘The advocates of MMT, however, make this possibility seem more hypothetical than real'”.

    At that point I felt like exclaiming “case closed!” and not bothering to read any more. It’s almost embarrassing to witness Bill’s remorseless demolition of Mankiw’s pitiful attempts – like this one – at self-justification, obfuscation and all the rest of the inconsequential nonsense he spouts and which he has the effrontery to inaccurately name “a guide to MMT”. He could more accurately have named it “a (deliberate) mis-guide to MMT”.

    How easy it seems to be to obtain a chair in any of the egregiously self-congratulatorily so designated “top university” economics departments, if this kind of insubstantial piffle is any measure of the intellectual prowess required!

  16. Ikonoclast: You’ve certainly piqued my interest and would love for you to further develop your ontological analysis of economics on this blog. I suspect that Bill and others would also. Is there anything more anti-philosophic than the brash and brutal philistinism of neoliberalism?

  17. “A latent or notional demand for a crust of bread is not a demand backed by cash!
    Mainstream economists have never really understood that.”

    If they did, how would they reconcile it with the Loanable Funds model?

  18. “In basic ontology we need first to delineate between formal systems and real systems.”

    Perhaps Neoclassical economics views markets and nature as two sides of the same coin.
    Therefore delineation is not necessary.

  19. This sort of behavior makes a lot of sense if you assume that the economists are not looking for *truth*.
    Those who are looking for truth are shunted aside by the group think.
    The rest are functionally part of a vast conspiracy funded by the rich with the goal of making the rich, richer.
    These economists and their lay followers know that they can’t defy the group think without being shunned.
    This makes Mainstream Economics a lot like a theology. To be part of the religion you must accept the basic tenants of the faith. A big difference in this case is your income strongly depends on keeping the faith.
    The articles being written are the masters of the group think telling the mass of followers just how the basic tenants make this {MMT} be unacceptable.
    As soon as one of them sees that he/she will lose the point(s) being discussed, they disappear.

    This also applies to politicians who need campaign contributions from the rich.

  20. Dear Bill,

    “You can never solve problems with the same way of thinking that created them.”
    Albert Einstein

    “The difficulty is not to find new ideas, but to escape the old ones.”
    John Meynard Keynes

    No wonder who’s got the problem.

    Greets from Germany

  21. Newton Finn wrote:-
    “Precisely, Bill, and of course they currently do so or at least appear to do so. Not only are we now living with post-gold standard fiat money but also with archaic gold standard constraints imposed, also by fiat, on the creation and spending of that money, constraints which mask the otherwise ample availability of federal funds to serve public, as opposed to elite, interests. Increasingly, it appears that overcoming the household budget paradigm, ingrained in both the public and political mind, is the initial task. And I further submit that this task may be as much philosophical as economic; i.e., explaining in clear and convincing terms the non-intuitive concept of creation ex nihilo”.

    With all of which I completey agree of course.

    But I have never understood why the “archaic gold standard constraints” go on being tolerated nearly fifty years after they finally became archaic.

    I can readily imagine that those whose own interests are promoted by the complete opacity of public accounts (which are little but a misrepresentation of the operation of our actually-existing fiat monetary system) – such as the entire body of mainstream economists – but for the life of me I can’t see why heterodox economists haven’t been publicly protesting against that myth-dissemination and, furthermore, doing something effective about getting it changed. How about regularly publishing a set of parallel “alternative public accounts” which tell the story as it ought to be told?

    Why for instance is the so-called “national debt” allowed to go on – unchallenged – being given that designation, when it’s actually the cumulative aggregate of the private sector’s savings in the form of government bonds – a total misnomer and one moreover which does enormous damage by propagating a lie?

    Why is the public blamed for believing myths, when it’s governments, offialdom, the academy and the media who disseminate those myths? Isn’t fifty years long enough for it to have been stopped by now?

  22. BILL. ACADEMIC DISDAIN – NO, AD HOMINEM. It’s a personal attack. It says you are deficient; it places a label on you of being out of top tier discussion and from a backwater. He says let’s judge this argument by the people who put it forward, and those people are backward. Of course, who you are and where you come from are irrelevant to the evaluation of your work – THE WORK STANDS ON IT’S OWN.

  23. For Newton Finn and Allen who commented on the issue of ontology. As a summary, I will add the following here:

    The key interdependent concepts of Complex System Monism (CSM) as a coherent metaphysical system within empirical philosophy can be summarized as follows, starting with definitions.


    Model: A simplified representation of a more complex original.
    Monism: Attribution of oneness or singleness to a concept or system, e.g. to the cosmos.
    Ontology: The study of existence, emergence and evolution, in terms of categories and relations.
    Process: A transformation over a period of time.
    System: A regularly interacting or interdependent group of items forming an integrated whole. Every system is delineated by its spatial and temporal boundaries, surrounded and influenced by its environment, described by its structure and purpose and expressed in its functioning.
    Real System: Any system which obeys the discovered Laws of hard science.
    Formal System: Any system of signs based on or forming a language, including mathematics.


    All-existence (the cosmos) may be posited as a single complex system (an a priori justification in philosophical terms) and thus the “concrete whole” in the priority monism sense. Parts of the cosmos are sub-systems, sub-systems of sub-systems and so on. The cosmos is a real system. All sub-systems of the cosmos are real systems.


    The entirety of human perception and understanding is achieved by modelling. Brain-internal coalesced perception, as perceived perception, is a virtual model of perceived external reality. Higher level ideations, concepts and explicit models themselves are also all models. Human understanding (and misunderstanding) is comprised of models and nothing but models.


    Truth correspondence exists (if it exists at all) as a connection of valid congruences or homomorphisms between our brain’s models (both internal modeled perceptions and understandings and explicit exteriorized statements and models) and all reality external to the brain or mind.


    Formal Systems are a sub-set of real systems, paradoxical as this statement might first seem. They are a special subset of real systems where information as patterns is encoded, transmitted, received and interpreted in and via real system media comprised of matter and energy. The formal system is instantiated in real system media.


    Matter, energy and information can be passed between real systems. For many open systems, the transfers of all three are important. In the case of human formal systems (instantiated in real systems of course including the brain), the transfer of information is usually the most important component. The transfers of matter and energy are often minimal and even deliberately minimized to achieve a high information transfer rate to energy use and/or matter “use”. These material and energy savings are one key reason that all models, both language and mathematical models and crafted scale models say, placed in a wind tunnel, are of pragmatic use as tools for investigating reality.


    Human Agency is the capacity of human actors to act in a given environment.
    The (or each) living human agent is the human connection between human formal systems and real systems.

    We can represent this process very simply as:
    Real Systems Human Agency Formal Systems

    What is represented by the arrows in the diagram? What is shown as passing from Real Systems, through Humans exercising agency, to Formal Systems and vice versa? The simplest physicalist answer is mass, energy and information. This is the correct and complete physicalist description according to modern physics and its relational system model of the cosmos.


    Matter, energy and information can pass through system boundaries depending on permeability or penetrability. A system boundary is a boundary that separates the internal components of a system from external systems. A system boundary can be an interface for the transfer of matter, energy and information. The process of empirical detection relies on matter, energy, information (in any combination) coming through a system boundary from the detected existent and passing in through the system boundary of the detecting system (a human or human instrument when taking an anthropocentric view). Thence, the “depths” or internals of any system can only be inferred or deduced (as the case may be) by system boundary phenomena or more correctly by system boundary transferred phenomena.


    The above ontology is more consistent with the discoveries of modern science. It removes the Cartesian assumption of dual substances (of matter and mind or matter and spirit). Hence it removes the “transmission problem”. In Cartesian dualism how does mind affect matter? How does “will” actuate body? How is impulse transferred? This ontology also helps to clear up the puzzle of formal systems and their relationship to real systems. Formal systems are patterns of information instantiated in real system media; real media like human brains, books, diagrams, formulae and scale models to give some examples. Formal systems can be of a descriptive or prescriptive nature. Hard science uses formal system models to describe real systems. Politics, ideology, religion and moral philosophy use prescriptive models to prescribe how humans should behave (and what beliefs should actuate them). Prescriptive models can be viewed as programming and coordination routines designed to govern human behavior in society.

    If we follow on from this we note that money is not real (descriptive of reality) in any way. It does not even measure value although it pretends to do so within the mythology of marketism. It can never capture all values (for example environmental and non-human values) and it does not even capture all human values properly or comprehensively. Money is not denominated in a scientific unit of measurement: SI units or the International System of Units being the only accepted and acceptable measuring units in hard science).

    It follows from this that we can identify money (and its support structure of market components and the state as guarantor of fiat money, markets and contracts) as prescriptive systems, not descriptive systems. Money and money systems tell us what to do and how to behave individually and in society. They are prescriptive not descriptive. To reify (concretize) and fetishize money as a real thing and a real measure (rather than as an invented fictive social agreement and “finite state machine” network in computing analogy terms) is to misunderstand the ontological category to which money belongs.

    If the “finite state machine” or “finite state model” of the money and market system does not model reality accurately or effectively in even some crucial circumstances (like the approach to thermodynamic and other limits to growth and approaching climate disaster) then it is the finite state machine model of capitalist money and finance which is wrong and which needs to be changed. QED.

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