Modern Monetary Theory – An Introduction: Part 2

By Dale Pierce

II. The Science of Government 


The wave of capitalist triumphalism that spread around the world from the 1980s on was, and remains, a very complex social, political and economic phenomenon. Future historians, if there are any, will marvel at the suddenness of its rise and the completeness of its victory. Margaret Thatcher and Ronald Reagan seemed to come out of nowhere. Working class Tories and Reagan Democrats rose up in their millions – to vote against the very parties and ideas that had made them prosperous. And which had also made it possible for many of them to send their kids to college for the very first time. The kids themselves graduated into an economy plagued by inflation and full of uncertainties and unknowable quantities that everyone, everywhere seemed determined to blame on some English guy named John Maynard Keynes. Him and his Welfare State. And all that reckless deficit spending. And all those high taxes. Who wanted to be for things like Welfare and taxes? So, a lot of those kids went ahead and took the logical next step and became Young Republicans.

But the institutions of Keynesianism were, for the most part, and in the advanced world at any raate, very deeply entrenched. The Welfare State was unpopular as a concept, not as the set of  policies through which it was concretely expressed. These everyone took for granted and scarcely noticed – until some politician was foolish enough to take himself seriously, move from the general to the particular and actually oppose a program like Social Security. In such political moments, the shallowness and insubstantiality of the Right’s propaganda and political economy were briefly revealed. But if it was only an inch deep, it was still at least a mile wide. Large numbers of Democrats and other progressives, afraid of the wild rise in popularity of “free-market” economic ideas, rapidly adopted those same ideas themselves. They became “centrists” and later “deficit hawks”. But as they moved to the right to appease their newly conservative-minded constituents, the Right itself moved relentlessly to the far-far-Right, culminating in the all-out craziness of today’s Tea Party. 

Ironically, Democrats and liberals found it easy to forget their Keynesian roots precisely because those roots were as deep and strong as they were. In all Western countries, and most Asian ones, there was some version of Social Security – and, as a rule, far stronger and more universal state-insured medical systems than in the United States. Institutionally, these and other safety-net programs looked unassailable – from unemployment benefits to welfare (or “the dole”), and even to state-paid child care in some countries. By the time of the Thatcher-Reagan “revolution” – it was really a counter-revolution – no one was seen as actively opposing the safety net. So liberals didn’t feel much need or obligation to defend it.

As for Keynesian economics, it was never nearly as popular as the  works and institutions it made possible. Not many people really understood it. And many who did either disliked or distrusted it. On the Left, it was suspect just because it was not Marxism, which every self-respecting radical felt obliged to at least approve of. On the Right, it was seen as outright immoral – as anti-individualist and statist. The latter of which assertions is, of course, quite true. In academia, Economics departments, steeped in the traditions of classical theory, worked away at the Borg-like task of assimilating Keynes and turning his revolutionary ideas into more familiar models and equations. At a certain point it was announced to the rest of us that this had been satisfactorily done and that no one needed to worry about it anymore. Almost no one was anyway.

But when they converted Keynes’ theories into something more familiar to themselves, the neo-classicists stripped it of its essential meaning, along with revolutionary character. Their so-called “modern synthesis” took a while to devolve into the “Supply-Side” or Whatchamacallit Economics of the 1980s. It then devolved further into what it is today – a body of completely abstract theory wrapped in a set of premises so absurdly divorced from reality they would be laughable if their consequences hadn’t been so tragic. this is an Economics whose own proponents admit has lost all practical relevance. (To learn the absurd details, see “Keynes: The Return of the Master” by Robert Skidelsky).

The first principle of Keynesian theory is that free markets are far too important to be left free – as in, free-to-fail-and-fall-apart. Markets, and especially financial markets, have to be regulated and moderated by the central government and its central bank if we are to avoid bubbles, panics, crashes and depressions. The “neo-classical” revival came in several flavors and wore a variety of different guises over the years, but every version has turned this principle upside down. First as theory, and more recently, as all-too-real, and tragic, public policy the de-regulation of financial markets and the repeal of the depression-era controls have been successfully imposed. In America, these policies have been adopted by both sides of our political duopoly. Madness and macro-economic blindness are now a fully bi-partisan affair.

Fish and Coconuts

The economy we have now and the Economics profession we have now are twin causes and twin consequences of the thirty-years-and-counting devolution we have undergone since Keynesianism was decertified as the ruling conception of a managed, domesticated form of capitalism. We have now almost completely returned most of the world’s financial sector to the kind of opaque, dangerous, gangsters-and-gamblers capitalism that prevailed before 1930. As a result, we have suffered a huge, worldwide financial crash caused by corporate criminality, fraud and deliberate risk-concealment in the mortgage-bond market. The crash and the rapid deflation of the housing bubble combined to send the U.S. into a Grand Canyon class recession and much of Europe into an outright depression.

We are grinding toward a sixth year of mass unemployment and weak, almost non-existent growth. Economic austerity has devastated the Eurozone and driven some countries to and beyond the brink of social disintegration. Yet the economists who praised the housing bubble and the dot-com bubble before it as a “great moderation” are still in charge. The hegemony of “neo-classical” theory and “neo-liberal” policy is as absolute and almost as unquestioned as ever. And while there is by now a quite well-established intellectual trend within Economics to challenge the hegemony of the neo-classical orthodoxy, it has yet to be recognized or engaged by that orthodoxy. Insular and in possession of all the important levers of academic power, the old guard just soldiers on, oblivious. The pundit class, as clueless as it is corrupt, goes right on lionizing them while ignoring their critics.

This can be very confusing and frustrating for lay people. We don’t understand why the people we are paying big salaries to – ostensibly to “do” a social science – have turned it into an exercise in mathematical navel-gazing. This stuff is supposed to work like every other science. As time passes, it’s supposed to get *better* at both prediction and practical problem-solving. We don’t pay aeronautical engineers to make airliners less airworthy or agronomists to reduce crop yields. Sociologists and market-researchers aren’t rewarded for systematically *mis*understanding public opinion. Why are we paying economists good money to produce less accurate and less useful analyses of the economic processes that determine outcomes for the whole world and everyone in it? Why did the entire orthodox Economics profession fail to understand the bubble-ized nature of the economy of 2002-2008? Why did virtually none of these economists expect the crash, and why have their explanations and policy pronouncements since then produced such abysmal real-world results? Where is the intellectual and professional accountability we demand in *everything* that we recon to be, and rank as, “science”? 

It is not the whole answer, but one big part of it is that “neo-classical” economics is, in at least one important respect, quite similar to the original. Like the Adam Smith version of Economics, (though unlike either Marxism or Keynesianism), the “neo-classicists” have very little interest in how we came to center so much of our economic activity around the getting and spending of money. For money itself is useless. Even money that is made out of silver or gold can only become useful by losing its status as money – i.e., by being melted down or hammered out or somehow otherwise made into something else – something that is no longer money. Some people like to look at coins, of course, and some also collect rare coins and notes. But their interest is in the incidental (and even accidental) characteristics of what they collect – the artwork, the state of preservation, and especially things that get printed or stamped incorrectly, and which are therefore rarities. Numismatists aren’t interested in the “money-ness”, per se, of their collections at all. And neither are “mainstream” neo-classical economists.

Whether they have used this terminology or not, classical and neo-classical economists have largely concerned themselves, not with money, but with utility – that is, with usefulness. People “truck, barter and exchange” things (to follow Adam Smith’s terminology) because, at any given moment, they have more use for some things than they have for others. And so, from the first paragraph of the second chapter of the very first Enlightenment-era economics text, we find a line of reasoning which minimizes and marginalizes money. (I.e., “The Wealth of Nations“).

Money is not even strictly necessary, this line of reasoning stresses. We could very well have an economy, (and there have been some actual economies) without any kind of money. In many versions, Robinson Crusoe and man-Friday  wander through the narrative at this juncture, colorfully haggling over the price of fish relative to coconuts and vice versa. And so on, through unknowable centuries and millennia of pre-historic time (this Economics says), humanity trucked, bartered, exchanged – and groped for a better way to do business. 

Different universal commodities were tried – from cattle to salt to circular stones so big no one could lift them. What tribe or culture first chanced upon the advantages of the precious metals is lost in the mists of time, but the advantages persisted and metal money was born. It was imperishable, portable, and uniform. It was ubiquitous enough to be found everywhere but still rare enough to represent value in a concentrated way. In short, it was perfect. As hunter-gathering and pastoralism receded and civilization commenced, gold, silver and copper coins became the markers of the new social wealth of the elites. The institution and the forms of metal money were then passed down, with the added force of tradition, all the way to modern times.

Apart from its being largely untrue as history, this very conventional classical account of the origins of money also suffers from the singular defect of saying nothing about the *issuer* of all this money. It offers no theory at all about the role of the state. Indeed, it is scarcely mentioned. This is very much in keeping with the neo-classical definition of Economics as the micro-examination of utility-maximizing behavior by individual “agents”. It is sometimes granted that these agents may be human beings, but this is regarded as largely unimportant and is rarely even mentioned. Money, having no utility, is unimportant to this version of Economics too – as are the institutions and operations of a country’s monetary authorities. Debt is another almost entirely ignored category for neo-classicists, as are the operations of banks, including central banks.

This economics, in other words, is all in our heads. it’s about how we choose between apples and oranges – or between coffee and tea. The large-scale, or “macro”, economy of industry, agriculture, banking, government, and so on all has to be considered, of course. But its components have increasingly been treated as mere aggregations. As in: the sum total of all individuals’ appetite for apples is – the demand for apples. What else might it be? Money, in this narrative, is a sort of lubricant for the exchange of utility-events. It provides a standard quantitative comparison of the value of qualitatively different useful things. And that’s about it.

The Politics of Economics

It is in these terms and on this basis that all modern Economics – as *micro*-economics – maketh “models”. And, as noted earlier, this activity definitely does serve some real, if esoteric, scientific purpose. Bless it. But when these “mainstream” economists divorce *all* economics from real-world premises; when they hijack the specifically *macro*-economic tradition, history and theoretical methodology that came down to us from Keynes, Mill, Marx, Skidelsky and others; and when they subordinate these useful, practical methodologies to a set of wholly non-scientific, wholly politico-ideological prejudices – well, that’s going a little too far.

That’s not just denying that there is anything our government can currently, usefully do for the economy. It amounts an assertion, which these economists do not shrink from, that no government can *ever* do anything useful for the economy *at all*. And it is this intellectual and academic cover which enables and legitimates the modern Right – from the bloodless “technocrats” of the Eurozone, to the Ayn Rand libertarians, to the delusionaly “Exceptional”, (and exceptionally delusional) Tea Party crazies.

Such people are running America and the world today – because men and women with a lot of letters after their names have taken Economics back to the bad old days. They have re-discovered the quietist, non-interventionist viewpoint which so endeared David  Ricardo and Thomas Malthus to the Victorian capitalists of the Industrial Revolution. They have made Economics “useless” again, as Keynes put it, except for purposes of defending status quos and drawing up neat intellectual arguments for doing absolutely nothing – in the face of near-depression levels of economic misery. They have gone farther still. They cry up austerity and throw fits over the budget deficits which are now the only moderating factor standing between regular people and a future bleaker than any American would have believed possible just a few short years ago. It is time for educated people everywhere to take an interest in this debate – and understand that the lunatics are only able to run the asylum because Ph.D. economists in places like Harvard and the University of Chicago have made their ravings intellectually respectable.

The astonishing, jaw-dropping macro-economic ignorance of even the average pundit or politician – of either party and of whatever political persuasion – is outright dangerous. In the “debate” over budgets and deficits, a veil has been drawn over the real needs and problems of regular people. Wholly unsubstantiated assumptions are represented as absolute truths. In this Econo-Cloud-Cuckoo Land, the economics of national states are blythely equated with the household budgeting that takes  place around that kitchen table we’ve all heard so much about. In this “debate”, money is talked about as if it was a commodity or natural resource that a sovereign nation could really somehow just “run out” of. The fiat character of modern money is completely ignored – or, if it is mentioned, it is merely for the purpose of denouncing it as the fuel for all this live-it-up liberalism in America. Who’s living it up? Food stamp recipients? Volunteers at homeless shelters? The homeless themselves?

It is past time for independent and progressive-minded Americans to demand a real economic debate again. There is another side to all this – the Keynesian and post-Keynesian side that collectively and specifically predicted the housing bubble, the global crash, the depth of the recession, the inadequacy of the 2009 stimulus and the ongoing weak and probably unsustainable “recovery”. These economists, including Paul Krugman, but also including quite a few others, accurately foresaw that inflation and interest rates would remain depressed for years in this under-performing economy, regardless of the size of the deficit. Where neo-classicists tripped over each other invoking “bond vigilantes” and Zimbabwe, Keynesians and post-Keynesians, including proponents of Modern Monetary Theory patiently explained that Monetarism and the Quantity Theory of Money were bunk, that central banks set interest rates in sovereign nations, and that the Eurozone countries’ problems arose principally because they had renounced their monetary sovereignty on the day they joined the Euro.

The people who are getting all of this wrong are still getting all of the funding. They have tenured hammer-locks on all the most important university chairmanships, and exercise veto-power over what gets published in any high-prestige Economics journal. They are acting like academic Al Capones. A number of them, as documented in the book “Predator Nation” and elsewhere, are literally on Wall Street’s payroll. And if their fellow-economists can’t too-openly say so, essayists and bloggers will just have to keep saying it for them.

This econ stuff is not easy. It takes more than just a little common sense in order to follow it. But what it mainly takes is an open mind and a willingness to think for oneself. This the group-thinking “neo-classical” economists clearly stopped doing a long time ago, preferring, always and everywhere, to strut their math. Serious-minded people who are interested in solving real-world problems should now just leave them to it and move on.

5 Responses to Modern Monetary Theory – An Introduction: Part 2

  1. Both part I and part II are stunningly brilliant. Bravo!

  2. Looking forward to part 3.

  3. No, the truth isn’t going to just suddenly dawn on them (Oh, we were wrong!) and they’ll relinquish their strangle-hold on authority and give over the reins of power to those who actually understand economics, who actually have a chance of steering us out of this quagmire and back to financial stability, where the possibility of combating what really threatens us (global warming .. for the twin swords of Damocles that stand over us are both our dysfunctional economics and the changing climate) can be undertaken once we have the wherewithal (cash! of necessity funneled into research and innovation to find solutions to it) to tackle the problem. No! Only a full-on revolution will accomplish that .. but by then it will be too late!

  4. –humanity trucked, bartered, exchanged – and groped for a better way to do business. — Adam Smith

    A nicely written article detailing as to how the concept of money having exchange value in place of barter system, developed. Hoping part 3 gives final touches to this thesis.

  5. Arliss Bunny

    I join the others in looking forward to your next chapter. In general, MMT really needs a wider array of introductory texts that reach out to people in many different ways and on many levels. As a physicist, my field is most successful when average people understand how it is that physics is a part of their everyday lives. As mentioned by a commenter to your first chapter, Stephen Hawking did this in a way which not only made him famous but which inspired physicists in many of the areas of specialty to do the same. Economics and MMT need to be pushed out into the light of day both by the terrific economists who develop and deepen the theories but by laymen who, though “hobbits” are themselves proving that the magic of the wizards is within the grasp of all.