MMT and the Next Growth Cycle

By Thornton Parker

Discussions on this forum generally treat MMT in isolation rather than in the context of other forces that drive an economy.   In Japan, for example, the sales tax increase to reduce the government’s deficit is widely seen as a recent cause of its lagging economy. But a bit of history shows a different picture.

At the end of World War II, the country was decimated. Many of its young men were dead; its industries and cities were in ruins; its people were humiliated and overwhelmed by two atomic bombs; even its religion was repudiated. An island nation, it had no local friends, little fuel, and almost no raw materials. The only thing it was rich in was poor people.

Most western economists believed it was destined to remain a basket case indefinitely. But the Japanese rejected that assessment, saying if that was what conventional economics predicted, they would invent their own economics. And they did just that.

After studying Britain’s industrial revolution, the rise of US industries, the Economists in western Pennsylvania, and other examples including their own history, they developed a new growth cycle which they called their virtuous cycle. They imported as little fuel and materials as they could and used several types of knowledge to convert them to products which they sold for high profits all around the world. They refined the idea of value-added as the foundation for industrial operations. Their growth cycle enabled them to become the world’s second largest economy in a few decades.  An important footnote is that the American occupation forces helped and guided the Japanese in this direction.

But eventually, they decided that developing new products created more value-added than making things that were becoming commodities, so they exported the manufacturing of TVs, VCRs, auto parts, and the like to other countries and concentrated on the front end of new product cycles.

They had not realized how fast the receiving countries could learn to develop new products of their own, however, and even the front-end development process became competitive. In addition, countries all around the world learned the lessons of value-added and the importance of quality control, so those advantages also turned out to be temporary.  And, I think most important; they accumulated so much money, making their money work became a major goal. Money managers replaced industry managers in importance and instead of investing to create a new growth cycle, they bought golf courses, prestige buildings, and trophy companies at exorbitant prices, which led to losses and lost opportunities.

This history is rarely mentioned when Japan’s problems are discussed, but it is important. It may be that the post WWII projections of western economists were just a bit early. The island economy with its aging population, few natural resources, and fuel limitations which are compounded by major weaknesses in its electrical system may be reaching the end of its spectacular run. Monetary and fiscal policies may not be much help.

If that is true, maybe we should be looking at growth cycles for our own future. A growth cycle is a combination of self-reinforcing loops of drivers that include dominant fuels, materials, modes of transportation, and industries; government policies; and financial innovations. A cycle spawns countless new products, businesses, and types of jobs as investors, companies, and individuals see opportunities to plug in. A cycle continues until a war intervenes, companies over-expand and markets become saturated, or new technologies become dominant.

The US has had several cycles. An early one involved wood and coal as the dominant fuels; wood, iron, and steel as dominant materials; rail and waterways as dominant modes of transportation; expansion of New England manufacturers and settlement of the West as the government policies; and commercial banking, bonds, and stock markets as the financial innovations. Each of the industrial drivers created markets for and sold to the others as the cycle expanded.

That cycle was gradually replaced by petroleum and electricity as the dominant fuels; autos and aircraft as the dominant transportation modes; stronger steel, concrete, copper, and aluminum as the dominant materials; industrialization of the South and expansion to the suburbs as the policies; and retail customer financing as a leading financial innovation.

Tales of the growth cycles and how they led to new supporting industries are fascinating. For example, the government fostered railroads with large grants of land which they could use or sell. It also paid for the first inter-city demonstration of the telegraph. As the railroads expanded, their right-of-ways were used to string telegraph lines across the country and stationmasters became telegraph operators.

The early railroads had only one set of tracks and there were no signal systems so the right of way was set by time. A train going in opposite direction without the right-of-way had to switch off to a lay-by so the two could pass. A cluster of serious wrecks brought a public outcry for greater safety, which led to the development of more accurate watches and spawned the New England watch business. The watches had to be synchronized, however, so this led to use of the telegraph to set them.

Meanwhile, the railroads wanted to build traffic for their tracks across the plains, so they established towns with grain elevators every so many miles. Even today, some of the towns still have their original street layouts and street names. The railroads populated the towns with immigrants whom they brought from Europe to be the farmers, ranchers, blacksmiths, butchers, and other tradesmen. The rails brought grain and cattle to Chicago, which became the central rail hub in the West. Merchants there prospered, including Montgomery Ward and Sears Roebuck that supplied the settlers with most of their needs including Sears kit houses. Railroads carried the traffic.

A growth cycle is a form of very broadband communication to millions of people. Part of this country’s problem today is that no growth cycle appears to be running, or if there is one, few people recognize or can participate. Companies will not invest to create new processes and new types of jobs that increase demand until they see the new trend. This is more basic than a monetary or fiscal policy issue. We just don’t see the next big picture.

If this is so, then MMT has a major opportunity to become a financial innovation of the next growth cycle. Global warming, dwindling water supplies, rising sea levels, and the growth of mega-cities which are major causes of environmental degradation are going to lead to major new industries which will be the drivers of the next growth cycle. But there is a big question: will those industries be defensive and just help the well-to-do cope with what is coming, or will they work to reverse the destructive trends for mankind and the planet? If the latter, they will need a great deal of financing long before they can become profitable, and today, the financial services industry doesn’t do much of that kind of heavy lifting.

Enter MMT. Those who are working on solutions to the country’s and the world’s biggest problems need MMT, they just don’t know it. Conventional finance will not support the long-term efforts that are needed. The leaders are systems thinkers who know that huge investments will be necessary. They are certainly able to absorb the basics of MMT. This is a natural match.

The Japanese were not the only ones to design a growth cycle. GE, the oldest, continuously listed company on the New York Stock Exchange had one developed by Thomas Edison that lasted until Jack Walsh killed it. One side of the company built generating, transmission, and distribution equipment for utility companies. The other side touched almost all parts of the economy as it built motors, lights, communications equipment, and appliances to use electricity. As the use side grew, it created demand for the utility side, and the beat went on. GE Credit, the financing arm that eventually became GE Capital, supported sales on both sides. Other companies have also built their own growth cycles, so the technique is proven.

If what we really need is a new growth cycle, MMT and what follows from it can be a major enabler or support function like GE Credit. It can be promoted in this context.

14 responses to “MMT and the Next Growth Cycle

  1. roger erickson

    Yes. This has been called “autocatalysis” & other names, by various biologists, ecologists and physicists … for well over 100 years now.

    Maybe time for a bit more cross-discipline coordination? Ya think?

  2. GDP is a mirror on the markets. It must not rule our lives | Diana Coyle http://gu.com/p/43fj8/stw

  3. Nuclear power will be a key to prosperity in the future. A massive buildout of nuclear power is just beginning in China. Nuclear power can bring unlimited high-quality energy (electricity) to the entire planet, with virtually now environmental consequences. There is a enough fuel already out of the ground to supply the US for centuries with advanced (fast neutron) reactors that fission all the uranium (later we can add thorium). We can couple this with development of electric vehicles and along with heat pumps eliminate reliance on fossil fuels, along the environmental degradation and political instability they bring.

  4. Sorry, should do a bit of editing before hitting the button:

    Nuclear power will be a key to prosperity in the future. A massive buildout of nuclear power is just beginning in China. Nuclear power can bring unlimited high-quality energy (electricity) to the entire planet, with virtually no environmental consequences. There is enough fuel already out of the ground to supply the US for centuries using advanced (fast neutron) reactors that fission all the uranium (later we can add thorium). We can couple this with the development of electric vehicles and deployment of heat pumps to eliminate reliance on fossil fuels, along with the environmental degradation and political instability they bring.

  5. Nuclear powered pumps for removing CO2 from the air…

  6. Nuclear power “…virtually no environmental consequences”?
    Like Fukushima didn’t happen… or Chernobyl… or Three Mile Island… Do a quick Google of “barrels of nuclear waste” why don’t you?

    Granted, it’s better than coal, but still… You can’t sell something by lying about it.

  7. True growth cycles require some kind of input (that is they extract something from the environment). You can’t have a growth cycle without an extractive industry at it’s base. I’m not sure another huge extractive industry is the solution we are looking for… I’m not sure another growth cycle is the solution we are looking for. You can only rearrange the deck chairs on the Titanic so many times, and in the long run, what’s the use? I’d love to see Daly or Galbraith working with Wray et al to synthesize MMT and Ecological Economics. MMT pushing another growth cycle, not so much…

  8. Excellent essay. Thanks.

    MMT can certainly contribute to new growth cycles, but whether or not it is used to our national advantage, and hopefully to world advantage, requires that we answer the rhetorical questions you asked:

    ” will those industries be defensive and just help the well-to-do cope with what is coming, or will they work to reverse the destructive trends for mankind and the planet? If the latter, they will need a great deal of financing long before they can become profitable, and today, the financial services industry doesn’t do much of that kind of heavy lifting.”

    The answer depends on who controls three things: the government, the means of production, and the means of finance. Those who control these institutions today will apply MMT, if they apply it all, in ways that are selfish and work against the common good. I call these powerful persons tyranno-capitalists. Our system of economics is tyranno-capitalism. Before we can get the full benefits of MMT we must replace tyranno-capitalism with democrato-capitalism, which requires making several important changes to our process of government.

    It is obvious that those who control these three elements of our society will act in their own interests. It is only natural. The Wall Street banks control the Fed, the Senate, the House, and regulators, and from time to time, the president.

    So, in order to replace these banks we will have to replace the government officials who are now in power. This means that we will have to change our process of electing our representatives–in effect we will have to have a new form of government. And once we do this there will be more to do. So the road before us is long and winding and it demands that we move very, very swiftly in order to escape the looming dangers of global warming. We must make fundamental changes to our government, the means of production, and the means of finance by 2034 or we will not be able to pull out of our dive to disaster.

  9. molten salt Thorium combined with vertical farming and then population growth then every thing is solved

    • roger erickson

      You know we’re in trouble when people claim to KNOW the solution. The corollary is that “we can now rest from the hard work of actually thinking”

      Message from thermodynamics & evolution: We have zero predictive power. Only adaptive power. Biases are suicidal. Completely open minds => faster adaptive rate.
      http://mikenormaneconomics.blogspot.com/2014/11/same-reason-our-schools-are-failing-our.html

      “No plan of operations extends with any certainty beyond the first contact with the [next context].” http://en.wikiquote.org/wiki/Helmuth_von_Moltke_the_Elder

      “In preparing for battle I have always found that plans are useless, but [practice at RE-planning] is indispensable.” Dwight D. Eisenhower

      To me, learning actual fiat currency operations enlarges our perceived policy space. It’s still up to us to explore those policy options, and practice generating more polity agility.

  10. Macrocompassion

    Every one of the examples given in the excellent descriptions of various waves of US progress, includes an exploration of some new kind of natural resource or the manufactured physical means of using it. But where and how does the MMT theory achieve this happy state?

    One cannot get active by simply spreading the doubtful knowledge about how our money is made use of. What is needed is the recognition of the next significant kind of natural resources becoming available. But since all of these resources are being exploited by speculators in their values, I rate the chances of boot-strapping by MMT as zero. Only by the introduction of a means for releasing fair and common access to these resources does the US stand a chance of self-improvement in the way that the cooperating Japanese managed it. The last innovator to suggest this kind of improvement with any sincerity was Henry George 135 years ago. I suggest its time the US of A tried to catch up with his ideas!

    • Thornton Parker

      Thanks, this comment comes directly to the point. Yes, all human-related growth cycles use resources, but rather than just using more, the next growth cycles could be built on using less. Let’s briefly consider just one resource–fresh water.

      As you know, agriculture is a major user. In some places, the land serves as a sponge to hold water after it is sprayed on and until it evaporates, with some going to the crops. Heavy use of fertilizer leads to contaminated runoff and water pollution.

      There are many ideas for using less water, and some have been proven. One is aeroponics, that grows vegetables on cloth trays in vertical stacks, perhaps several stories high. Small amounts of water and nutrients are sprayed on the roots which extend below the cloth. The plants are bathed in LED lights and the runoff water is recycled within the system. The systems use far less water than plants grown outdoors, no herbicides, and minimal amounts of electricity. The systems are modular and can be installed in old city buildings near the customers. And local, unskilled residents can become be productive quickly. A test installation is being arranged for Newark, NJ and a few others are in the pipeline.

      But there is a glitch–money. These systems require capital investments and start-up costs. If they are to truly make a contribution, their interest costs must be held down. A venture capital firm is funding the Newark system. But typically, VCs fund rapid growth companies which they can exit in a relatively short time for substantial profits.

      My main question about MMT is what good is it or what can it do? I suggest that a major federal program, probably run largely through state and local governments, could make grants for technology development like the Small Business Innovation Research (SBIR) grants, small business start-up grants, and forgivable long term loans to stimulate a wide range of water-saving technologies, of which aeroponics could be an example. The virtues of the program will be obvious, there can be strong local support all around the country, and including MMT in the mix can make it fiscally feasible.

    • Thornton Parker

      Thanks, this comment comes directly to the point. Yes all human-related growth cycles use resources, but rather than just using more, the next growth cycles could be built on using less. Let’s briefly consider just one resource–fresh water.

      As you know, agriculture is a major user. In some places, the land serves as a sponge to hold water after it is sprayed on and until it evaporates, with some going to the crops. Heavy use of fertilizer leads to contaminated runoff and water pollution.

      There are many ideas for using less water in agriculture, and some have been proven. One is aeroponics, that grows vegetables on cloth trays in vertical stacks, perhaps several stories high. Small amounts of water and nutrients are sprayed on the roots which extend below the cloth. The plants are bathed in LED lights and the runoff water is recycled within the system. The systems use far less water than plants grown outdoors, and minimal amounts of electricity. The systems are modular and can be installed in old city buildings near the customers. And local, unskilled residents can become be productive quickly. A test installation is being arranged for Newark, NJ and a few others are being planned.

      But there is a glitch–money. These systems require capital investments and start-up costs. If they are to truly make a contribution, their interest costs must be held down. A venture capital firm is funding the Newark system. But typically, VCs fund rapid growth companies which they can exit in a relatively short time for substantial profits.

      My main question about MMT is what good is it or what can it do? I suggest that a major federal program, probably run largely through state and local governments, could make grants for technology development like the Small Business Innovation Research (SBIR) grants, small business start-up grants, and forgivable long term loans to stimulate a wide range of water-saving technologies, of which aeroponics could be an example. The virtues of the program can be made obvious, there can be strong local support all around the country. Linking a simple explanation of MMT to the justification for the program would show that it is financially feasible. Those who want the program would learn enough about the basics of MMT to get over their fears bring pressure on their senators and congressional representatives to enact.

      This comes down to selling MMT with a form of demand-pull. It could be used for many other needs.