Modern monetary theory and inflation – Part 1

It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.

One recent commentator said:

Bill, do you believe governments should be concerned with price stability at all? Do you believe that fiscal sustainability should have anything to do with the level of inflation (in the MMT world in which monetary policy as we know it does not exist).

In all truth, unless you start seriously talking about inflation and how it will be controlled in a “MMT” economy, I think many minds will remain closed to your ideas.

If your response is simply something along the lines of “unemploment [sic] is a greater problem than inflation, we shouldn’t be too worried about it” it is too easy to dismiss your arguments as idealogically [sic] motivated.

First, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.

Even our favourite sham-book – Mankiw’s Principles of Economics – notes that “inflation does not in itself reduce people’s purchasing power”. He lists “shoe leather costs” (walking to the bank more often); “menu costs” (changing catalogues); “confusion and inconvenience” (but “difficult to judge” how severe); “inflation-induced tax distortions” (mainly impacting on returns to saving); and “arbitrary redistributions of wealth” (if inflation suddenly changes) but the estimated losses arising are nothing like those attributed to persistent unemployment.

There has been no credible study that shows that overall the losses from these “costs” amount to millions of dollars of foregone output every day. There is ample evidence that mass unemployment results in huge permanent losses every day in foregone output and income.

And then if you study the broader literature (health, mental health, sociology, crime, family studies etc) you realise that the macroeconomic losses from unemployment are just the tip of the iceberg. The personal, family and community losses are very large and persist across generations.

Second, embedded in MMT is a concern for price stability. It is one of the first principles of fiscal sustainability. The models developed provide innovative solutions to the twin evils of unemployment and inflation, even if we recognise as an empirical fact (independent of our ideologies) that unemployment is a much more significant evil.

I have written extensively about inflation – in my academic work and in many blogs. In my recent book with Joan Muysken – Full Employment abandoned – we considered inflation as a central concept. In my PhD work, unemployment and inflation were the central themes. My contribution to the development of MMT over many years has been focused on inflation as a primary concern.

So at the risk of repetition, here is some more on inflation.

What is inflation?

In this blog I am only considering inflationary pressures that arise from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses. In other words, I am excluding inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil). That is another issue altogether.

The reason I am excluding supply-driven inflationary impulses is because the mainstream attack on the current use fiscal policy (and monetary policy) is really about demand pressures. We are continually reading crude statements such as there is “too much money” in the system.

Further, the mechanisms through which the supply shocks manifest are different and this deserves a separate analysis, which will come in a subsequent blog (Inflation Part 2).

However, the solution to both sources of inflation is not that dissimilar although additional measures might be brought to bear to handle the case of a price hike in an imported raw material.

First we should make sure what we are talking about. Many conservative commentators think that when workers get a pay rise it is inflation. It is not. Those on the left think that when the corporate sector increase the price of a good or service it is inflation. It is not.

It is also not inflation when the exchange rate falls pushing the price of imports up a step. So a depreciation in the currency does not constitute inflation. It might stimulate inflation but is not in itself inflation.

It is also not inflation when the government increases a particular tax (say the VAT or GST) by x per cent to some new level.

So while a price rise is a necessary condition for inflation it is not a sufficient condition. Observing a price rise alone will not be sufficient to categorise the phenomena that you are observing as being an inflationary episode.

Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode. In this case, the inflation rate would be considered stable – a constant rise per period.

If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation. Alternatively, if the price level was rising by 10 per cent in month one, 9 per cent in month two etc then you have falling or decelerating inflation.

If the price level starts to continuously fall then we call that a deflationary episode.

Hyper-inflation is just inflation big-time!

So a price rise can become inflation but is not necessarily inflation. Many commentators and economists get this basic understanding wrong – often and continually.

Second, it also follows that cyclical adjustments in price levels by firms from what they are currently offering at depressed levels of activity to what the price levels that are defined at their normal operating capacity levels are not inflation. When the economy is in poor shape, firms cut prices in an attempt to increase capacity utilisation by temporarily suppressing their profit margins and hence maintain market share. As demand conditions become more favourable the firms start increasing the prices they offer until they get back to those levels that offer them the desired rate of return at normal capacity utilisation.

Firms are basically quantity adjusters if they have spare capacity. They will seek to maintain market share when nominal demand grows by increasing output where possible. Should nominal demand growth (supported in part by net public spending) outstrip this capacity then firms will become price adjusters, because they can no longer expand real output.

Bottlenecks in some sub-markets may occur before other sectors are at full capacity and so price pressures might emerge just before overall full capacity is reached. So, in reality, the aggregate supply response (which tells you how much real output will be forthcoming at each price level) may not be strictly reverse-L shaped (where price is on the vertical axis and output on the horizontal axis). The extent to which the reverse-L becomes a curve at at a point approaching full capacity is an empirical matter.

Inflation occurs when there is chronic excess demand relative to the real capacity of the economy to produce.

Buffer stocks and price stability

MMT provides a broad theoretical macroeconomic framework based on the recognition that fiat currency systems are in fact public monopolies per se, and introduce imperfect competition to the monetary system itself, and that the imposition of taxes coupled with insufficient government spending generates unemployment in the private sector.

An understanding of MMT allows us to appreciate how unemployment occurs and to detail the role that government can play in maintaining its near universal dual mandates of price stability and full employment. My work on this goes back to my early writings in 1978!

Please read my blog – Functional finance and modern monetary theory – as an introduction to this material.

There are two broad ways to control inflation and buffer stocks are involved in each:

  • Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
  • Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee (JG) model which is central to MMT is an example of an employment buffer stock policy approach.

Under a Job Guarantee, the inflation anchor is provided in the form of a fixed wage (price) employment guarantee.

Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.

Under the neo-liberal policy regime, central banks have, increasingly, been given the responsibility by government for managing the price level. In conducting monetary policy to fulfill their major economic objectives, central banks manipulate the interest rate and attempt to manage the state of inflation expectations.

These policy tools are employed to achieve an “optimal” level of price stability and capacity utilisation (typically assumed to be invariant in the long-run to nominal aggregates). Where negative real effects from the operation of inflation-first monetary policy are acknowledged they are theorised to be necessary for optimal long term growth and employment and small in magnitude.

These considerations suggest that the central bank, as part of the consolidated currency-issuing government sector, has another, somewhat similar yet far more effective buffer stock option which is in fact an alternative way of managing the unemployment program.

In MMT, a superior use of the labour slack necessary to generate price stability is to implement an employment program for the otherwise unemployed as an activity floor in the real sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.

The employment buffer stock approach (the JG) exploits the imperfect competition introduced by fiat (flexible exchange rate) currency which provides the issuing government with pricing power and frees it of nominal financial constraints.

The JG approach represents a break in paradigm from both traditional Keynesian policies and the NAIRU-buffer stock approach. The difference is a shift from what can be categorised as spending on a quantity rule to spending on a price rule.

For example, under current policy, the government generally budgets a quantity of dollars to be spent at prevailing market prices. In contrast, with the JG option, the government additionally offers a fixed wage to anyone willing and able to work, and thereby lets market forces determine the total quantity of government spending. This is what I call spending based on a price rule.

Under the JG scheme, the government continuously absorbs workers displaced from private sector employment. The JG workers thus constitute a buffer employment stock and would be paid the minimum wage.

Many economists who are sympathetic to the goals of full employment are sceptical of the JG approach because they fear it will make inflation impossible to control. To answer these claims, I once again outline the inflation control mechanisms inherent in the JG model. If the private sector is inflating, a tightening of fiscal and/or monetary policy shifts workers into the fixed-wage JG-sector to achieve inflation stability without unemployment.

Unemployment buffer stocks and price stability

There have been two striking developments in economics over the last thirty years. First, a major theoretical revolution has occurred in macroeconomics (from Keynesianism to Monetarism and beyond) since the mid 1970s. Second, unemployment rates have persisted at the highest levels known in the Post World War II period and in the current crisis have sky-rocketed upwards.

The concept of full employment as a genuine policy goal was abandoned with introduction of the natural rate of unemployment hypothesis (Friedman and Phelps) which has became a central plank of current mainstream thinking.

It asserts that there is only one unemployment rate consistent with stable inflation. In the natural rate hypothesis, there is no discretionary role for aggregate demand management and only microeconomic changes can reduce the natural rate of unemployment. Accordingly, the policy debate became increasingly concentrated on deregulation, privatisation, and reductions in the provisions of the Welfare State with tight monetary and fiscal regimes instituted.

The almost exclusive central bank focus on maintaining price stability on the back of an overwhelming faith in the NAIRU ideology has marked the final stages in the evolution of an abandonment of earlier full employment policies.

The modern policy framework is in contradistinction to the practice of governments in the Post World War II period to 1975 which sought to maintain levels of demand using a range of fiscal and monetary measures that were sufficient to ensure that full employment was achieved. Unemployment rates were usually below 2 per cent throughout this period.

Under inflation targeting (or inflation-first) monetary regimes, central banks shifted their policy emphasis. They now conduct monetary policy to meet an inflation target and, arguably, have abandoned any obligations they have to support a policy environment which achieves and maintains full employment. Unemployment since the mid-1970s has mostly persisted at high levels although in some economies low quality, casualised work has emerged in the face of persistently deficient demand for labour hours.

However, central bankers do not characterise their approach in this way and they avoid recognition of the empirical fact that contractionary monetary policy continues to generate output and employment losses which are permanent. Instead the dominant paradigm suggests that full employment is a natural derivative of the maintenance of price stability even though this approach to price stability requires the maintenance of an unemployed buffer stock.

The use of unemployment as a tool to suppress price pressures has, based on the OECD experience in the 1990s, been successful in that inflation is now no longer driven by its own expectations. One explanation is that unemployment temporarily balances the conflicting demands of labour and capital by disciplining the aspirations of labour so that they are compatible with the profitability requirements of capital.

Similarly, low product market demand, the analogue of high unemployment, suppresses the ability of firms to pass on prices to protect real margins. Other explanations for the effectiveness of unemployment in controlling inflation are possible.

The empirical evidence is clear that most OECD economies have not provided enough jobs since the mid-1970s and the conduct of monetary policy has contributed to the malaise. Central banks around the world have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities in many cases have further worsened the situation with complementary austerity.

How useful is the NAIRU as a guide to policy? There is a growing literature that shows that the NAIRU is useless as a guide to policy.

Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.

While there may be some stability between inflation and unemployment for a period, experience from many OECD countries suggests that a sudden shock, especially from the supply side (as in 1974) can worsen the unemployment resulting from a deflationary strategy, which is attempting to exploit a given Phillips curve.

Evidence from the OECD experience since 1975 suggests that deflationary policies are effective in bringing inflation down but impose huge costs on the economy and certain demographic groups, which are rarely computed or addressed.

The overwhelming quandary that the NAIRU approach to inflation control faces is whether the economy, once deflated by restrictive aggregate demand management, can be restarted without inflation.

If the underlying causes of the inflation are not addressed a demand expansion will merely reignite the tensions and a wage-price outbreak is likely. As a basis for policy the NAIRU approach is thus severely restrictive and provides no firm basis for full employment and price stability.

Further, despite its centrality to policy, the NAIRU evades accurate estimation and the case for its uniqueness and cyclical invariance is weak. Given these vagaries, its use as a policy tool is highly contentious.

Employment buffer stocks and price stability

It is clear that central bankers are now using buffer stocks of unemployed to achieve a desirable price level outcome. While the real effects of such a policy have been contested, there is overwhelming evidence to suggest that the cumulative costs of this strategy in real terms have been substantial.

Several researchers have found that sacrifice ratios remain significant and persistent, meaning that GDP losses during disinflation episodes are substantial. Additionally, a major component of this monetary policy stance is the persistent pool of unemployed (and other forms of labour underutilisation, for example, underemployment) as a buffer stock for wage and thereby price stability.

Please read my blog – The Great Moderation myth – for more discussion on this point.

In addition to lost output, other real costs are suffered by the nation, including the depreciation of human capital, family breakdowns, increasing crime, and increasing medical costs.

So the unemployment pool is thus widely recognised and monitored as a price anchor, a primary concern for price stability in general, and a prime object of monetary policy. However, the effectiveness of an unemployed buffer stock has been shown to deteriorate over time, with ever larger numbers of fresh unemployed or underemployed required to function as a price anchor that stabilises wages.

So in recognising that the effectiveness of unemployment per se as a price anchor is a further function of the terms, conditions, and administration of the unemployment program, MMT recommends management of the unemployment policy and programs be made a function of the agency responsible for said price stability – the central bank.

The question that arises is whether using a persistent pool of unemployed (or casualised underemployed) is the most cost effective way to achieve price stability?

An understanding of MMT principles suggest that a better alternative would be to utilise an employed buffer stock approach which is in fact an alternative way of managing the unemployment program.

MMT argues that a superior use of the labour slack necessary to generate price stability is to implement an employment program for the otherwise unemployed as an activity floor in the real sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.

The concept of a Job Guarantee

In this vein we are suggesting that politicians should set a minimum acceptable living standard and ensure that a base level job is always available to allow all citizens to achieve that living standard independent of welfare payments. This is the essence of the JG. Analogous to the central bank’s function of lender of the last resort, the JG functions as a buffer which absorbs all potential employment, at the accepted minimum wage. Government then is also the employer of the last resort.

An additional advantage is that by creating an employment buffer stock government also facilitates inflation control.

Please read my blog – When is a job guarantee a Job Guarantee? – for a detailed introduction to the JG concept.

While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreciate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability based on the principle of buffer stocks where job creation and destruction is but one component.

The idea came to me in 1978 when I was studying agricultural economics at the University of Melbourne. My earlier works discusses the link between the JG approach and the agricultural price support buffer stock schemes like the Wool Floor Price Scheme introduced by the Australian Government in 1970.

This was a system where the government desired to stabilised farm incomes and so agreed on a price for wool with the farmers. The government would then purchase excess wool supplied into the market to ensure the agreed price was maintained and in better times sell wool. They kept the wool in big stores spread all around the country.

So the government held buffer stocks of wool to manage the price. The JG is a buffer stock scheme too.

While generating full employment for wool production, there was an issue of what constituted a reasonable level of output in a time of declining demand.

The argument is not relevant when applied to unemployed labour. If there is a price guarantee below the prevailing market price and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then a form of full employment can be generated without tinkering with the price structure.

The other problem with commodity buffer stock systems is that they encouraged over-production, which ultimately made matters worse when the scheme were discontinued and the product was dumped onto the market. These objections to do not apply to maintaining a labour buffer stock as no one is concerned that employed workers would have more children than unemployed workers.

Benjamin Graham wrote in the 1930s about the idea of stabilising prices and standards of living by surplus storage. He documents how a government might deal with surplus production in the economy. He said the:

State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by “dumping” it; or (d) by conserving it.

In the context of an excess supply of labour, governments now choose the dumping strategy via the NAIRU. It makes much better sense to use the conservation approach via a JG. Graham (1937: 34) noted:

The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments …

The distinction is important in the JG model. The Australian Wool Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer.

The JG policy is an example of storage for use where the “reserve is established to meet a future need which experience has taught us is likely to develop” (Graham, 1937: 35).

Graham also proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus. In the context of the JG policy, this means setting a JG wage below the private market wage structure. To avoid disturbing the private sector wage structure and to ensure the JG is consistent with price stability, the JG wage rate should probably be set at the current legal minimum wage, though an initially higher JG wage may be offered if the government sought to combine the JG policy with an industry policy designed to raise productivity.

Under the JG, the public sector offers a fixed wage job, which we consider to be price rule spending, to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks, but potentially with considerably more liquidity if properly maintained.

The JG thus fulfills an absorption function to minimise the real costs currently associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls.

The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is open to everyone, it will functionally become the national minimum wage.

Inflation control under a Job Guarantee

The fixed JG wage provides an in-built inflation control mechanism. In an earlier published paper I called the ratio of JG employment to total employment the Buffer Employment Ratio (BER).

The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector.

Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. That is it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.

The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy.

A plausible story to show the dynamics of a JG economy compared to a NAIRU economy would begin with an economy with two labour sub-markets: A (primary) and B (secondary) which broadly correspond to the dual labour market depictions. Prices are set according to mark-ups on unit costs in each sector.

Wage setting in A is contractual and responds in an inverse and lagged fashion to relative wage growth (A/B) and to the wait unemployment level (displaced Sector A workers who think they will be re-employed soon in Sector A).

A government stimulus to this economy increases output and employment in both sectors immediately. Wages are relatively flexible upwards in Sector B and respond immediately.

The compression of the A/B relativity stimulates wage growth in Sector A after a time. Wait unemployment falls due to the rising employment in A but also rises due to the increased probability of getting a job in A. The net effect is unclear.

The total unemployment rate falls after participation effects are absorbed. The wage growth in both sectors may force firms to increase prices, although this will be attenuated somewhat by rising productivity as utilisation increases. A combination of wage-wage and wage-price mechanisms in a soft product market can then drive inflation. This is a Phillips curve world.

To stop inflation, the government has to repress demand. The higher unemployment brings the real income expectations of workers and firms into line with the available real income and the inflation stabilises – a typical NAIRU story.

Introducing the JG policy into the depressed economy puts pressure on Sector B employers to restructure their jobs in order to maintain a workforce. For given productivity levels, the JG wage constitutes a floor in the economy’s cost structure. The dynamics of this economy change significantly.

The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage-wage pressures that were prominent previously are now reduced.

The wages of JG workers (and hence their spending) represents a modest increment to nominal demand given that the state is typically supporting them on unemployment benefits. It is possible that the rising aggregate demand softens the product market, and demand for labour rises in Sector A.

But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in this environment. They must pay the going rate, which is still preferable, to appropriately skilled workers, than the JG wage level. The rising demand per se does not invoke inflationary pressures if firms increase capacity utilisation to meet the higher sales volumes.

With respect to the behaviour of workers in Sector A, one might think that the provision of the JG will lead to workers quitting bad private employers. It is clear that with a JG, wage bargaining is freed from the general threat of unemployment.

However, it is unclear whether this will lead to higher wage demands than otherwise. In professional occupational markets, some wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work.

They have a disincentive to immediately take a JG job, which is a low-wage and possibly stigmatised option. Wait unemployment disciplines wage demands in Sector A. However, demand pressures may eventually exhaust this stock, and wage-price pressures may develop.

A crucial point is that the JG does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming. Traditional Keynesian remedies fail to provide an integrated full employment-price anchor policy framework. In fact, a Keynesian policy agenda would impact more significantly on inflation if it was true that a JG was inflationary as a result of its impacts on demand in the product market.

Would the NAIBER will be higher than the NAIRU?

This last point invokes a fierce debate as to relative sizes of the NAIBER vis-à-vis the NAIRU. Some commentators argue that the NAIBER would have to be greater than the NAIRU for an equivalent amount of inflation control.

There are two strands to this argument. First, the intuitive but somewhat inexact view is that because JG workers will have higher incomes (than when they were unemployed) a switch to this policy would always see demand levels higher than under a NAIRU world.

As a matter of logic then, if the NAIRU achieved output levels commensurate with price stability then, other things equal, a higher demand level would have to generate inflationary impulses. So according to this view, the level of unemployment associated with the NAIRU is intrinsically tied to a unique level of demand at which inflation stabilises.

Second, and related, it is claimed that the introduction of the JG reduces the threat of unemployment which serves to discipline the wage setting process. The main principle of a buffer stock scheme like the JG is straightforward – it buys off the bottom (at zero bid) and cannot put pressure on prices that are above this floor. The choice of the floor may have once-off effects only.

It should be noted that while it is clear that JG workers will enjoy higher purchasing power under a JG compared to their outcomes under a NAIRU policy, it is not inevitable that aggregate demand overall would rise with the introduction of JG.

But assuming aggregate demand is higher when the JG is introduced than that which prevailed in the NAIRU economy, a traditional economist (and some Post Keynesians) might wonder why inflation is not inevitable as we replace unemployment with (higher paying) employment.

Rising demand per se does not necessarily invoke inflationary pressures because by definition, given the logic developed in Chapter 8, the extra liquidity is satisfying a net savings desire by the private sector.

Additionally, in today’s demand constrained economies, firms are likely to increase capacity utilisation to meet the higher sales volumes. Given that the demand impulse is less than required in the NAIRU economy, it is clear that if there were any demand-pull inflation it would be lower under the JG. So there are no new problems faced by employers who wish to hire labour to meet the higher sales levels.

Any initial rise in demand will stimulate private sector employment growth while reducing JG employment and spending.

The impact on the price level of the introduction of the JG will also depend on qualitative aspects of the JG pool relative to the NAIRU unemployment buffer. It is here that the so-called threat debate enters.

The JG buffer stock is a qualitatively superior inflation fighting pool than the unemployed stock under a NAIRU. Therefore the NAIBER will be lower than the NAIRU which means that employment can be higher before the inflation barrier is reached.

In the NAIRU logic workers may consider the JG to be a better option than unemployment. Without the threat of unemployment, wage bargaining workers then may have less incentive to moderate their wage demands notwithstanding the likely disciplining role of wait unemployment in skilled labour markets.

However, when wait unemployment is exhausted private firms would still be required to train new workers in job-specific skills in the same way they would in a non-JG economy.

Further, JG workers are far more likely to have retained higher levels of skill than those who are forced to succumb to lengthy spells of unemployment. It is thus reasonable to assume that an employer would consider a JG worker, who is already demonstrating commitment to working, a superior training prospect relative to an unemployed and/or hidden unemployed worker. This changes the bargaining environment rather significantly because the firms now have reduced hiring costs. Previously, the same firms would have lowered their hiring standards and provided on-the-job training and vestibule training in tight labour markets.

The functioning and effectiveness of the buffer employment stock is critical to its function as a price anchor. Condition and liquidity is the key. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity.

There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment. It is clear that the more employable are the unemployed the better the price anchor will function.

The JG policy thus would reduce the hysteretic inertia embodied in the long-term unemployed and allow for a smoother private sector expansion. Therefore JG workers would constitute a credible threat to the current private sector employees. When wage pressures mount, an employer would be more likely to exercise resistance if she could hire from the fixed-price JG pool.

As a consequence, longer term planning with cost control would be enhanced. So in this sense, the inflation restraint exerted via the NAIBER is likely to be more effective than using a NAIRU strategy.

Another associated factor relates to the behaviour of professional occupational markets. In those markets, while any wait unemployment will discipline wage demands, the demand pressures may eventually exhaust this stock and wage-price pressures may develop.

With a strong and responsive tertiary education sector combined with strong firm training processes skill bottlenecks can be avoided more readily under the JG than with an unemployed buffer stock in place. The JG workers would be already maintaining their general skills as a consequence of an on-going attachment to the employed workforce.

The qualitative aspects of the unemployed pool deteriorate with duration making the transition back in the labour force more problematic. As a consequence, the long-term unemployed exert very little downward pressure on wages growth because they are not a credible substitute.

Responsible fiscal practice in MMT

This is the macroeconomic sequence that defines responsible fiscal policy practice in MMT. This is basic macroeconomics and the debt-deficit-hyperinflation neo-liberals seem unable to grasp it:

1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.

2. Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.

3. The sovereign government can purchase any real good or service that is available for sale in the market at any time. It never has to finance this spending unlike a household which uses the currency issued by the sovereign government. The household always has to finance its spending (as do state and local governments in a federal system).

4. The non-government sector typically decides (in aggregate) to save a proportion of the income that is flowing to it. This desire to save motivates spending decisions which result in the flow of spending being less than the income produced. If nothing else happened then firms would reduce output and income would fall (as would employment) and households would find they were unable to achieve their desired saving ratio.

5. The government sector must in this situation fill the spending gap left by the non-government sector’s decision to withdraw some spending (in relation to its income). If the government does increase its net contribution to spending (that is, run a budget deficit) up to the point that total spending now equals total income then firms will realise their planned output sales and retain current employment levels.

6. The government sector’s net position (spending minus revenue) is the mirror image of the non-government’s net position. So a government surplus is equal $-for-$, cent-for-cent to a non-government deficit and vice versa. So if the non-government sector is in surplus (a net saving position) then income adjustments will render the government sector in deficit whether it plans to be in that state or not. If income is falling in the face of rising saving behaviour of the non-government sector and that spending gap is not filled by government net spending then the budget deficit will rise (as income adjustments cause tax revenue to fall and welfare payments to rise). You end up with a deficit but the economy is at a much less satisfactory position than would have been the case if the government had have “financed” the non-government saving desire in the first place and kept employment levels high.

7. A fiscally-responsible government will attempt to maintain spending levels sufficient to fill any saving but not push nominal aggregate spending beyond the full capacity level of output.

Conclusion

Given the overwhelming central bank focus on price stability, and the critical roll of today’s unemployed buffer stocks of unemployed, we argue that functioning and effectiveness of the buffer stock is critical to its function as a price anchor.

Condition and liquidity are the keys. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity. There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment.

It is clear that the more employable are the unemployed the better the price anchor will function. The government has the power to ensure a high quality price anchor is in place and that continuous involvement in paid-work provides returns in the form of improved physical and mental health, more stable labour market behaviour, reduced burdens on the criminal justice system, more coherent family histories and useful output, if well managed.

It is also the case the training in a paid-work environment is more effective than contextually isolated training schemes, which have become the fashion under the active labour market programs pursued by governments in all countries over the last two decades.

Now don’t say MMT doesn’t integrate a concern for inflation at the level of first principles.

That is enough for today!

This entry was posted in Debriefing 101, Inflation, Job Guarantee. Bookmark the permalink.

109 Responses to Modern monetary theory and inflation – Part 1

  1. Nathan says:

    Bill,

    Great post. Isn’t a better definition of inflation a rise in prices that is not commensurate with a rise in the standard of living? For instance, I could care less if prices are rising so long as my wages are rising an equal amount.

    Thoughts?

  2. valeriobrl says:

    Great post, obrigado Bill.

  3. Anas Jalil says:

    Dear comrade,

    The underlying concept of NAIRU is based on monetarist assumption that is “inflation is always and everywhere a monetary phenomenon”.
    They use Philips Curve as an empirical evidence to support that assumption. But since they believed that “inflation is always and everywhere a monetary phenomenon”, the monetarist say that there is no long term trade off between unemployment and inflation (hence, Philips Curve is vertical in the long term according to monetarist).

    Lo and behold, the new empirical evidence in UK (using 19 yrs data from 1992-2009) shows that the assumption of vertical or even downward sloping Philips Curve is no longer valid, the current Philips Curve is completely HORIZONTAL!

    You could watch the presentation on this here (by Anatole Kaletsky)
    http://ineteconomics.org/sites/default/files/media_files/players/INETVideoPlayerAlone.swf?startingVideo=hJdj5GOcJ0M
    His paper presentation is here
    http://ineteconomics.org/sites/inet.civicactions.net/files/INETSession1-AnatoleKaletsky.pdf

    Kaletsky says that the invalid theory is still been thought because it is politically convenient to do that in term of Academics Politics. This concept was useful ideologically in 1970s when the mission was to deal with ‘monopolization of the labour market’ according to Kaletsky, I would interpret that as using invalid economic theory to quashed the powerful labour union globally for the benefit of certain group.

    cheers

  4. Aidan says:

    Bill -

    I’m glad you’ve finally got around to discussing the inflation issue in detail. However as usual I’m far from convinced that things would actually work the way you predict. I won’t go into a long discussion about it until I’ve read part 2, but there appear to be a few glaring errors:

    Inflation is the continuous rise in the price level.
    No it isn’t. Inflation is inflation whether continuous or abrupt. If you want to restrict your arguments to underlying inflation then go ahead, but I’ve observed that redefining inflation is the first sign that an economist is not worth taking seriously.

    Hyper-inflation is just inflation big-time!
    That’s a very misleading statement. Hyperinflation is the collapse of a currency. Normal inflation isn’t, and often doesn’t even involve devaluation of the currency.

    Also you seem to be implying that inflation targetting relies on a NAIRU. But it doesn’t have to – they could just go by the inflation numbers.

  5. houseman says:

    “The modern policy framework is in contradistinction to the practice of governments in the Post World War II period to 1975 which sought to maintain levels of demand using a range of fiscal and monetary measures that were sufficient to ensure that full employment was achieved. Unemployment rates were usually below 2 per cent throughout this period.”

    If things were so great back then, the public wouldn’t have voted for a change in policy. Your claim is that the inflation-targeting policy that people voted for in the 70s was a bad one, which seems fair enough given what has happened. But why will focusing on full employment work this time round, when it clearly didn’t back then?

  6. anon says:

    “If the price level was rising by 10 per cent in month one, then 11 per cent in month two, then 12 per cent in month three and so on, then you have accelerating inflation.”

    I assume 10 per cent per month, every month, is constant inflation.

    So 10, 11, 12 is increasing inflation.

    And 10, 11, 13, 16 is accelerating inflation.

    This acknowledges inflation as a first derivative of price.

    So increasing inflation is a second derivative, and accelerating inflation a third.

    Does this cause you to tear up your thesis and start over?

    :)

  7. anon says:

    A JG buffer must be very elastic, because it is a point of extreme employment concentration, and subject to big swings. Conversely, private sector employment is diffused and heterogeneous and more easily able to “take the other side” of the same swings.

    How well can a government bureaucracy manage that elasticity?

  8. anon says:

    Excellent and informative post overall.

    Other observations:

    “So in recognising that the effectiveness of unemployment per se as a price anchor is a further function of the terms, conditions, and administration of the unemployment program, MMT recommends management of the unemployment policy and programs be made a function of the agency responsible for said price stability – the central bank.”

    Huh? Seems like a weird sentence/thought for MMT.

    Also, you completely lost me on the A and B sub-market discussion, and how it relates to JG/non-JG partitioning of the labor market.

  9. Stephan says:

    Here we go. We’ve also now a Peter Peterson Foundation in Germany. It’s called “Initiative New Social Market Economy”. The main difference: it comes directly from the economic profession meaning Bill’s German colleagues the economic Profs. They are now official paid vasals of the German industry. Right now they’re running a full page campagne in German newspapers. I will translate the ad claims left to right:

    (1) You see a proper German housewife gladly looking at her orderly household. The claim: “Who has its budget under control, deserves respect.”
    (2) You see a nice beach front on Mallorca. The claim: “That is what you are missing out because of the national debt of last year. I.e. 2 weeks Mallorca 1.600€”
    (3) No campaign without Ludwig Erhard. You see ordinary citizen. The claim: “Every expense by the government is based on a sacrifice by the citizenry.”

    Here are the motives: http://www.dasrichtigetun.de/index/Presse/Presse-Sparen/Downloads.html I must say I’m speechless. A major part of the academic profession decides to abandon any standard of decency and resorts to outright lies and propaganda.

  10. Stephan says:

    Oops … Sorry for the mistakes: vassals and campaign. But given this scandal you might forgive these minor errors.

  11. Neil Wilson says:

    “How well can a government bureaucracy manage that elasticity?”

    Very simple – outsource most of it. Pay a living pension to all and scrap the minimum wage.

  12. Neil Wilson says:

    Bill,

    Great post. Looking forward to part 2, where I hope to see a discussion of the OIL problem. Fear is the biggest obstacle to change, and when your entire argument is countered by “petrol will go up in price once the currency devalues”, you need a good rebuttal.

  13. Tom Hickey says:

    This post appeared in Yves Smith’s links for 7.7.10. She cautions:

    Note Bill claims MMT says what government “should” do. He really is not in a position to dictate MMT “positions” on policy (many if not most of the serious MMT writers in the US would say that MMT tells you about policy tradeoffs, it doesn’t dictate policy choices), so you need to discount his pronouncements.

  14. Ramanan says:

    Bill,

    I too lost you on the A/B dynamics. The way I understand is:

    Price setting by firms is affected by costs not demand. The neoclassical marginal-cost-marginal-revenue story is flawed because it assumes perfect foresights and weird things like that.

    Wage costs are the most important costs.

    Its a class struggle and wage rates are decided by bargains in the labour markets.

    Prices rise when the wage rates rise faster than productivity growth.

    Higher demand increases employment and when employment nears full employment, workers’ bargaining power increases, putting a slight upward pressure on the wage rate.

    If the State runs a JG, I am slightly confused on whether it increases the bargain powers of labour or decreases it :)

  15. WHQ says:

    Somewhat related to the question of elasticity management, how will the government employ those who have lost their private-sector jobs? What will they be doing and how will they be integrated into on-going work and existing organizational structures? There would have to be a lot of local work since people aren’t going to move or commute too far for a minimum-wage job. Would people be placed into, say in the US, state, county or municipal jobs with their pay provided by the federal government? I’d have more confidence in such a policy were I given a few specifics on its actual implementation rather than just the macroeconomic theory behind it. I like the idea, but the devil is always in the details.

  16. Anon,

    You’re right about the elasticity of the JG. But, only a small subset of all JG workers need be moving in/out to have significant stabilizing effects. I found as much when I simulated the jg in a macro model and started fiddling with the flexiblity of the jg labor force.

  17. Ramanan says:

    Off topic

    Excellent animated video – on the crisis of capitalism

    http://www.youtube.com/watch?v=qOP2V_np2c0

  18. Neil Wilson wants to “Pay a living pension to all and scrap the minimum wage.”

    That is a big incentive for employers and employees to collude (consciously or subconsciously) to create a large amount of very unproductive work. E.g. someone who can currently earn min wage plus two dollars an hour (and who is thus actually able to produce min wage plus two dollars an hour of output), would then be happy with a job producing only two dollars an hour, because the rest of the wage comes from the pension. The employer would be equally happy.

    This unproductive work is acceptable for short periods, e.g. when someone temporarily cannot find a job that suits their skills or qualifications. But it’s not acceptable for long periods.

    So there is a problem. I.e. Neil’s suggestion needs a few alterations or additions. I’ll think of something.

  19. Tom Hickey says:

    Neil, Ralph, a negative income tax was proposed over a half century ago. In the US, Milton Friedman was a proponent of it.

  20. Tom Hickey says:

    Ramanan, agreed. It packs a lot of info into a small package. Plus it is an excellent use of the video medium. It’s an interesting production model that is simple but flashy. My chief suggestion for improvement would be to slow the pace a bit.

  21. bill says:

    Dear Tom at 2010/07/08 at 1:33

    I offered this comment to Yves:

    Dear Yves

    Your caveat seems strange to me. It carries the implication that I am not a “serious MMT writer” although I am one of the early developers of the contemporary literature in this area and the buffer stock analysis goes back to 1978 (very early).

    Further, none of my “serious” US colleagues would disagree with any of the points I make in the post you mention. The statements and policy options I outlined as core MMT are all part of the shared understanding I have with my US colleagues (and friends).

    And as a senior developer of the MMT tradition I have every right to articulate the policy implications that come from the theoretical understanding we have developed.

    Someone has to translate it into a preferred set of policy options to provide traction within the public debate.

    best wishes
    bill

  22. Gamma says:

    Bill,

    Very interesting post, many thanks. I am looking forward to the second part on so-called “cost-push” inflation, where you will address supply shocks. I anticipate that you will discuss the inflation in the 1970s and the OPEC oil price increases.

    If that’s correct and you have the time and inclination, I would be very interested if you would address the alternative theory that the inflation in the 1970s was not purely a result of the oil price shocks, but actually had a largely monetary origin.

    As I understand it, this alternative theory is something broadly along of this:

    - During the late 1960s, as a result of the “full employment policies” of governments in many countries, significant wage inflation was starting to develop
    - For a couple of years this wage inflation pressure did not result in higher consumer price inflation, until 1970 and 1971, when consumer price inflation started to increase in many countries around the world
    - In October 1973 (well after the first stage of an increase in price inflation) OPEC decided to increase oil prices partly as a reaction to the previous inflation
    - This increase in the price of oil really only then served to strengthen and accelerate the trend in world inflation rates that was already present before the OPEC increases

    Some basic evidence to support this theory is as follows:

    - Although all nations faced the same increase in the oil price, the price inflation experience was very different. For example inflation was relatively subdued in Germany during the 1970s (compared to the US and Australia).
    - In a number of countries (Australia and Japan) inflation was already trending aggressively higher during the start and middle of 1973, months before the October OPEC increase.

    Although I don’t necessarily subscribe to the above argument in full, to me there seems to be some evidence that the 1970s inflation experience was not completely due to the OPEC oil price increases, and that monetary factors played a significant role.

    Cheers.

  23. Tom and others: Re negative income tax, as the Wiki site to which Tom directs us points out, negative income tax reduces the incentive to work. I.e. it suffers the same problem as Neil’s suggestion.

    I.e. if the employment subsidy that is inherent in JG is unconditional, incentives are reduced.

    And there are other problems. The elasticity mentioned by Anon above is one. Another is that JG employees will tend to be relatively unskilled, and the private sector is better at employing the unskilled than the public sector.

    My preferred solution to the incentive problem is to limit the time a subsidised employee stays with a given employer. That would “call the employer’s bluff”. I.e. if the relevant job is genuinely unproductive, the employer would be happy for the employee to go. The latter can then move on to a different subsidised job: and there is no harm in the otherwise unemployed experiencing different working environments.

    Alternatively, if the job is relatively productive, the employer (particularly a private sector one) would then admit that the subsidy was not needed and would be allowed to keep the employee. (No employer wants to lose productive employees.)

  24. Gamma says:

    Bill,

    Also, a question about the job guarantee: would the JG completely replace unemployment benefits or would an unemployed person have a choice between accepting a JG position at minimum wage or going on the dole?

    The reason I ask is this. If I lost my job paying an average wage of $60,000 per year, would I prefer to go on the Job Guarantee at the equivalent of $30,000 (annual min wage) or unemployment benefits between $11,000 to $16000 (annual equivalent)?

    If I anticipated that I had a good chance of finding a new private sector job relatively soon, I would probably rather receive unemployment benefits so I could dedicate most of my time towards finding a new job.

    Maybe for some unemployed people, a job guarantee system (without the dole) would turn out to be a worse system than the one we currently have.

  25. Gamma,

    Regarding unemployment benefits, back in 2000 Randy Wray explained it this way:

    “It could replace unemployment compensation, although it could be simply added on to give workers who have lost their jobs more choices. In the US well under half of the officially unemployed even qualify for unemployment compensation. The point is that no matter what social safety net exists, ELR can be added to allow people to choose to work over whatever package of benefits might be made available to those who choose not to work. Obviously, generous benefits to those who do not work can affect willingness to work. The ELR benefit and wage package should be set higher than the benefit package given to similar individuals who do not work, but even this is not absolutely necessary. If ELR enhances one’s access to desirable private and public sector (non-ELR) jobs, then some individuals will choose to work in the ELR program even if this means taking a benefit cut. However, if society values work, it seems far more reasonable to reward ELR workers with a better compensation package than they would receive if they did not work.”

    http://www.cfeps.org/pubs/wp/wp9.html

  26. Fed Up says:

    “What is inflation?”

    I HIGHLY, HIGHLY recommend descriptors to the words inflation, income, and maybe even debt.

    I have seen way too much time wasted as someone discusses “inflation” when that person means price inflation and for another person it means debt inflation and/or currency inflation. (anybody been to Mish’s blog?)

    I have seen way too much time wasted as someone discusses “income” when that person means national income and for another it person means wage income.

    I have seen way too much time wasted as someone discusses debt when that person means debt denominated in something other than currency and for another person it means currency denominated debt.

  27. Min says:

    Ralph Musgrave: “Another is that JG employees will tend to be relatively unskilled, and the private sector is better at employing the unskilled than the public sector.”

    Really? What makes you say that?

    Thanks. :)

  28. bill says:

    Dear WHQ, anon and others

    The post you are commenting on was not a complete presentation of the Job Guarantee concept. It was only articulating the capacity of an employment buffer stock to fight inflation.

    I have dealt with all the operational questions etc including the debate between income guarantees and employment guarantees in great detail in the following posts:

    When is a job guarantee a Job Guarantee?

    Income or employment guarantees?

    Also you might like to read this very long report we produced in December 2008 which was the result of a 3-year study:

    Creating effective local labour markets: a new framework for regional employment policy

    I think all the matters are addressed there.

    They are also addressed in an academic manner in my recent book with Joan Muysken – Full Employment abandoned.

    best wishes
    bill

  29. Tom Hickey says:

    Bill at 3:56,

    It seemed to me that Yves had a point, since economic theory is thought of descriptive, explanatory, and predictive, but not normative. “Should” seems to imply normative. Thank for clarifying.

    However, it still doesn’t seem that MMT’ers are in total agreement on everything regarding policy. For example, you and Warren seem to be a bit at odds over emphasis on tax cuts and spending. Warren is chiefly putting forward a payroll tax holiday and you seem to favor government expenditure that is more directly targeted. Of course, Warren has other proposals as well that he is not emphasizing as much as the tax cut, which would be popular and fairly easy to pass in the House and Senate, and have the president sign, at least in comparison with bills involving expenditure.

  30. bill says:

    Dear Tom

    First, the so-called separation between normative and positive is a myth perpetuated by neo-classical (mainstream) economics to pretend they offer value-free statements (that is, free of ideology). There are values embedded in every theoretical construct.

    Second, Yves point (in private correspondence and only summarised) is that if something is not accepted as a realistic policy goal (for example, full employment) then one should not advocate it only as a policy option not as a mandate. Further, there is an objection in specifying fiscal sustainability in terms of a government responsibility for filling the spending gap and therefore ensuring full employment. I fundamentally disagree with this position. It is my responsibility as an academic to present policy options that are logically implied by the theoretical constructs that I use (and have developed). If I just lay out the theory and say …. well I have nothing further to offer then I am avoiding that responsibility. A lot of the work that I and my colleagues have done is in outlining in operational ways the manner in which full employment policies can be pursued by government.

    I fundamentally disagree that the MMT camp is only interested in presenting a framework that you can choose policy within. I agree and state it often that MMT offers policy options and you can take your pick. But all of us are also advocating full employment.

    In Boston last week one of the participants asked Warren and me to articulate our differences. We tried to work out some differences and there are not many. You have to understand that he is now a politician and so is working out political agenda’s which require all sorts of compromises etc. I am not a politician. He is also working within the US policy system and payroll taxes are structured very differently there than they are, say in Australia.

    But all of us advocate strongly a Job Guarantee as the base level government intervention to ensure there is a job for all and that a nominal anchor is in place that does not undermine jobs.

    That has been a central and unifying policy theme for all MMT developers and advocates. To single me out and suggest I am now outside the camp is to misunderstand this unity.

    best wishes
    bill

  31. Min says:

    Tom Hickey: “It seemed to me that Yves had a point, since economic theory is thought of descriptive, explanatory, and predictive, but not normative.”

    Coulda fooled me! A great deal of economic vocabulary is normative. Besides, economics is obviously ideological. And if it is predictive, why are so many economic projections presented without error estimates? I don’t buy it, sorry.

  32. anon says:

    I thought Yves’ qualification was a bit odd. My impression is that the key advocates of MMT all emphasize the idea of policy options that may flow from the analytical substance of MMT. It’s only natural for them as individuals to present their own preferred selection from those options. Different individuals have different selections. Yves’ implied notion that MMT itself should present some standardized view on policy, or omit discussion of it altogether doesn’t seem very realistic.

  33. Fed Up says:

    Instead of a jobs guarantee, what about a retirement guarantee?

    Almost everyone says there are not enough jobs. What if the number of jobs is about correct and there are too many workers?

  34. markg says:

    My gut feeling is mainstream theory is opposite of reality. I think high unemployment is inflationary because workers are given compensation but produce zero goods or services. In others words they are consumers but not producers. This results in demand above supply – inflation. And higher interest rates set by the central bank adds to inflation. Higher interest rates result in higher govt payments on debt. This is money given to the private sector without a good or service provided or enhancement of productivity. Warren has suggested low interest rates are deflationary. I agree. The late 1970s saw high unemployment, high interest rates and high inflation. The late 1990s had low unemployment, low interest rates and deflationary forces.

  35. Matt Franko says:

    FWIW,
    I wouldnt have any interest in MMT unless I saw the shared policy vision of full employment evidenced by MMTs elite proponents.
    Resp,

    PS The accounting record should always be considered secondary to the policy outcomes.

  36. Tom Hickey says:

    Point of clarification: I was not taking Yves side on this issue. I was simply seeking clarification. I have long claimed that economics is not a science but a branch of social and political philosophy, where it began, as a matter of fact. It does not seek to be informed by other sciences and merely emulates science through the extensive use of mathematical modeling. I posted a string comment over at Warren’s to this effect quite recently.

    Conversely, my perception is that many economists, especially the “orthodox” ones, are convinced that they are doing science and that others are either not doing science, or are mistaken. Philosophers and those who study human behavior as scientifically as possible, such as anthropologists, sociologists, psychologists, and biologists find this amusing, especially since such economists do not consider relevant information or speculation outside their own discipline. They are also somewhat deficient in logic, although skilled in math (of course, mathematicians, physicists and engineers would find that debatable, too).

    The fact that it is ideological and not scientific is shown by the disagreement over fundamentals that has persisted over time. This is an indication that economic issues are not resolvable empirically based on replicable experiment, or that the participants are not interested in such resolution.

    I would further argue that economics per se contains hypothetical imperatives, not categorical ones. That is to say, If a goal is such and such, then this course of action will likely promote it. The goals are given in terms of social and political philosophy, which is a branch of ethics. Ethics as the study of what human ought to do is based on metaphysics (study of being) and epistemology (study of knowledge), in that it depends on a view of “human nature” — what constitutes human being and what human can know.

    Every economic theory is nested in a complex worldview and to presume that economics is somehow independent is just myopic. Humans do not agree among themselves on an overarching worldview, and this is what philosophy is about. It analyzes various worldviews in terms of their key fundamentals and compares them.

    This is not to say that no economics issues are empirically decidable. They clearly are. It is simply the claim that an overarching economic theory will have philosophical underpinnings, and people espousing those competing theories should recognize and acknowledge these underpinnings.

    When I was entering grad study in philosophy in a very diverse department, I asked one of the profs why they never talked philosophy with each other. He smiled and answered: Oh, we are argued each other back to our fundamental principles, and there was nothing more to say. So we just agreed to disagree. Now we talk about other things with each other.

  37. “When I use a word,’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.”

    Bill says, “Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.” Why 2%? What about all the people who don’t want a job? What about people who have part time jobs? What about a PhD who is forced to work at Walmart?

    Bill says, “Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it.” So if prices rise 20% one month, stay level the next, then rise another 20%, that is not inflation in Bill’s world.

    Bill says, “I am excluding inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil). That is another issue altogether.” First, the price of oil has been the primary cause of inflation for 40 years. See: INFLATION

    Bill also says, “I am only considering inflationary pressures that arise from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses.” That type of inflationary pressure has become almost impossible in this worldwide import/export economy. He omits the prime cause of inflation in favor of next-to-impossible cause.

    Though Bill was one of the early MMT thinkers, the world seems to have passed him by. He has begun to talk like the old line professors, who tell you how long they have been doing this, and how long it has been since they have learned something.

    Rodger Malcolm Mitchell

  38. bill says:

    Dear Rodger

    You said:

    Bill says, “Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.” Why 2%? What about all the people who don’t want a job? What about people who have part time jobs? What about a PhD who is forced to work at Walmart?

    (a) 2 per cent is about the level of friction in most labour markets.

    (b) People with part-time jobs who are a happy with them are not underemployed.

    You said:

    So if prices rise 20% one month, stay level the next, then rise another 20%, that is not inflation in Bill’s world.

    The definition I provided is not mine. It is the standard definition. Further, the time period you assess the price rises over is judgemental. I only used a month as an example of one frequency.

    You said:

    Bill says, “I am excluding inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil). That is another issue altogether.” First, the price of oil has been the primary cause of inflation for 40 years.

    Better stay tuned for Part 2. I signalled I would deal with "cost push" inflation then.

    Part 1 addressed "demand pull" inflation which is the source of most of the concerns about deficits and monetary policy right now.

    etc.

    best wishes
    bill

  39. NKlein1553 says:

    “There are two broad ways to control inflation and buffer stocks are involved in each.”

    What about Abba Lerner’s Market Anti-Inflation Plan (MAP)? From:

    http://homepage.newschool.edu/het//profiles/lerner.htm

    “Heuristically, MAP proposes to “internalize” the costs of inflation by setting up a type of voucher system whereby a firm obtains a surplus voucher to increase sales if sales in that year fall before a particular aggregate target, while a firm whose sales growth exceeds the target will incur a deficit voucher. The rattlesnake juice comes with the market part of it: if a firm wishes to raise sales above target regardless, then it can buy surplus vouchers on the open market from firms who are selling below target. This extension of the marketplace to the very process of inflation, Lerner argued, would not only internalize the externalities of inflation but also be an effective way of controlling aggregate demand without losing the individual dynamism of entrepreneurial activity.”

    This seems to be a third way of controlling inflation that has nothing to do with employment levels. Some of the more thoughtful critiques I’ve seen of MMT contend that MMT advocates spend too much time worrying about employment. I don’t agree with these critiques, but I do believe there are other avenues through which inflation can manifest itself besides the labor market. Dr. Lerner’s MAP proposal seems an interesting way to deal with such a possibility.

  40. Tom Hickey says:

    The crux of the MMT argument presented here concerning the JG and NAIBER is the claim:

    1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.

    I take it that is derived economically from state money creating the possibility for unemployment. This is an “unnatural state” since absent state money, full employment would be the norm, as it is in primitive societies. Therefore, since state money and unemployment are creatures of the state, the state has the responsibility to provide the correct amount of money to create demand ensuring full employment. To avoid creating inflation, the government needs to provide price stability as well. A JG provides an anchor price for labor, and this anchors price stability. Therefore, with state money and the possibility of unemployment, a policy goal is full employment along with price stability. This is accomplished through functional finance and a price anchor.

    In addition, others have noted, and I would agree, that there are ethical, social and political grounds that supersede economics here. Such an argument might run along these lines: The primary purpose of government is ensuring the good order of society. Full employment is necessary for good order. Therefore, a primary purpose of government involves ensuring full employment. Price stability is also necessary for good order. MMT shows how to achieve this objective.

    This objective is particularly necessary to achieve in a complex modern society. In such societies both in the developed world and in developing nations, it is no longer possible to sustain oneself without employment and even less possible to support a families. Without making full employment a policy goal, some people will lack the ability to sustain themselves without resorting extreme means, e.g., criminal activity. Ethicists are in general agreement that stealing is not morally wrong under such conditions, and some would argue that it is an obligation if no other recourse is available. This is clearly a threat to good order.

    Usually, the issue is approached on the basis of designing a society around an economy, e.g., for efficiency as the criterion. However, economics is for society, and not society for economics. Modern liberal societies are based on human rights and equality of persons with respect to rights.

    There has also been much philosophical criticism of the utilitarianism as “the greatest good for the great number,” in that it treats society as an aggregation of individuals instead of a community of persons, in which each person enjoys basic human right such as the right to life, to liberty, including freedom from exploitation), etc.

    While this discussion has focused chiefly on the economic issues, there are also underlying philosophical issues that are more fundamental. The human rights aspect is particularly germane, and it is especially applicable to underdeveloped nations where traditional economies are being replaced without an adequate life-support system being provided. The results have been, are, and portend to be devastating, with a range of untoward consequences. This is unjust and a violation of human rights.

  41. william wilson says:

    Bill – this is great stuff, and drives thinking on the mechanisms of money. But where I am lost is – how can MMT, or any monetary policy, drive employment when industry is being deliberately and systematically destroyed by government action? In my state (California) manufacturing, energy production, mining, timber, farming, food production, etc is being driven out by regulation and capricious government fiat. As an example, the adjoining cities of Palmdale and Lancaster are in a near civil war – Palmdale wants to build a solar power plant, and Lancaster wants to build a factory for a Chinese company that will build electric cars. But the AQMD can only, under CA law, issue air pollution credits for ONE of the two proposals. The law is that when a company folds or leaves California – which MANY are doing, and at an accelerating pace – their newly-available credits must be reduced by 1/3. That obviously continually reduces any possibility of replacement businesses. And notice that these are both examples of the promised “green” jobs! This is just one example among countless others.

    Yet no relief from the regulation is even considered. Meanwhile government sucks ever more money (as a percentage, regardless of money supply) out of the economy with continually increasing taxes. How can MMT or any other scheme help in this situation? How can there be anything close to full employment? Numbers printed on pieces of paper don’t help, do they? It seems to me that employment must continually decrease in this regime.

  42. Min asks why I think that JG employees will be relatively unskilled.

    There is plenty of research into the characteristics of the unemployed which shows they tend to be less skilled than average. E.g. “A National Survey of the Unemployed” by W.W.Daniel, Table II 5, p.11, shows that 27% of the workforce are unskilled or semi-skilled, whereas 54 to 64% of the unemployed are unskilled or semi-skilled.

  43. CharleJ says:

    Bill et al.
    I have just found a stunning clip of Alan Budd from the UKs Office of Budget Reponsibility, who is now stepping down. This clip from 1992 shows him worrying about Tory policy in the 1980′s and that it was really all about creating unemployment for political reasons:

    http://www.taxpayersalliance.org/news/alan-budd-on-the-tories-real-motives

    Kind Regards
    Charlie

  44. Neil Wilson says:

    Ralph,

    “E.g. someone who can currently earn min wage plus two dollars an hour (and who is thus actually able to produce min wage plus two dollars an hour of output), would then be happy with a job producing only two dollars an hour, because the rest of the wage comes from the pension. The employer would be equally happy.”

    Why is that a problem? The employer gets more profit and profit taxes would increase stabilising the situation. If aggregate demand is still too high then profit taxes can be increased to stabilise the situation.

    But because it works all the way up the tree, all wages would drop by the minimum wage delta and profit taxes would go up by the same amount. So the employer pays in tax what they currently pay in wages.

    Bear in mind that if an employer generating min wage + 2 dollars tries to drop their wage, then they will be competing with a load of new employers who are generating 2 dollars of output from an employee. At the moment the latter jobs can’t exist, which distorts the employment market.

  45. Tom Hickey says:

    Charlies J at 22:46

    Great link.

    Here is a piece of the transcript posted there for those that may not have time to watch the clip.

    Sir Alan told Adam Curtis:
    “The nightmare I sometimes have, about this whole experience, runs as follows. I was involved in making a number of proposals which were partly at least adopted by the government and put in play by the government. Now, my worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation.

    “They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes — if you like, that what was engineered there in Marxist terms was a crisis of capitalism which re-created a reserve army of labour and has allowed the capitalists to make high profits ever since.

    “Now again, I would not say I believe that story, but when I really worry about all this, I worry whether that indeed was really what was going on.”

  46. NKlein1553 says:

    “To avoid creating inflation, the government needs to provide price stability as well. A JG provides an anchor price for labor, and this anchors price stability.”

    This statement rests on the assumption that anchoring the price of labor is sufficient to prevent an outbreak of demand-pull inflation. But the fact is there are other ways inflation can manifest itself besides through the labor market. For example, in the 1970′s inflation began to accelerate even before the supply-side oil shocks that decade is now famous for. Professor Mitchell acknowledges the possibility of inflation outbreaks unrelated to labor market realities or supply-side shocks when he writes “if inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER.” In order to convince skeptics of Modern Monetary Theory I think it is important to more fully explain what these MMT consistent policies are. Is it just increase taxes/decrease spending and/or increase the Fed’s target interest rate? If so, why should these policies be any more effective now than they were in the 1970′s, which is to say not at all. One possible policy I have been reading up on is the Lerner/Colander Market Anti-inflation Plan. See here for an introduction:

    http://community.middlebury.edu/~colander/books/map.html

    I would be curious to know if Professor Mitchell and other important MMT developers consider the Market Anti-inflation Plan to be MMT consistent. I know in past blog posts Professor Mitchell has expressed admiration for Dr. Lerner’s work, but he has never, to my knowledge, addressed Lerner’s later policies to control inflation. It is my understanding that later in life Dr. Lerner moved away from his emphasis on the kinds of pure fiscal policy actions described by Professor Mitchell in his “Functional Finance,” post, in favor of the MAP approach. Perhaps in his next post about inflation Professor Mitchell will address alternative policies to combat inflation that has its source in avenues outside of the labor market. In my opinion, addressing the fears of the hyper-inflation hyperventilates is probably the most difficult task proponents of MMT have to address.

  47. WHQ says:

    bill,

    Thank you for providing the links expanding on the JG concept (at least in one case, again, since you provided the same link in your post and I failed to use it).

    I took particular notice to and appreciated this in your “income or employment guarantees?” post:

    The failure to engage in paid work cannot be narrowly construed as an inability to generate disposable income which can be addressed through a benefit, but entails a much broader form of exclusion from economic, social and cultural life, which has highly detrimental consequences.

  48. Min says:

    Ralph Musgrave: “Min asks why I think that JG employees will be relatively unskilled.”

    {Answer and ref follow.}

    Thanks, Ralph. :)

    Now for the second part of my question: Why do you say, “The private sector is better at employing the unskilled than the public sector.”

    Thanks. :)

  49. Min says:

    Fed Up: “Instead of a jobs guarantee, what about a retirement guarantee?

    “Almost everyone says there are not enough jobs. What if the number of jobs is about correct and there are too many workers?”

    There you go! The traditional retirement age in Japan used to be 50.

  50. I just left the following lengthy comment on the Bill/Yves exchange at Naked Capitalism.

    “Note Bill claims MMT says what government “should” do. He really is not in a position to dictate MMT “positions” on policy (many if not most of the serious MMT writers in the US would say that MMT tells you about policy tradeoffs, it doesn’t dictate policy choices), so you need to discount his pronouncements.”

    First, while Bill Mitchell, as you say, “. . . is not in a position to dictate MMT “positions” on policy. . . ” as one of the three most widely known MMT economists, he is extremely influential among those who practice the MMT approach. So, when he says that MMT is about both full employment and price stability, that “pronouncement” isn’t one to be discounted. Also, other MMT economists such as Randy Wray, Warren Mosler, Stephanie Kelton, Pavlina Tcherneva, Marshall Auerback, Scott Fullwiler, Mat Forstater, Greg Norman, and others all address both problems of getting to full employment and achieving price stability in their writings. In your recent thread on AmericaSpeaks, the charge frequently surfaced that MMT had no regard for inflation. Well, Bill’s series on inflation is in part directed at that view and is a refutation of it.

    Second, even though you’re right that most serious US MMT writers “would say that MMT tells you about policy tradeoffs, it doesn’t dictate policy choices,” it is also true that every MMT writer I’ve ever corresponded with, at least 10 now, do think that the Government ought, at least, to accept that full employment is an important aspect of public purpose and ought to be a goal of Government activity.

    You’ve said above in your reply to him that Bill ought to have said something like that rather than said:

    “The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.”

    However, Bill asserted this in the context of a section in his post on “Responsible fiscal practice in MMT.” This section is explicitly normative since it is stating Bill’s view about such practice. I think every MMT writer has the right to say what they think “responsible fiscal practice in MMT” is, including Bill. I don’t think their statements about this ought to be discounted either, but, instead should be evaluated against other ideas about what responsible fiscal practice in MMT is. I thank Bill for his view on this, and I also think that as one of the developers of MMT for more than 30 years and as one of the three most acknowledged leaders in MMT, that his view is important because it is bound to be an influential one in the MMT school. Apart from that, however, I think there is merit in his view of fiscally responsible MMT practice, and that he may be right about what that is. So, again, I certainly don’t think his view should be discounted.

    You also said that Bill’s statement about a sovereign government’s responsibility

    “. . . is not widely accepted in the US, in fact, I would hazard most reject the idea that government should play a role in assuring full employment, much “has a responsibility” (which I read as a stronger claim). Even though that is the goal of most policy prescriptions made by economists, many people, perhaps even most, in the US reject the idea of the government having responsibility for employment.”

    I’m not sure that most of us here reject the idea that the Government should play a role in assuring full employment. As far as I know there is no direct polling on this question, but perhaps I’m wrong about this. If I had to guess about this I’d say that a majority of us do think that the Government should play a role in helping to achieve “full employment” and that people are divided about the size of that role. and the degree of that obligation of Government.

    I also think that our views on this subject have varied greatly over the years. During the period from the end of WWII through the 1970s the view that Government ought to pursue full employment was much more popular than it’s become in the neo-liberal period since Reagan’s election. With unemployment so high in the US it’s a fair conjecture to make that more of us may again think that the Government should provide full employment.

    Here’s a link to a Federal Reserve Bank of SF newsletter on the goals of monetary policy policy written in 1999:

    http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-04.html

    The newsletter outlines the evolution of the Fed’s legislative mandate and discusses its employment goals in that context. Among other things it says:

    “The Fed then has two main legislated goals for monetary policy: promoting full employment and promoting stable prices. With this mandate, the Fed has helped foster the exceptional performance of the U.S. economy during the past decade. Still, some have argued that the Fed’s mandate could be improved, especially in looking ahead to future attempts to maintain or institutionalize recent low inflation. Much discussion has centered on two topics: the transparency of the goals and their dual nature.

    The transparency of goals refers to the extent to which the objectives of monetary policy are clearly defined and can be easily and obviously understood by the public. The goal of full employment will never be very transparent because it is not directly observed but only estimated by economists with limited precision. For example, the 1997 Economic Report of the President (which has authority in this matter from the Humphrey-Hawkins Act) gives a range of 5 to 6% for the unemployment rate consistent with full employment, with a midpoint of 5.5%. Research suggests that there is a very wide range of uncertainty around any estimate of the natural rate, with one prominent study finding a 95% probability that it falls in the wide range of 4 to 7-1/2 % (see Walsh 1998).”

    The meaning of “full employment” here is associated with the idea of a “Non-Accelerating Inflation Rate of Unemployment” or NAIRU. It’s because of ideas prevalent about the NAIRU that the level of “full employment” discussed above is so high. But Bill Mitchell, along with other MMT economists, believes that the NAIRU hypothesis is invalid. See his: http://bilbo.economicoutlook.net/blog/?p=1502 for his reasoning and some evidence.

    So, his target of full employment at only 2% unemployment has to be viewed in that context. Let’s say that Bill’s view about the NAIRU were adopted by the Fed, then the newsletter above implies that the Fed’s “full employment” goal as part of implementing the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978 would correspond with Bill’s assertion that it is the responsibility of the Federal Government to do all it can consistent with price stability and the other goals of the act.

    In short, a case can be made that Bill’s assertion that the Government “has a responsibility for seeing that the workforce is fully employed,” is already the law of the land in the United States.

    Sorry for the length of this comment. But I thought yours deserved a careful reply.

    Best,

    Joe Firestone

  51. Tom and Bill

    In the exchange above about Yves having a point. I agree very much with Bill’s reply. I want, however, to make particular note of this point:

    “First, the so-called separation between normative and positive is a myth perpetuated by neo-classical (mainstream) economics to pretend they offer value-free statements (that is, free of ideology). There are values embedded in every theoretical construct.”

    I agree very much with this and wrote a paper some time ago. It’s posted here and contains a very extended argument:

    http://bit.ly/a1zQog

    To summarize the points, all scientific work introduces values in a) the selection of the problem; b) the development of conjectures, hypotheses, models, theories, etc.; and c) the acceptance or rejection of any b) in the context of evidence or arguments. Today, I’m sure I’d add that a) and b) involve values in the development of frameworks leading to both.

    I don’t think that the view that values enter every area of scientific endeavor means that scientific work can’t be objective, but I do think that our views about “objectivity” have to be re-examined, and that we have to seek it in theories that combine fact and value. I see Bill’s views on fiscal sustainability and responsibility as theories of that sort. My view about the general notion of objectivity may be found here:

    http://www.kmci.org/media/Whatknowledgeis%20(non-fiction%20version).pdf

  52. anon says:

    Greg Norman?

    I was impressed with Mosler’s Mick Jagger connection, but this is truly excellent.

  53. Fed Up says:

    Min’s post said:

    “Fed Up: “Instead of a jobs guarantee, what about a retirement guarantee?

    “Almost everyone says there are not enough jobs. What if the number of jobs is about correct and there are too many workers?”

    There you go! The traditional retirement age in Japan used to be 50.”

    Thanks! Does anyone know of any economist(s) that factor in changes in retirement dates into his/her economic models and don’t automatically assume that living longer means working longer?

  54. Fed Up says:

    Min’s post said:

    “Fed Up: “Instead of a jobs guarantee, what about a retirement guarantee?

    “Almost everyone says there are not enough jobs. What if the number of jobs is about correct and there are too many workers?”

    There you go! The traditional retirement age in Japan used to be 50.”

    I would also like to concentrate on workers that experience negative real earnings growth and are “tricked” into going into debt are having their retirement date changed (retire later) and the spoiled and rich who are experiencing extremely positive real earnings growth can retire at about any time but won’t.

  55. Uh, so Bill. How would you cure inflation? How would you cure stagflation? How would you cure deflation?

  56. Tom Hickey says:

    Joe at 3:11. Good response.

    Perhaps economists believe that the public doesn’t think that government has a responsibility for employment, but politicians know differently, or soon find out the hard way. The coming elections is going to be about jobs.

  57. Tom Hickey says:

    Joe at 4:22: The so-called separation between normative and positive is a myth

    Cognitive science has shown that the distinction between reason and feeling is bogus because that this just not the way the brain operates. See Demasio, Descartes’ Error: Emotion, Reason, and the Human Brain (1994), for example. It’s not possible to separate subjective and objective in the neural processes that underlie human thought. Philosophically, such notions are holdovers from the Age of Reason. In the 21st century these ideas are obsolete.

  58. Fed Up says:

    Joe Firestone’s post said: “The Fed then has two main legislated goals for monetary policy: promoting full employment and promoting stable prices.”

    IMO, full employment and stable prices WITHOUT targeting debt levels is nothing more than an excuse for the spoiled and rich to use an oversupplied labor market to “steal” the real earnings growth and retirement of the lower and middle class.

    Abolish the fed!

  59. Tom at 10:25, Thanks. I certainly agree. But, again, concern about full employment is also the Law. Seems to me that the people in the Executive Branch of Government in the United States should start living up to their oaths of office and execute the laws, including the Humphrey-Hawkins Act, as well as numerous other laws that are now being dishonored in the breach.

  60. Tom at 4:22, Thanks, Tom. I know some cognitive science. It’s a field related to my specialization in Knowledge Management. However, I’m not sure how closely it relates to the “is”/”ought” question, at least in its modern formulation. In that formulation the doctrine is a logical and linguistic one. It asserts that normative propositions can’t be deduced from descriptive ones, and vice versa. The paper I cited above argues that this logical distinction doesn’t hold for a variety of reasons, none of which have to do with cognitive science.

  61. Fed Up at 11:51 Thanks Fed Up. I agree that the Fed should be abolished, because I think the Central Bank should be subject to the President.

    As for the rest, whose debt levels are you talking about? If you’re talking about Government debt, then I’d point out a few things. First, increases in Government deficits are also increases in private savings, whether those deficits involve debt issuance or not. And 2) Government can target debt by ceasing to issue it. If continues deficit spending and ceases t issue debt, then over time the debt to GDP ratio will get smaller and smaller.

  62. Tom Hickey says:

    Joe at 16:37

    Agreed. This is not just a matter of norms, it is also a matter of law in the US. Congress has given a mandate to the Fed, for example, to target both price stability and full employment, but the Fed has been ignoring that rule by using employment as a tool. In addition, as Bill has shown, NAIRU is bogus, a ploy to justify the Fed strategy.

    Joe at 16:43

    Cognitive science strongly suggests that humans are not capable of standing outside their worldviews, the boundaries of which are defined by norms (high value frames). Words are labels for conceptual frames. Frames are the real neural pathways that correspond to nominal labels or tokens. Frames are activated by the words (labels, tokens) that correspond to them. A worldvew is a complex conceptual framework that is not necessarily self-consistent regarding either facts or values. Core values are very difficult from most untrained people to distinguish accurately, because the norms that communicate them are expressed as apparently descriptive propositions.

    The tip-off logically is that they are privilege from error, since they function as criteria. This is true even if the hard sciences. Suggesting to most physicists that do normal science that the speed of light is not an absolute (could possibly be exceeded) and they will deny it. But some theoretical physicists have already gone there. This is more obvious, say, in the worldviews of religious fundamentalists of whatever faith. They privilege certain dogmatic statements as certainly true, establishing them as criteria for judging the truth of other assertions and claims.

    Ludwig Wittgenstein’s later work examines the logic of justification in ordinary language and shows how this all works at the level of logic. I did my dissertation on Wittgenstein’s On Certainty, which focuses on this issue. I find it interesting than cognitive science is bearing out scientifically what Wittgenstein elucidated logically some years ago.

  63. Tom at 23:27

    “Words are labels for conceptual frames. Frames are the real neural pathways that correspond to nominal labels or tokens. Frames are activated by the words (labels, tokens) that correspond to them. . . ”

    I don’t think that “words” are labels for conceptual frames. Nor do I agree that “frames are the real neural pathways that correspond to nominal labels or tokens. Frames in our minds (yes, I still believe in “mind”) may be activated by words which in certain situations can serve as stimuli activating dispositions, but that doesn’t mean that the words “correspond” to the frames or to real neural pathways. I think phenomena are physical/material (including biological), mental, and cultural, and that there are interactions but not strict correspondences among these three worlds. Without making this a long dissertation my epistemological and ontological positions are closest to the later Popper, Bartley, Donald A. Campbell, Peter Munz, and most recently Mark Bickhard views on these matters. My views on epistemology are here: http://www.kmci.org/media/Corporate_Epistemology.pdf And my views on Ontology are here: http://www.dkms.com/papers/openenterpriseexcerptnumb1final.pdf here: http://www.amazon.com/exec/obidos/ASIN/0750676558/qid%3D1054138077/sr%3D11-1/ref%3Dsr_11_1/102-6734139-9384918 , and here: http://kmci.org/alllifeisproblemsolving/?s=ontology

    “. . . A worldvew is a complex conceptual framework that is not necessarily self-consistent regarding either facts or values. Core values are very difficult from most untrained people to distinguish accurately, because the norms that communicate them are expressed as apparently descriptive propositions.”

    I agree entirely with how this paragraph is expressed, but I think the term conceptual framework is ambiguous since it can refer to either something psychological/mental or something cultural/linguistic. I think the paragraph is right in either case however.

    I agree with most of the rest of what you say. I have a feeling though, that we may have differences about Wittgenstein. Have you read Peter Munz’s Beyond Wittgenstein’s Poker. Also, Munz’s “Philosophy and the Mirror of Rorty” and W. W. Bartley’s “Theories of Rationality” (both in Gerard Radnitzky and W. W. Bartley III, Evolutionary Epistemology, Rationality, and the Sociolgy of Knowledge)? These provide a critique, which I find compelling, of Wittgenstein’s On Certainty. Munz’s book also provides some critical perspectives on evolutionary psychology and some aspects of cognitive science. It’s a book that’s a bit disorganized in structure. Reads like two different long essays that are not really well-integrated. Nevertheless, the book’s really great on many levels.

  64. Tom at 23:27 I’ve already tried to reply to this once and composed a long one, but it went into the ether, and now I’m running short of time. My views on Ontology, epistemology and Values are here:
    http://kmci.org/alllifeisproblemsolving/archives/tag/epistemologyontologyvalue-theory/

    here:

    http://www.dkms.com/papers/openenterpriseexcerptnumb1final.pdf

    and here: http://www.kmci.org/media/Corporate_Epistemology.pdf

    I’m a Realist and a Critical Rationalist. In cognitive science, I’m pretty favorable to Paul Thagard’s work, and love Mark Bickhard’s stuff.

  65. Tom Hickey says:

    Joe at 2:10

    Joe, I was summarizing George Lakoff’s position, expressed in his political works, e.g., the post to which I provided a link. It is possible that I did not express his ideas well, but it is his terminology, not mine. I am not a cognitive scientist, so I can’t really comment on his assertions from any level of expertise. But as someone who has studied philosophy of logic, I can see that some sort of connection must exist between words and concepts at the physiological level, and the mind-body connection that cognitive scientists now feel that they have found sounds like it is in the ball park to me.

    As you know (and for the benefit of others reading this), the connection between “nominal” terms and statements, “mental” concepts and propositions, and “real” objects/events and facts has been a subject of controversy in Western philosophy from the time of the Greeks. It seems to me that cognitive science is now taking steps to resolving the physiological aspects of it., and that informs the philosophical debate to some degree, but does not resolve it. (Wittgenstein, I believe, thought that this could not be resolved using language, other than through elucidation. since this relationship is shown.)

    The correlation of words/concepts with physiological states doesn’t resolve the fundamental philosophical questions either. This cognitive work is still in in its infancy, however, and there is no dominant paradigm yet, so we will have to see what develops. I am open-minded on this because I think it is premature to draw any hard conclusions. Right now, there are some interesting suggestions.

    These issues aside, the important point that Lakoff makes for us here, and one that I suspect has merit, is that abstract words/concepts like “freedom” correlate with neural pathways that open and close depending on use, sort of like habit structures of behavior. These concepts, such as “freedom,” are both normative and descriptive, and are part of a high value conceptual framework. The high value conceptual frameworks of conservatives and progressive are different, and therefor key concepts like freedom function differently. As a philosopher of logic I would agree. Conservatives and progressive often misunderstand each other and talk at loggerheads because the meaning of their key terms/concepts is fundamentally different, even though they use the same words. These words are so different largely because they are also highly charged emotionally and strongly held as norms. So one person’s “freedom” is an other person’s oppression, leaving aside the Liberal Paradox, which is based on choices rather than meaning.

    The point that Lakoff makes is that debate of issues is rarely sufficient to change these concepts significantly, as many people who based their argument on reason seem to think, because they are not based on reason but are burned-in neural pathways. Therefore, contrary messaging takes repetition over time in order to shut down one pathway and open another.

    The Right has been at this in a coordinated way since the Goldwater debacle and a lot of money has been made available for it. They have managed to change the universe of discourse from a progressive FDR/New Deal one to a conservative Reagan/Hayek/ Friedman one. Now that the conservative paradigm has become dominant in the US, changing it is going to require much more than reasonable argument because it is burned into brains and is structured in emotions as well as reason, in fact, probably more in emotions.

    Regarding Wittgenstein: Interpretation of Wittgenstein’s work is highly controversial, because he claimed that “what is shown cannot be said.” His work is a series of elucidations that he never explained because he did not think that this was possible. For him, all philosophical explanation is essentially nonsensical in that key terms/concepts are not given specific meaning. So when people say that Wittgenstein said or meant such and such, I am skeptical. I have my own interpretation, but like all such interpretations, it is impossible to establish whether it bears any close relationship to what Wittgenstein actually intended. :)

    Joe at 2:35

    Thanks for the links. I’ll check them out. I generally cite Lakoff because he has related cognitive science to contemporary politics in a way that is available to most people. I encourage progressives to read his political works. It is a pretty good analysis of how the left (if one can call it that in this environment of conservatism, in which the actual left is marginalized) gets the messaging wrong and plays into the hands of the opposition by strengthening their key frames, which ground in their core values. This just moves the Overton window further to the right and anchors it there. Those wishing to advance MMT as a policy tool should look at this, too. I agree that his take is a bit simplistic, but he has aimed it about right to be generally accessible, IMHO.

    If you think there is better way to look at this strategically, I’m all ears.

  66. Tom at 8:26, Tom thanks for your well-considered reply. I\’ll think about it. I have to finish my AmericaSpeaks series tonight. But after that, \’ll get back to your reply and do it justice. I will say, briefly, that while I have considerable sympathy for some of Lakoff\’s views on the findings of cognitive science, I also think that many in the political sphere interpret his views in a very wooden way leading to stereotypes about how to “message.” Often this results in failure to engage the key issues that are really hamstringing us. Anyway more later.

  67. Tom Hickey says:

    Look forward to the continuation, Joe. In the interim, let me qualify my view. I think that Lakoff makes good points about the messaging. Messaging is different from articulation of positions and informed debate of issues. I don’t see this a either/or. One can have a reasonable exchange with some people who disagree anyway, and this is a useful exercise that can be fruitful if it is conducted sincerely in the pursuit of truth.

    Ideas must be tested, and the dialectic method is the way to do that. This is integral to the Western tradition for the time of the ancient Greeks, with some breaks for theocracy.

    But political messaging is different. The Dems for the most part come across as wonks, and they wins them zero points with most people. Repetition of key talking points, slogans, if you will, like “small government, low taxes, strong defense, traditional values” has a strong appeal to conservative voters and many middle of the roaders, for example. No matter than the party mostly mouths these slogans without expaining what they really mean — deregulation, regressive tax cuts heavily favoring the wealthy, endless war and military Keynesianism, and sops to social conservatives like nominating socially conservative judges and justices, but who are also decidedly pro-business.

    The Democrats have mounted nothing comparable in response. This is a debilitating oversight. “Hope” and “change”? And then disappoint and further the agenda of the previous administration on many key issues.

    With opponents like this, neoliberals have to bring themselves down all by themselves. And when they do, the Dems jump in, pick them up, and brush them off, and then expect thanks. Worse, they never learn — or are bought off. It’s not just the messaging that’s gone wrong.

  68. pebird says:

    “A worldvew is a complex conceptual framework that is not necessarily self-consistent regarding either facts or values.”

    The problem with this statement is that is implies a perspective outside of the subjective framework that has a privileged position to determine “facts”. It assumes a God view that has these facts and can render a judgment over others. No wonder it is criticized as elitist.

    Whose neural pathway is correct? I think this is a reductionist dead-end. Unless you are in the psychopharm business.

    I also think this is the “philosophical” foundation of neo-liberalism, the notion that there is this “rationality” that will win out in the long-run, most likely with the same long-term outcome that Keynes pointed out. Sometimes I think that our Western left political philosophy is still stuck in the post WWII Quiet Period that finance has already figured out is over.

  69. Tom Hickey says:

    pebird, it is actually pretty easy to tell that some people’s worldview is not self-consistent. Psychotherapists and counselors make a lot of money from “double-bind.”

    One can’t stand outside of one’s own worldview, but one can observe the phenomenon in others. Anthropologists have been doing this for a long time and reporting back on it. Based on this, it’s pretty conclusive that we have our own worldview, too, that we call “reality.”

    Wittgenstein showed how logical investigation can illuminate even one’s own cultural worldview (which people in it presume to be “reality”) based on examination of the use of ordinary language.

    I don’t disagree that explaining mental states as “nothing but” brain states is reductionism that make a logical jump. However, cognitive research into brain functioning does suggest that a lot of presumptions about “reason” are wrong.

    I trace the erroneous notion of reason that underlies neoliberalism to 18th century Deism. I’ve spoken to Gavin Kennedy about this and he does find any direct evidence of Deism in Smith. But many others do think that Smith was a Deist, based on indirect evidence, Deism was eventually transformed into Positivism by eliminating the deity of Deism. In the view of Deists and Positivists, the universe is a “machine” that runs IAW the laws of nature, such as the law of least action, i.e., “reason.” Deists hold that God remains in the background, while Positivists just apply Occam’s razor. This is essentially the invisible hand.

    However, there are enormous problems in constructing a theory of unified science in which the physical sciences underlie and explain the life sciences, and the life sciences underlie and explain the social sciences. There are just too many gaping holes to be able to claim success, one of which is the “hard problem” of consciousness, that is, how to get subjectivity out of objectivity, quality out of quantity, without reductionism, i.e., making a logical jump that begs the question. Moreover, there are problems creating models of human behavior that show “reason” acting as an invisible hand. A lot of crucial behavior appears to be chaotic. Neoliberalism isn’t good at doing complexity.

    The post WWII quiet period is over because neoliberals ended it.

    Whose neural pathway is correct?

    What would the criterion be for deciding this? Each position posits its own criteria, so the question is undecidable outside a normative context. Unless someone can demonstrate in a logically compelling way or based on evidence that there are absolute criteria having universal application in all circumstances.

    We could say that Individuals and groups (teams) bet that their choice is an adaptive trait that will be successful, or else think that the status quo is the trait that will perpetuate.

  70. jrbarch says:

    Dear pebird & Tom Hickey @ July 11,

    1) If I am standing in a pit, looking up at a greasy hot motor dripping with oil – then that is one ‘worldview’ of my car.

    If I am in a helicopter, watching my car travelling along a highway far below and there is a four hour traffic jam up ahead – then that is another ‘worldview’ of my car. The difference between the two is just elevation or perspective. I am the same person in both instances, same brain and neural pathways; in regard to these ‘worldviews’ am I elitist? If not, then elevation is important.

    2) The other night I watched on TV some scientists who thought they had discovered the ‘I’, the human sense of self, in the interconnectivity and electrical impulses of the neurones. I think people forget about the ‘boxes’. Religion is a box; economics is a box; philosophy is a box; politics is a box; science is a box etc …. Poetically speaking, for as many grains of sand as there are on the beach, there are stars whirling in our galaxy, each one absolutely unique; and universes in space and time. All of this tells me that the ‘I’ is the real challenge: of the absolute, miraculous and unavoidable fact that in an Infinite universe for a short time, I actually exist! First thing I should do is celebrate and appreciate every moment!

    Returning to the boxes then for a moment, we humans would be much better off regarding our world as a playground where we dress up and act out our imaginations, ‘our dreamtime’ – although we could play much more nicely together. (I think Shakespeare said something like that)!

    The greatest challenge then is: ‘who is pebird?’ or ‘who is Tom Hickey?’ In illimitable time and space, you exist – for a very very brief moment, visible in time and space? Then we are rubbed out, forever. What does that mean to you? Are you really just a little electrical activity playing over a few fat cells? You and I are definitely finite, and yet there is something, some energy if you want to call it that, which always Was, Is, and Will Be (i.e. Infinite) – out of which everything has come (including all of the billions of self conscious ‘I’s).

    If – in the beginning there was nothing, then nothing comes out of that!

    A little redhead stood up on the indo-aus tectonic plate not so long ago and pronounced that there was no G.O.D. (generator, operator, destroyer). Well, if she was talking about one of the Gods fished out of a box I would concur. If she was talking about that Infinite energy that unreservedly and without judgement maintains her rather precarious and minute existence, arriving on the breath, departing on the breath without ado, then she needs to learn a little humility – it goes a long way and would have helped her predecessor enormously! But then truth is, even a little tsunami or earth tremor humbles human beings.

    The simple (unboxed) message for such a long time has always been – within each finite human being resides no less than the Infinite! ‘The drop is within the ocean, everybody know that; but very few know the ocean is also within the drop!’ (Kabir) In other words, a human being is a door. And knowing something ends all worldviews period. Like knowing how to ride a bike or satisfy your thirst ….

    That makes sense to me! I hope you will take it as a genuine contribution to your discussion.

    Cheers …

    jrbarch

  71. Tom Hickey says:

    jbarch @ 16:45

    If I am standing in a pit, looking up at a greasy hot motor dripping with oil – then that is one ‘worldview’ of my car.

    That’s not a worldview. Here is an example of a worldview. An anthropologist took some Pigmies who have never been out of the jungle to the plains. They had always seen things close up in the jungle and when they looked at large objects moving in the distance on the plain, they thought they were just insects. They had not developed the logical structure of perspective at a distance in their culture. A worldview is a perspective (aspect) from which one “sees” things in the larger sense. All humans have the same logical categories (or they would not be able to communicate with each other — Kant’s insight). However, different cultures and subcultures use these categories differently, often involving internal contradictions (Hegel’s and Marx’s insight).

    I think people forget about the ‘boxes’. Religion is a box; economics is a box; philosophy is a box; politics is a box; science is a box etc

    Richard Dawson coined the term “meme” for these cultural units. The idea is similar to Lakoff’s frames, cited above. A complex of memes, like a religion, is called a “memeplex.” Worldviews are constructed of memes and memeplexes. They are conceptual/linguistic categories ( category is like a box) that humans use to organize data in terms of ideas. Institutional economist Douglass C. North notes that such memes and memeplexes get expressed socially as conventions and culturally as institutions (see his paper, Economics and Cognitive Science).

    Thus the dominant worldview and its universe of discourse determines the conventions and institutions of policy, economics, etc. In arguing against neoliberalism one is not just arguing against a position that rests on reason alone. Neoliberalism is the expression of the dominant worldview and its universe of discourse in economics, policy, and politics. That is why it is so hard to argue against it, even when it fails completely and obviously. It is burned into to too many brains for rational argumentation to dispense with by showing it to be unsound.

    The other night I watched on TV some scientists who thought they had discovered the ‘I’, the human sense of self, in the interconnectivity and electrical impulses of the neurones.

    They discovered a correlation between a mental experience of self and a location in the brain. It would be silly to claim, therefore, “I am in the x section of my brain,” and even more ridiculous to claim, “I am x section of my brain.” This is the folly of reductionism. But finding out where and how the brain functions in relation to the sense of self is significant. It is well established that there are physiological correlates of psychological states. What that implies is controversial.

    in the beginning there was nothing, then nothing comes out of that!

    For example, physicists have found that the state of least excitation of energy is a vacuum. The building blocks of what we perceive as “real” are randomly emitted from that vacuum. So is is not just the mystics that are saying this.

    The simple (unboxed) message….And knowing something ends all worldviews period.

    Realizing “nothing” transcends all worldviews, period. Until that point, one is stuck in some worldview because one cannot stand outside of it to see its boundaries. However, it is possible to locate some of the boundary conditions, either through prior analysis or by running up against them. It is less difficult to find the boundary conditions of other people’s/groups, cultures’ worldviews than one’s own not only because it is burnt into the brain but also since one is heavily invested and emotionally attached through preference.

    There is much more to be said about this, obviously, but I will leave it here for the moment, except to observe that the notion of “self” is fundamental to memes and memeplex construction, hence to conventions and institutions. For example, it makes a huge difference whether one sees selves as individuals (objects that can be aggregated like atoms) or as persons (subjects that are essentially different from objects, and aggregating subjects as though they were objects is a category error of the greatest magnitude imaginable). I guess you see where this is going.

    Excuse me if this has gone a bit philosophical, but one cannot do credible economics and policy without considering foundations, for otherwise the whole edifice will just be built on sand.

  72. Hi Tom, More on your earlier post at 23:27 first. You said:

    “Cognitive science strongly suggests that humans are not capable of standing outside their worldviews, the boundaries of which are defined by norms (high value frames). Words are labels for conceptual frames.”

    It does suggest that. There’s earlier work in psychology dealing with the open and closed mind and the authoritarian personality. That work suggests that their are open-minded people who can transcend their conceptual frames. Since there are plenty of people who can’t easily do that, cognitive science gets plenty of support for its more pessimistic view of human nature. The problem is that support for generalizations is always very cheap. You look for cases that support your view or design instruments to manufacture statistical evidence that supports your view and ignore evidence that refutes it. In any case Complex Adaptive Systems Theory suggests that the phenomenon of emergence is real and occurs under the right conditions. Emergence in human thinking is one instance and suggests that people can and do transcend their frames at least some of the time. What’s that old saying of Lincoln’s: “you can fool some of the people . . . ”

    “Frames are the real neural pathways that correspond to nominal labels or tokens. Frames are activated by the words (labels, tokens) that correspond to them. . . ”

    I’m not sure that I accept that “frames” are neural pathways. This smacks a bit of neural determinism and an ontology that assumes a material/biological world and perhaps human culture, but no mind per se. My ontology postulates at least three “worlds” including a psychological/mental world as co-evolving in the clash of the other two. I think neural pathways record the traces of memory, but that our psychological conceptual frames, while reconstructed from neural pathways are reconstructed, from moment to moment in interaction with specific situational contexts and attitudinal predispositions.

    Also, I think the term “frames” is ambiguous since it can refer to both mental and expressed linguistic constructs. In addition, I’m bothered by the notion that non-linguistic frames “correspond” to nominal labels or tokens. There’s often a relationship between non-linguistic frames and nominal labels of tokens, but I think such relationships involve propensities and not correspondences.

    “. . . A worldview is a complex conceptual framework that is not necessarily self-consistent regarding either facts or values. Core values are very difficult from most untrained people to distinguish accurately, because the norms that communicate them are expressed as apparently descriptive propositions.”

    I agree with this when referring to linguistically-expressed conceptual frameworks, however, when talking about mental conceptual frameworks I don’t know what it means to say that they are not necessarily self-consistent. From where I sit mental states or predispositions just are, and neither consistent nor inconsistent. Consistency and inconsistency are predicates I apply to linguistic formulations, but not t mental states or predispositions.

    Moving on to Tom at 8:26, I agree with the first part of your note, and am happy to see you begin to talk about “correlates” rather than “correspondences.” You also say:

    “These issues aside, the important point that Lakoff makes for us here, and one that I suspect has merit, is that abstract words/concepts like “freedom” correlate with neural pathways that open and close depending on use, sort of like habit structures of behavior. These concepts, such as “freedom,” are both normative and descriptive, and are part of a high value conceptual framework. The high value conceptual frameworks of conservatives and progressive are different, and therefor key concepts like freedom function differently. As a philosopher of logic I would agree. Conservatives and progressive often misunderstand each other and talk at loggerheads because the meaning of their key terms/concepts is fundamentally different, even though they use the same words. These words are so different largely because they are also highly charged emotionally and strongly held as norms. So one person’s “freedom” is an other person’s oppression, leaving aside the Liberal Paradox, which is based on choices rather than meaning.”

    I agree with this in the main, but I also think that further illumination can be gained by noting that every value like “Freedom” exists within a configuration of values and attitudes of varying strengths and degree of specificity, and that while people may value the same things, they may not value them with the same intensity, and that the organizational structure of their conceptual frameworks will also differ. I think this is not only the case between liberals and conservatives, but also among people in both groups. Perhaps this is just another way of saying what you are saying but I think it directs attention more to the value and emotional aspects of mind, rather than just to the matter of cognitive organization.

    “The point that Lakoff makes is that debate of issues is rarely sufficient to change these concepts significantly, as many people who based their argument on reason seem to think, because they are not based on reason but are burned-in neural pathways. Therefore, contrary messaging takes repetition over time in order to shut down one pathway and open another.

    The Right has been at this in a coordinated way since the Goldwater debacle and a lot of money has been made available for it. They have managed to change the universe of discourse from a progressive FDR/New Deal one to a conservative Reagan/Hayek/ Friedman one. Now that the conservative paradigm has become dominant in the US, changing it is going to require much more than reasonable argument because it is burned into brains and is structured in emotions as well as reason, in fact, probably more in emotions.”

    I agree that it is hard to change attitudes that have been embedded over a long period of time through persuasion alone. This was known long before Lakoff and dates back at least as far as attitude change research in the ’40s, ’50s, and ’60s of the last century. But I’m not sure I agree that the “conservative paradigm has become dominant in the US,” if what we’re talking about is a complex conceptual framework. That implies that basic political values and attitudes in the United States have moved “right” since, say, the 1940s, and I’m not sure that’s happened. What’s happened I think is that neo-liberal economic views have become dominant among the elite in the United States and at our Universities since, perhaps the 1980s, and also that political opinions have changed among working people, as indicated by changes in party preferences and other key opinions about politics and economics.

    Now, however, we have huge failures of the neo-liberal economic paradigm that are visible to everyone, so that the expectations of both the elites and working people have proven to be inconsistent with reality. So now, the neo-liberal paradigm is open to challenge among the elites and we have the possibility of change in political opinions and maybe even deeper attitudes upon us. Obama could have facilitated that change if he had gotten results using an alternative paradigm, and done some explaining about why the alternative paradigm worked. Not all the strength of the right-wing propaganda machine could have trumped good results from Government action, and the need to explain them with an anti-Government pro-market ideology.

    But Obama hasn’t gotten outstanding results that cannot be denied in any area, so he is blowing this opportunity for change. Moreover, no amount of progressive messaging, no matter how clever will help the Democrats to persuade people that they’ve done well at governing over the past few years, because reality is refuting that proposition. Anyway, my main point here is that you don’t change political opinions and perhaps even attitudes over time with better messaging, though, no doubt, that may help somewhat, especially if what you say fits reality pretty well. You do so, instead, by doing things that refute what the opposition is saying rather than reinforcing its messaging. The Dems aren’t doing those things, and that’s the primary reason why the rightist messaging has been hard to refute, even more than the undeniably better join the right has done in messaging.

    Finally you said:

    “I generally cite Lakoff because he has related cognitive science to contemporary politics in a way that is available to most people. I encourage progressives to read his political works. It is a pretty good analysis of how the left (if one can call it that in this environment of conservatism, in which the actual left is marginalized) gets the messaging wrong and plays into the hands of the opposition by strengthening their key frames, which ground in their core values. This just moves the Overton window further to the right and anchors it there. Those wishing to advance MMT as a policy tool should look at this, too. I agree that his take is a bit simplistic, but he has aimed it about right to be generally accessible, IMHO.

    If you think there is better way to look at this strategically, I’m all ears.”

    Didn’t Abba Lerner say “never argue out of paradigm,” or words to that effect? I agree that one should not reinforce another’s message by strengthening their key frames. In fact, I think a large part of the reason for Democrats losing ground over the past 40 years has been their penchant for constructing arguments of the “we both agree on this, but our way of doing things is a little from yours,” or “we share your concern about ‘x’, but we think things will work better this way. . . ” followed by some wonky proposal that’s too complex and clever by half. Apart from that however, I think a better way of looking at this strategically is not in terms of messaging techniques, but in terms of how actions and messages get coordinated so they reflect one another and are entirely consistent with one another. You don’t do a happy dance about your success in passing health care reform, when you don’t immediately cut materially into the 45,000 annually who will die from lack of health insurance, or the very large number who will be driven into bankruptcy by medical expenses, or will be driven into foreclosure by the same. You don’t declare victory when you’ve passed a stimulus package that you know from the get-go won’t work. You don’t claim success in credit card reform when you continue to allow the Companies to charge nearly 30% annual interest rates to some folks, when the banks themselves are paying close to zero. You don’t tout your financial reform package when it still leaves “too big to fail,” alive and well. And so on. I’d say the first principle in Democratic Strategy should be don’t lie to the public about what you’ve done or what you’re going to do ever. Use clever messaging. But only to tell the truth. And the second principle is never move the Overton window to the right by advocating for solutions that are less than you think are the best ones for any problem. If you have to compromise on legislation to get it through, then do so. But don’t advocate for the compromise, continue to advocate for the solution, grudgingly accept the compromise, and the day after it’s done don’t congratulate yourself, but go back to the fight for the solution.

  73. Tom at 10:49, I pretty much entirely agree about this post, as the long one I just completed may suggest.

  74. pebird at 1:41

    ““A worldvew is a complex conceptual framework that is not necessarily self-consistent regarding either facts or values.”

    The problem with this statement is that is implies a perspective outside of the subjective framework that has a privileged position to determine “facts”. It assumes a God view that has these facts and can render a judgment over others. No wonder it is criticized as elitist.”

    I agree with the rest of your post, But I’m not sure about the above. I think the statement does assume that there can be a perspective outside of the framework being criticized, but I don’t see why this is a problem because I think human beings can break out of one conceptual framework by forming a broader one and that we often do that to criticize the framework we’re breaking out of.

    Also, I don’t know if creating a broader framework necessarily implies a privileged position to evaluate facts that can help us to choose between an old framework and the broader one, since both frameworks may consider the same events as facts. This happened for example in the competition between the theories of Einstein and Newton. Both predicted the perihelion of Mercury in a certain time period, and both accepted as facts the same measurements that were used to determine that the prediction of Einstein’s theory was closer to the truth than the prediction from Newton’s Theory.

  75. Tom at 0:44, Here:

    “They discovered a correlation between a mental experience of self and a location in the brain. It would be silly to claim, therefore, “I am in the x section of my brain,” and even more ridiculous to claim, “I am x section of my brain.” This is the folly of reductionism. But finding out where and how the brain functions in relation to the sense of self is significant. It is well established that there are physiological correlates of psychological states. What that implies is controversial”

    we are in agreement.

  76. Tom Hickey says:

    Joe at 7:12

    Hi Tom, More on your earlier post at 23:27 first. You said: “Cognitive science strongly suggests that humans are not capable of standing outside their worldviews, the boundaries of which are defined by norms (high value frames). Words are labels for conceptual frames.”
    It does suggest that. There’s earlier work in psychology dealing with the open and closed mind and the authoritarian personality. That work suggests that their are open-minded people who can transcend their conceptual frames….

    Point of clarification. What I meant was not that we cannot become aware of conceptual frames and choose to change those we can change, and work on those we can’t change very easily. Some are burned in so deeply we can probably never completely overcome them (in one lifetime), but we can do our best to do so. Can one who grew up in a racist culture entirely erase that pathway in the brain? Probably not completely , but one can recognize it and tame it if one makes an effort.

    What I meant is that none can stand outside their worldview (overarching conceptual framework) through intellectual analysis alone, because a worldview is necessary to organizing the world. Each of us takes our worldview to be “reality,” and most presume that everyone else shares that worldview, i.e., “reality.” One must rise above that level of “reality” to see the world anew.

    If there are indications to the contrary of one’s worldview, then the conclusion is that the other is lying, deluded, crazy, or just plain stupid. “Primitive peoples” are considered, well, primitive, even though anyone from our culture wouldn’t last a day in their environment. Orientals are “inscrutable,” which is often a euphemism for devious. Science means nothing to someone who is convinced that the world is only ~ 6000 years old. Superstitious people are convinced of all sort of strange things happening as a matter of course. Deeply religious people are convinced that God intervenes in their lives daily. The president believes that God told him to invade Iraq, and a whole vierw of reality is constructed (manufactured) around this that radically changes America’s self-concept in the minds of many people without them noticing. As the ground shifted those people remained with both feet planted on the ground while it was shifting, apparently oblivious to it.

    One’s worldview is an overarching framework of boundary conditions (norms) and there is not way to identify and enumerate all our norms, or know that we have if we think we have. This worldview can and often does shift across time, e.g., as one becomes better educated. That is why lifelong learning is important. Many people’ worldviews crystallize much too early, and they get stuck there.

    One’s worldview and its universe of discourse shapes fact. Facts do not exist independently of the context of a worldview and universe of discourse with its norms and categories. That is why it can be difficult for people having different worldviews to agree on “the facts.” They “see” (structure) the world differently. In many fields there are the “orthodox,” presumably those who get reality “right,” and “heterodox,” presumably those who don’t quite get it right, or have a “bad attitude” that makes them not get it at all — you know, like Marxists, in economics.

    This is a reason it can be so difficult to reason with people about, say, MMT. One can claim that it is based on an operational description of how the monetary system works, but the other person contests the “facts,” maybe trotting out a current Federal Reserve publication describing the money multiplier and citing numerous “prestigious” economists that profess it. This is an alert that for such people this is not a an argument over operational facts. Rather, the bone of contention is a norm functioning as a criterion against which other propositions are judged. I recall Mark Thoma refusing to debate Bill because Bill denies the money multiplier. You can’t debate a norm. It is a criterion, and therefore privileged. This particular concept is also a device that functions as a foundational structure supporting an edifice (monetarism). Removing it would undermine the edifice, and a lot of people are heavily invested in that edifice.

    All spiritual masters have agreed that it is impossible to escape being captured by one’s worldview using intellectual analysis alone. One must transcend one’s boundaries experientially by moving to a more expanded level of awareness. Only then can one look back and see the box that one was in previously was arbitrarily limited by one’s hidden presuppositions. We can get a glimpse of this in our own lives through memory by looking back our childhood, when we had a very limited view of the world and gradually grew out of it as we matured physically and psychically. But those memories are usually very dim. And in the process we lose something psychically, too. “You must become as little children to enter the kingdom,” “the kingdom” being a symbol of an enlightened state.

    Important aspects of one’s worldview can be altered quite precipitously, e.g., through a conversion experience, for example. The proof is a changed way of living that could not plausibly be feigned over time. There are many striking instance of this reported in the lives of the saints.

    This can happen in economics and politics, where conversions also occur. MMT can certainly provoke a conversion when one “gets” it. Then many things that seemed disparate and even contradictory fall into place, and one see with new eyes, as it were. Since economics is so fundamental to the way a person structures “reality,” this conversion can be said to quality as a conversion that alters the person’s worldview in a significant way. The “facts” become different when defined operationally. Government debt is no longer “debt,” for instance. The “snake” is discovered to be only a piece of rope.

    But this is only altering a worldview, not stepping outside of it. The only way to step beyond one’s worldview is by transcending it through moving to a more expanded level of experience, just as we all grew out the very limited worldview of our childhood as we matured physically and became consciously sexual. Transcending involves the spiritual aspect of life. “There are many levels.” Trying to talk to people with no experience of this is like trying to talk to very young children about sex. They don’t get it because there are underdeveloped in that area. This is different from a physicist trying to explain quantum mechanics or relativity to someone who has no math. That person could learn math. But a child cannot understand sex before puberty by study.

    This may seem tangential or off topic to some here. But it is not. It is similar to, say, the relation of evolutionary biology to economics. If you don’t think it is relevant, read David Sloan Wilson’s series on evolution and economics.

  77. Tom Hickey says:

    Joe at 7:12

    Didn’t Abba Lerner say “never argue out of paradigm,” or words to that effect?….

    It is usually pretty difficult or even impossible to argue out of paradigm. Debate presumes some fundamental agreement on “what’s up.” LIke take paradigm shift in science, which Kuhn examined in The Structure of Scientific Revolutions. At certain points “normal science” (operations and questions in paradigm) begins to break down. Adjustment need to be made ad hoc, and pressing questions remain unanswered. An Einstein comes along with a new way of “seeing” (structuring) the data, resulting a new paradigm that is more comprehensive. But there is also paradigm shifts that don’t incorporate and go beyond the existing paradigm, but replace it, such as the Copernican revolution that replace the earth-centric paradigm of Ptolemy, which was very cumbersome mathematically, with the heliocentric one. This lead ultimately to Newton’s laws of planetary motion through the development of normal science based on the Copernican paradigm.

    Is MMT an adjustment of neolibertalism such that in-paradigm argument could produce. Or, it is a new way of seeing? I would argue that it involves a new way of seeing because it recognizes the obvious, the transition from a convertible fixed rate currency to a nonconvertible floating rate currency and what this implies for monetary economics and macro. The sectoral balance approach is also completely different and operational rather than theoretical. While this is not unique to MMT, it is a different way of seeing, too. (Compare Godley and Cripps, Macroeconomics (1982) with the standard neoliberal and New Keynesian texts.)

    I think we can perhaps approach the recent kerfuffle involving Yves and Bill in this light. Some proponents argue at NK by presenting MMT in paradigm. Owing to this and the fact the Yves likely is not well acquainted with the MMT literature, she assumed that Bill’s position (out of paradigm) was eccentric to him. As he showed, this is not the case. He was stating MMT as a new paradigm in which growth (expansion of the economy relative to those entering the workforce) based on full employment and price stability is paradigmatic. In the “orthodox” view it is impossible other than by redefining full employment to mean something else.

    So should MMT’ers be argue “out of paradigm” relative to “orthodoxy”? Maybe in certain cases. But overall, if MMT is to permeate as a new paradigm for doing macro, then it cannot be presented completely in paradigm relative to orthodoxy as an “adjustment.” This is going to take reconfiguring some brains, not just some in paradigm argument. :)

  78. jrbarch says:

    Dear Tom,

    Thanks for your reply at 0:44.

    I see selves both threefold and as one:

    a) as individuals (that can never be aggregated in reality because they are unique; but are conceptually by folk such as statisticians thereby drawing a veil over what it means to be both individual and extant), and
    b) as persons (having both unique and similar qualities and appearances), and
    c) as a part of the ‘universal energy’

    - which I can only access through feeling when the mind is absolutely still; and which renders the ‘I’ and dare I say it the content of the mind, ultimately finite or illusory! Sorry about that but I didn’t make it that way!! Subject and object kind of merge there, but remain – can’t say I understand it? Some things you just accept the way you find them!

    So, in the world of boundaries, memes, frameworks, paradigms, values and elevation above them all (none of which I repudiate in their own world), I can only use the analogy of the mango: taste it, and all of the agricultural papers will be laid to rest! Not redundant if you want to grow mangoes – just laid to rest.

    Cheers …

    jrbarch

  79. Tom at 10:45,

    Btw, I very much agreed with the applied parts of this piece of Lakoff’s in HuffPo:

    http://www.huffingtonpost.com/george-lakoff/disaster-messaging_b_639040.html

    And I think that some of what I said above in Joe at 7:12 is very much the same orientation to what the Democrats should be doing now. Expressing some of what Lakoff said in an alternative way, I think it’s pretty clear that over the last 40 years or so, mainstream Democrats have become much less ideological than conservatives in their public political postures and in political action. This is ironic because the Press is fond of saying that politics has gotten increasingly ideological in Washington as the years have gone by. However, the Press is way off base. The Republicans have gotten more ideological; but the Democrats have gradually given up appealing to the ideology that guided them during the New Deal and the post-deal era up to the 1970s.

    I don’t know whether the origin of this was the drubbing McGovern received at the hands of Nixon in 1972, or whether it happened later when Carter ceased New Deal-style framing and messaging after he took over the Democratic Party in 1976. In any case from the time Carter took over, it became fashionable to talk about making pragmatic compromises to gain electoral success and get things done, and to present positions that were self-consciously more centrist.

    In this evolving political context including the Reagan victories and the intensification of conservative ideological frames, the Democrats did not fight back with their own ideology of liberalism. In fact, they let the very name of “liberalism” get trashed by the conservatives without fighting for the label, and using their own frames which had once been very effective in opposing conservatism. They ran away from liberal framing, and even began to call themselves progressives.

    And then they developed “progressive” framings which reinforced more conservative framings like “bi-partisanship,” fiscal responsibility in the sense of balanced budgets, even expressing mistrust of big government, and faith in the markets, and concern about “excessive regulation.” Less and less were Democrats seen as expressing concern over growing inequality. They gave way to progressive tax cuts even though they controlled both Houses of Congress for most of the 80s, and right up through the end of 1994. They did little in the way of public works and little for education. They chose leaders who reflected the new framings and who left liberal framings behind. They weren’t as Republican, perhaps as Bob Taft had been or Reagan was, but, in the 90s they ended to the right of where Nelson Rockefeller and even Richard Nixon had been, and they have remained there until this day. No wonder they have no framings that are effective in opposing Republican framings. Their frames are Republican frames. They may not be radical conservative frames, but they are moderate Republican frames that are well to the right of where the Republicans stood in the 50s, 60, and much of the 70s, and that share much with the radical conservative Republican frames. In fact, the conflict in American politics is like the conflict in the 1970s when the conservatives gradually took over the Republican Party. But now the Democrats are like the Modern Republicans were in relation to the conservatives and they lack the ideological ammunition to oppose the conservatives just as the Republicans did in the 1930s.

    Lakoff is saying that the Democrats have to reinforce their own frames in their messaging and not the Republican frames. But to do that the Democrats have to back off short-run pragmatism and glorying to their identity as great compromisers. They have to become the social and economic justice party again, and they have to talk like it and act like it. I think Lakoff is actually calling for that and that he using the language of framing to do it.

    I did have a problem with part of what you said. Namely:

    “What I meant is that none can stand outside their worldview (overarching conceptual framework) through intellectual analysis alone, because a worldview is necessary to organizing the world. Each of us takes our worldview to be “reality,” and most presume that everyone else shares that worldview, i.e., “reality.” One must rise above that level of “reality” to see the world anew.”

    I agree with this and I don’t. I think that while we have a world-view all the time, our world views are more or less coherent. We have frames that conflict with one another. Sometimes, aided by experience, we will use one frame or set of frames not previously dominant to criticize or to dampen the strength of previous sets of frames dominated our structure. In a sense our “selves” stand outside our frame structure to modify it enough to cause structural reorganization that changes our worldview. So, I think that from time-to-time we do step outside our world views and change them; part consciously, and part unconsciously.

  80. Tom at 11:25, Thanks. I think that when MMT people say “never argue out of paradigm,” they mean to admonish one another to greater self-consciousness in how they present their criticisms of deficit hawks and deficit doves. It is easy to argue out of paradigm when doing this.

    For example, you can say to a deficit hawk, why doesn’t the Government stop issuing debt instruments. If it does that 60% of the deficit problem you’re projecting for 2025 won’t exist, so there won’t be much of a problem yet. Of course in making this argument, one is granting that the deficit is or may be problem if it gets too great in the abstract. This conclusion or inference however, is taking on the paradigm of the deficit concerned, whether hawk or dove, and is outside the MMT paradigm which asserts that deficits are unimportant, only the concrete consequences of Government spending are.

    I agree with your point that to really change minds we won’t be able to argue within the orthodox frame. Rather we have to teach our frame to the orthodox, or more likely to the people who are no longer ideologically attached to the orthodox frame because its failure is not something they’ve been able to ignore.

  81. Punchy says:

    Bill Said:But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in this environment. They must pay the going rate, which is still preferable, to appropriately skilled workers, than the JG wage level.
    Rather than calling them appropriately skilled workers lets call them cleaners and gardners. These workers get paid a wage that would be within 10% of the JG wage if the JG starts tomorrow. They will not go to work for 10%. Either the JG will have to be say 50% less or the min private sector wage will have to increase 50%. If we cant get the bottom rung to work all our macro thinking is just a model.
    Other than fancy modeling It seems to be just a different way of managing the underemployed pool or unemployed pool for stability of prices.You could do this now my manipulating the size of the public service or increasing the unemployment “wage”. I am a supporter of full employment and I think one way to acheive it is to recognize that just because someone is educated they are not worth more than the guy cleaning our toilets. The toilet cleaner should be getting a bigger slice of the pie and the bankers and the rest of us should take less of the pie so that the cleaner can raise his families living standard. That would work for all of us in so many ways other than just who get the most money. Eventually the Cleaning class will get fed up with the elites and take what they have. Dont think it wont eventually happen, it allways does. Time for part 2.

  82. Punchy says:

    Bill said:”However, the solution to both sources of inflation is not that dissimilar although additional measures might be brought to bear to handle the case of a price hike in an imported raw material”

    So if your China what if anything can you do about the hike in Iorn Ore and Coal? As China’s response to these price hikes will determin the future of AUD and Australia’s terms of trade its worth sharing some thoughts on.
    As an aside its amazing the difference in Australia’s economy compared to USA, its also a bit disturbing for the manager of retirement funds, me.
    Cheers Punchy

  83. Rob says:

    Bill,

    Huge fan of the blog. I bought your book, Full Employment Abandoned, and on p. 146, I believe, it does address the stagflation of the 1970s, specifically, that the inflation was a result of “the ‘battle of mark-ups’ period par excellence.” I am eagerly awaiting your part 2 which will provide an MMT explanation/framework on cost-push inflation and the experience of the 1970s stagflation. Explaining MMT to my brother, it’s the one area that I am quite unsure of, do you have an idea of when you will post part 2? Thanks!

  84. Andrew says:

    The nature of money and why more money devalues money.

    1. Imagine applying MMT to the gold standard. Under the gold standard the private banks still had ‘bankers balances or reserve balances’ at the central bank. The central bank would lend upon receipt of collateral. So in a deflationary environment the central bank could supply more reserves to the banks to satisfy whatever needs they had and keep the interest rate low. Overtime however, prices varied only by the amount of gold accessable to humans because all of the created money was redeemable for gold. So at some point interest rates would be forced higher, debt would be reduced and the risk created by excessive leverage of the base gold removed from the market. However also the historic variation in the amount of base metal can be seen in history when there were deflations and then there were gold discoveries made and an economic boom came about? Similarly in Spain when they found silver in the Americas they found prices rose?

    2. So imagine you are on this gold standard and a very large new deposit of gold is found that turns gold from being a valueable rarity to something that is as common as iron. Obviously the price of iron would rise relative to the price of gold because people would be saying ‘no i dont want that gold, i already have too much, i need something more valueable i can spend easily because everybody already has so much gold (gold scrap yards would be in each town like for iron) – which is what begins to happen in the final stages of hyperinflation where finally the paper currency only has value as fuel for burning.

    3.Now imagine you are on a modern fiat currency where money is ‘hard to come by’ and the government begins spending money into the economy without debt to overcome some difficult times where deflation is present. Fairly soon we find there is plenty of money about. People begin saying, ‘i dont want all those 5 notes do you have it in hundreds?’ What therefore happens to prices?

    This is a simple model, so i dont see why it needs to be more complex than this. Money is valueable and has purchasing power because it has a rarity. Therefore if you receive it, you in turn will know the next person will know they can spend it easily, because it is sought after rather than being easily come by.

  85. Some Guy says:

    Yes, of course. The government can raise prices, create inflation if it wants to. But modern economies tend to suffer from insufficient demand and unemployment and excess capacity. Until true, high full employment is reached, e.g. with a Job Guarantee, the additional output & wealth will match the additional money, so no serious inflation should occur. What is telling is that the neoliberal high unemployment era has been no better at fighting inflation, a trivial problem compared to unemployment, than the previous Keynesian (passably) full employment era. Worrying about inflation in today’s depression economies is absurd. When you are on the roof of your house in the middle of a flood, do you worry about it burning down?

    What you are saying is OK in an ideal classical world, and true very grosso modo. But one way I like to think about MMT is that its recommended policies are what are necessary to get to something like this ideal classical full employment world, that much mainstream economics wishfully pretends is an everpresent, stable reality. Usually, only if one has sufficient spending and a JG does one get to the world where “more money devalues money.” In the real, present world, in most places, in the US & Europe, more money would emphatically not devalue money. Indeed the US’s historically large (but not large enough) deficits – more money – have not devalued money.

  86. Andrew says:

    I think what we are seeing in the world at the moment is that there is plenty of demand for say copper or pork. Government stimulus and cheap interest rates have enabled demand for many things to continue. We can also reason that people with money can buy things made of copper or eat pork. People with less money cannot demand these things. If you give them money then they can and the prices will go even higher unless more copper can be found and mined economically or more pigs raised and killed.

    Already we notice that to find copper, men have to be thousands of feet underground at great risk and great cost. (chilean miners), and the lives of pigs are pretty disgustingly led before they are slaughtered due to factory nature of their lives. Same with eggs or chicken.

    There are so many resources on this one planet and we have now a huge population demanding more and more. To keep this kind of human existance operating so that mouths are fed and workers do something useful for the other humans who provide food or commodities is hugely complex. When it breaks down i cannot see there are any solutions which involve spending money that fundamentally has no value when created unless you just want to give a quick transfusion into the lifeless corpse to get it moving a little while longer.

    We could now be at an end of days scenario where we collapse back to babarianism or some new world order will eventuate that humans can be happy to live with. I just had a child last year so i am voting for something optimistic to come out of this somehow.

  87. stone says:

    Andrew, I agree with you that for money to function it needs to have scarcity value. Currently consumer prices are kept from inflating because the build up of money is as “leakage to savings” ie to savings that are never to be spent and are to accumulate indefinately. I personally think that that phenomenon is in the long term at least as damaging as consumer price inflation. MMTers do not seem to see that though. They seem to consider “leakage to savings” entirely benign and unrelated to expansion of the FIRE sector, asset price inflation and the ponzi nature of the global economy.

  88. Sergei says:

    Andrew, just make your same case for the “labour cost standard”. Once the gold standard has been scrapped, labour became the next most valuable and important resource in every economy in the world. And the cost of labour is going down. The only reason this world managed to make through the last 40 years was debt. But here we arrived and started to look into darkness.

  89. Some Guy says:

    There are so many resources on this one planet and we have now a huge population demanding more and more. What is overlooked is that in prevailing conditions, these extra mouths to feed will create more resources if they are only provided with something creatable at will, money. The need for money, created by the state, is the cause of unemployment, so it is absurd for the state to deny employment on demand. No matter what state one thinks the world is in, the idea that the world is somehow better off if people are involuntarily unemployed – forced to NOT work – is frankly, insane.

    There is no particular increasing risk or expense to finding copper nowadays – that company just broke a zillion regulations & like companies everywhere, treated its workers like garbage. The high-tech device the company denied them called a “ladder” would have saved them immediately no muss & fuss. The way to “vote for something optimistic to come out of this somehow” is to take an objective & scientific look at economics – and realize that the world operates far below potential, because of grossly unscientific & irrational economics, stemming ultimately from the theory of Metallism, the ignorance of what money is.

    The only way to understand the history of the USA in the past 30 years is that elites feared ordinary people getting too rich and uppity, so they have systematically tried to make its economy as inefficient, slow-growing, wasteful and unjust as possible. Resources have been channeled toward useless, parasitic and destructive make-work sectors (finance, security, military, private medical, prisons) while starving productive ones (education, scientific research, infrastructure, public health, state and local governments, some manufacturing & industry) Sane government in the USA, with its enormous advantages, could double real wealth in just a few years. Of course the system is enormously complex. But the USA – the Kingdom of Unreason – shows how robust it is, how far we are from any real limits.

    spending money that fundamentally has no value Every time I see somebody say something like this, I ask the writer to send me a boxful, so they can get this rubbish off their hands. So far no takers, but one can hope.

  90. Andrew says:

    @Some guy says

    >>The need for money, created by the state, is the cause of unemployment, so it is absurd for the state to deny employment on demand

    I can see a few problems with that kind of philosophy because the usual way of employing people for wages is to demand that they work.

  91. bill says:

    Dear Andrew (at 2010/11/07 at 9:11)

    SomeGuy said that “The need for money, created by the state, is the cause of unemployment, so it is absurd for the state to deny employment on demand” which is a valid and essential insight into how unemployment is a function of state money.

    You replied:

    I can see a few problems with that kind of philosophy because the usual way of employing people for wages is to demand that they work.

    The view expressed by Some Guy – that the state should ensure there are enough jobs available to match the preferences of the labour force – which means effectively they should invoke a Job Guarantee to absorb all workers who have no bid for their services in the market – has no connotation that the state doesn’t require work effort in return for wages. You just made that allegation up and it has no substance in anything that has been written on this blog. I wonder what percentage of my past posts you have actually read and/or understood.

    On employment guarantees – start with this set of Readings. Then you would not waste your time making these sorts of statements. In general, my advice is to read before your type it will help all of us avoid unnecessary diversions.

    best wishes
    bill

  92. Andrew says:

    Bill

    It was not an allegation. it was my way of expressing what i believe amounts to a different philosophy.

    For example when i was younger you could still become an unpaid apprentice and get a valueable beginning introduction into craftsmanship that would keep you employed all of your life. But some people objected to such unpaid work and what they regarded as exploitation and now as far as i know it can be difficult for parents to find their children apprenticeships to learn a craft that can keep them employed if they are not sucessful in a school system that does not suit their practical and creative minds.

    As often as not the unemployed do have bids if the employers were allowed to employ them.

    It comes down to differences in philosophy as far as i can see.

  93. stone says:

    SomeGuy “The only way to understand the history of the USA in the past 30 years is that elites feared ordinary people getting too rich and uppity, so they have systematically tried to make its economy as inefficient, slow-growing, wasteful and unjust as possible.”

    -The last 30 years (since monetary expansion kicked off) have gone down that route but I don’t think it is neccessary to say that it was due to a conspiracy to prevent ordinary people getting too rich and uppity. It is much harder to be constructive than destructive. That is simply the law of entropy. In my view the economy needs the “tough love” of a non-expanding currency in order to be constrained along a constructive path. If the economy is endlessly cut slack in the form of monetary expansion, then there is nothing to prevent it from bubbling into the innane set up we currently have.

  94. Some Guy says:

    Stone, your cure would be much, much worse than the current disease – so much so, so unworkable, that no one should worry about it ever happening. It would either turn into a tyrannical and oppressive command economy, or much more likely, be corrupted and be exactly what the oligarchs want – nations composed of 99+% debt peons and a few oligarchs. “Monetary expansion” has been going on for longer than 30 years – indeed throughout history – because it is necessary for a growing economy. The resource channeling and regulation removal I was talking about was the result of explicit decisions. Keep the same proportion of resources devoted by governments to the productive sectors and the parasitic ones in the US in 1960, 1970 or 1980, instead of today’s demented distribution, and there would be a very different USA. I was not claiming any shadowy conspiracy – there is plenty of support from statements powerful people in the US. Consider Chomsky’s writings on “The Crisis of Democracy” – elites said there was too much of it back then. Consider Victor Quirk’s thesis.

    Andrew: I don’t see any difference between us that I would call philosophical. Or any clearly expressed difference at all. Non-monetary economies do not have unemployment – ordinarily, there is no good which is scarce, necessary for practical survival and unobtainable by individual, or even mass effort. The situation confronting the unemployed is like a non-monetary community faced with a natural disaster. You acknowledge involuntary unemployment in your penultimate sentence. All I am saying is that it is incumbent on government to clean up the mess it has made. Why shouldn’t it?

  95. stone says:

    Some Guy, “Keep the same proportion of resources devoted by governments to the productive sectors and the parasitic ones in the US in 1960, 1970 or 1980, instead of today’s demented distribution, and there would be a very different USA.”

    What I don’t understand is how, as the ratio of invested wealth to non-financial-sector-GDP increases, it is possible to hope that we can “keep the same proportion of resources devoted by governments to the productive sectors and the parasitic ones in the US in 1960, 1970 or 1980″. The FIRE sector has not suddenly sprung up now. It has been gathering pace for over three decades. It makes sense to me that the greater the ratio of invested wealth to non-financial-sector-GDP, the greater the proportion of resources that becomes allocated to managing invested wealth.
    Please could you trace through very roughly how an asset tax and a citizens’ dividend would either lead to “99+% debt peons and a few oligarchs” or to “a tyrannical and oppressive command economy”. Those are exactly the end points that I (like you) most want to avoid us falling towards.

  96. stone says:

    I’ve been puzzled about how MMT would advise governments to respond to the recent rocketing prices of gold, silver and copper. Should they be subjected to specific taxes or left to bubble away? Am I right in understanding that MMT favours below inflation interest rates? My impression was that whenever that happens there is a danger of metals becoming in effect currencies. Is such a slide away from national currencies towards metal pseudo currencies underway now? If it became accepted as normal to have a 25% increase in gold price every year then wouldn’t that start to have severe disruptive consequences? Is the MMT approach to presume that metal prices will lurch around so violently that that will prevent too much use of them as a means of saving? Even if metals were dealt with by specific targeted taxes, then some other unexpandable pseudo currency would spring up. Farmland could in principle be divided up into exchange traded fund shares and then get used as a pseudo currency.

  97. Tom Hickey says:

    I don’t know that MMT would advise government to do anything about cash spot prices set by competitive markets, but Minskians (of which MMT’ers are a subset) would be concerned about the abuse of leverage, especially in derivatives like options, ETF’s etc. Government do have levers to control abusive leverage, such as margin requirements. Of course, matters like cartels, market cornering, and other manipulation have to be addressed, too.

    But in general commodities and other scarce resources are going to appreciate owing to the increased demand coming from emerging nations with large populations and their fast-developing markets hungry for resources. Increased global wealth also drives up asset values and instigates financial innovation. Governments and cb’s will be hard-pressed to keep a lid on this to prevent it from boiling over periodically due to abusive leverage and other “imprudence.” (See Minsky’s financial instability hypothesis)

    Where did you get the idea that MMT favors below inflation intrest rates? MMT’ers generally regard interest rate setting by the cb to be a blunt instrument to be avoided in favor of fiscal policy, especially when interest rates are used to target inflation using unemployment as a tool. But that doesn’t mean suppressing the interest rate either. Generally speaking, fooling with interest rates results in market distortions. MMT’ers generally aren’t concerned with interest rate setting but rather fiscal policy.

    Farmland is already becoming an issue, and eventually it will have to be addressed politically, especially in view of climate change. Here in Iowa the regulators are already watching for bubble characteristics so they can head it off. RE can only appreciate to the degree that banks are willing to lend against it, and regulators have come control over that. They do not want to see a repeat of the boom and bust of the 80′s in farmland.

    The Minskian answer is generally to tax economic rent as unproductive. From the Minskian perspective, most of the issues that arise relative to asset prices involve economic rent and can be addressed by taxing it away.

  98. Tom Hickey says:

    Stone, regarding you Nov 8 @ 19:45, the Minskian solution lies in taxing away economic rent, changing institutional incentive structure to disincentivize extraction, and enforcing laws and regs against cheating, especially at the top. Michael Hudson, Randy Wray, and Bill Black have written extensively on this.

  99. stone says:

    Tom Hickey, I just wanted a clarification as to whether -with regard to a current situation- MMTers would declare specific currently rising prices as being eligible for the imposition of targeted taxes (which I gather is the MMT proposal to deal with them). I get the impression that you are saying that the 70% rise in silver prices since the summer does not yet constitute a sufficient bubble to warrent such a tax but that the goverment should be watchful. I just want a sense in real time as to how capable MMTers are of identifying bubbles that hypothetically they would tax down were they in power. I’m not sure that new taxes on gold and silver in the USA would do the trick now though because so much of the buying is from elsewhere in the world.

  100. Tom Hickey says:

    stone, I am not an economist so I can’t give you an informed view of this. But basically, the role of government is to keep a level playing field in markets and not influence prices unless it is due to a tilted field. Generally, the most powerful tool government has to influence speculative markets is through leverage. When authorities see bubbles forming they can increase margin requirements, for example. This affects potential gains from economic rent quickly and directly.

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