British Labour Party surrenders … back to its Monetarist roots

Last week, the shadow British Chancellor, John McDonnell confirmed that the British Labour Party under Jeremy Corbyn will not be part of a progressive realignment of the public debate regarding fiscal policy. By that I mean, they have chosen, probably for misplaced ‘political’ concerns (leaving aside total ignorance), to reinforce in the public mind the neo-liberal myths relating to the capacities of a currency-issuing government to spend and advance prosperity. I have no doubt that John McDonnell desires, genuinely, to advance the material well-being of the working class in Britain. His public career to date would suggest that. But like many on the Left, he has been seduced by the neo-liberal snake oil into believing that fiscal rules that bind a currency-issuing government to balance, in total or in part, the fiscal situation and that such a government should submit itself to the dictates of a technocracy full of mainstream economists, is a necessary requirement of responsible fiscal management. His most recent statements really amount to surrender. The British Labour Party is staying faithful to its Monetarist roots, which were established in 1974 under Harold Wilson’s second tilt at the top job. The distractions of New Labour and now Jeremy Corbyn has not really changed anything. This is a neo-liberal party no matter what they claim and their advice and underpinnings are firmly neo-liberal.

I have written about this in the recent past but there are some things that need repeating and further amplification.

Please read the following blogs for previous statements on this topic:

1. British Labour Party – U-turning towards oblivion.

2. British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’.

3. The non-austerity British Labour party and reality – Part 2.

There was an article in the Australian Fairfax press this morning (March 14, 2016) – Budget reform likely to be just tinkering – that also bears on this topic.

It was written by the Fairfax senior economics editor, one Ross Gittins, who is held in high regard by his Australian readership, which just goes to show how ingrained these myths are in the public space.

I will return to that article in a moment.

Consider a household or a business firm. The first thing they have to work out in terms of their ‘economies’ is how to generate spending capacity.

Without spending capacity, these private entities can have no command over any real resources that they may desire to advance their specific interests.

Spending capacity can come from labour income (household) or revenue from product sales (firms), running down past savings, asset sales (that is, reducing the wealth position of the entity), or by borrowing.

The fact that this spending capacity is not innate for these entities allows us to depict them as ‘financially constrained’.

In this context, the concept of a ‘budget’ becomes one of managing the financial sustainability of the entity.

A household will soon have repossession agencies knocking on their door or demands to appear in court to repay debts if it consistently spends more than its spending capacity (defined by the sources noted above).

A business firm will soon be filing for bankruptcy if its revenue (spending capacity) is less than its costs (spending).

So while the underlying motive for developing spending capacity for a household or a business firm is to advance the specific interests of the entity, and additional, and overriding consideration or target, has to always be the maintenance of financial sustainability.

A moment’s reflection will tell you that these concerns are not applicable to a currency-issuing government, which spends that currency into existence as part of a process whereby it accesses the real resources owned by the non-government sector and deploys them to advance public interest.

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

First, there is no analogy for such a government in terms of household or business firm bankruptcy. Such a government can never run out of money (‘go broke’).

Second, such a government can use its innate spending capacity (innate because it issues the currency) to purchase what ever is for sale in that currency whenever it desires. It has no necessity to engage in prior ‘revenue’ raising activities, such as taxation and/or borrowing, in order to facilitate those purchases (spending).

By way of qualification to that previous remark, we recognise that, given the real resources that the government deploys are ‘owned’ by the non-government sector, which may prefer to use them to their own ‘private’ advantage (as opposed to the broader social good), the government has to seek a way to deprive the non-government sector of that usage.

In other words, one of the activities of a currency-issuing government is to create idle real resources in the non-government sector there can be subsequently deployed by that government in pursuit of its electoral mandate.

Modern Monetary Theory (MMT) shows that this is one of the major roles of taxation – to create unemployed real resources that can then be used by the public sector.

The public sector then deploys these resources through spending. We should note that the need to deprive the non-government sector of spending capacity via taxation is to ensure that total spending is commensurate with the available real resources in the economy.

If the growth in nominal spending outstrips the productive capacity of the economy then inflation becomes the problem.

Third, following the previous insight, it also becomes clear that if the non-government sector does not desire to use all of its available income after taxation – that is, it desires to save overall – then there will a gap between income generated and total spending, other things equal.

The economy generates income from deploying available resources in production in response to expected spending. Should the actual spending be less than the spending that firms expected, then the current level of production will be ‘too high’.

That is, firms will have produced more than would be justified by the current level of sales and as a consequence they will be forced to accumulate unintended inventory (unsold production).

As a result, if firms revise their expected sales downwards, then they will cut back production and increase the stock of idle resources, including labour, in the economy. That is, unemployment will rise.

Note, I said ‘other things equal’, by which I was referring to the alternative source of spending – government spending.

We should be clear on the temporal causality that operates in a monetary economy.

Government spending provides revenue (income) to the non-government sector, which then allows the latter to extinguish its taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.

It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector, which allows the government to pursue its economic and social policy program.

While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work, which eliminates the unemployment created by the taxes.

So it is the introduction of State Money (which we define as government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment.

For all the goods and services produced in any period to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period).

Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages). This unemployment thus occurs when the private sector, in aggregate, desires to earn the currency through the offer of labour but doesn’t desire to spend all it earns, other things equal.

As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.

In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase total spending.

Thus we understand that the purpose of the currency of the government and the fiscal policy choices that bring that currency into existence is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.

Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency.

This includes, of-course, the offer of labour by the unemployed.

The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. Either government spending is too low relative to the current tax receipts or taxes are too high relative to the level of government spending.

This makes the purpose of fiscal policy clear. It is not to balance any financial accounts. Rather, it is to generate full employment.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid.

In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.

Keynesians have used the term demand-deficient unemployment. In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.

For a time, what may appear to be inadequate levels of net government spending can continue without rising unemployment. In these situations, as is evidenced in many countries in the pre-GFC period, GDP growth can be driven by an expansion in private debt.

The problem with this strategy is that when the debt service levels reach some threshold percentage of income, the private sector will ‘run out of borrowing capacity’ as incomes limit debt service and banks become risk-adverse.

Typically, this will then provoke efforts to reduce the debt exposure (so-called ‘balance sheet restructuring’) and rmake the household and/or firm finances less precarious.

As a consequence, total spending from private debt expansion slows and the economy falters.

In this case, any fiscal drag (inadequate levels of net government spending) begins to manifest as unemployment.

Which brings me to the Fairfax article I referred to above.

Ross Gittins writes:

Which brings us back to the budget’s primary macro-economic purpose, achieving “fiscal sustainability”. We’ve been assured – as usual, by leak – that any improvement in revenue estimates arising from the seeming recovery in iron ore prices will be allowed to reduce the budget deficit, not used to fatten the tax cuts or otherwise buy votes.

Which would lead his readers to conclude that the fiscal balance (the ‘budget’ outcome) is an legitimate policy target in its own right, which would be at odds with the observation that government must use its fiscal policy to offset non-government spending gaps.

The same readers would be excused for thinking that ‘fiscal sustainability’ is something to do with reducing the “budget deficit” independent of other considerations.

The problem is that Gittins is just channelling the mindless nonsense that parades as mainstream economics these days that the “budget’s primary macro-economic purpose” is to be in balance or surplus either always or, in the case, of the so-called progressive New Keynesians (advising Corbyn and McDonnell) over some economic cycle.

In this misguided interpretation of what constitutes responsible fiscal policy – fiscal sustainability is reduced to a self-contained balance between revenue and spending – that is, it is defined within the confines of financial accounting.

However, as I have argued often, fiscal sustainability is a ‘real’, not a financial concept.

To repeat the relevant first principles, which many of you will know well by now.

In a fiat monetary system where the national government issues its own currency and floats it on international markets:

  • A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
  • The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.
  • A currency-issuing government can always meet the liabilities it issues in its own currency.
  • Nations that have ceded their sovereignty by entering currency zones (such as the Eurozone); by dollarising their currencies; by running currency boards; and similar arrangements clearly are not sovereign and face the same constraints that a country suffered during the gold standard era.

In the real world, rather than in the mainstream macroeconomics textbooks, the concept of fiscal space and fiscal sustainability is real, not financial.

Please read the following introductory suite of blogs – Fiscal sustainability 101 – Part 1Fiscal sustainability 101 – Part 2Fiscal sustainability 101 – Part 3 – to learn how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.

What these blogs will teach you is that the purpose of fiscal policy is to ensure there is full employment and price stability – which is quite a different concept to what Gittins is suggesting.

Another way of thinking about this is to reflect on Abba Lerner’s ‘steering wheel’ metaphor, which he introduced in his 1941 article – The Economic Steering Wheel: the Story of the People’s New Clothes – (reproduced with minor editorial changes as Chapter 1 in his 1951 book – The Economics of Employment).

[Reference: Lerner, A. (1951) The Economics of Employment, New York, McGraw Hill.].

Lerner saw the economy as a vehicle that we (through the government) can control to achieve our collective well-being. This is in contrast to the neo-liberal concept of the economy as a self-regulating mechanism, which demands us to act as sacrificial lambs to maintain its ‘health’.

It is contrast to notions the government ‘budgets’ need ‘repairing’ if they are in deficit (another claim that Ross Gittins often repeats – see below).

The ‘steering wheel’ metaphor is used by Lerner to juxtapose the laissez-faire approach where the car zig-zags across the road, often out of control and producing multiple wrecks, with the alternative, where judicious use of the steering wheel can ensure the car travels safely and smoothly along the road.

Lerner considered fiscal and monetary policy to be ways in which government can ‘steer’ the economy to avoid the crises that the free market approach creates.

In relating the metaphor to the economy, Lerner (1951: 4-5) noted that in the main, people accept the need to use the steering wheel for orderly driving:

But are they as reasonable about other things as they are about the desirability of steering their automobiles? … Do they not allow their economic automobiles to bounce from depression to inflation in wide and uncontrolled arcs? Through their failure to steer away from unemployment and idle factories are they not just as guilty of public injury and insecurity as the mad motorists …

Abba Lerner distinguished between what he called Functional Finance and Sound finance, the latter being the orthodoxy he confronted.

‘Sound finance’, which also dominates the public debate in the current period is usually expressed in terms of some defined fiscal and monetary policy rules – for example, governments should aim for a fiscal balance or the central bank should only allow the money supply to increase in line with the rate of real output growth.

These rules, which are rarely challenged, usually disguise an underlying conservaitve morality about the role of government (for example, deficits are characterised as ‘living beyond the means’ etc).

By way of departure, Lerner considered a government should always use its policy capacity to achieve full employment and price stability and thought that fiscal or monetary policy rules based on conservative morality were not likely to help in that regard.

In contrast to ‘Sound finance’, Lerner said that (1943: 39-40):

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound … The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.

The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. The government can increase total spending by spending more itself or by reducing taxes so that the taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced.

As almost an afterthought, as he has already pushed the readers into thinking fiscal sustainability is about getting the fiscal balance back into surplus, Ross Gittins says that:

With forward-looking trend growth now reduced to 2.75 per cent a year and the economy growing by 3 per cent in 2015, we should be getting on with budget repair.

In other words, a rather weak attempt to relate the state of the fiscal balance to the real economy.

But the bridge between the fiscal position of government and the real situation in the economy is hardly made concrete by appealing to some reduced trend rate of real GDP growth.

Is 2.75 per cent real GDP growth acceptable?

Well, to answer that question, consider the following:

1. At present the Australian unemployment rate is hovering around 6 per cent.

2. Underemployment is around 8.4 per cent (when last measured – November 2015).

3. The participation rate is well below the November 2010 peak – which when you account for changing composition of the labour force (ageing) still means that some 120 thousand workers have become hidden unemployed as a result of the weak and often negative employment growth over the last several years.

4. When we adjust for the slack participation rate and add those discouraged workers back into the labour force the unemployment rate would be around 7 per cent in January 2016 rather than 6 per cent.

5. In other words, the broad labour wastage is around 15.5 per cent – a long way from any reasonable interpretation of what a full employment position would be.

6. And all that is being sustained by trend real GDP growth of 2.75 per cent.

7. Further, inflation is well below the RBA’s official targetting range and has shown no signs of accelerating for some years despite the rather large exchange rate depreciation in recent times.

At some times, it is necessary for the government to engage in a discretionary reduction in its net spending to stop the economy moving beyond the full employment (full capacity) level.

Now is definitely not the time to be contemplating that. Rather, the Australian government should be introducing a significant new fiscal stimulus equivalent at least to 1 to 1.5 per cent of GDP.

That is the only way the massive and persistent level of labour underutilisation (wastage of human potential) will be reduced in any coherent way.

Further, the concept of ‘budget repair’ assumes that the fiscal balance is akin to a car or a bad heart in a medical patient. That is, it is sick or in disrepair and needs to be fixed.

It is one of those neo-liberal metaphors that are designed to mislead us and to lead us into a construction of the fiscal balance that is inapplicable to a modern monetary system.

It biases our thinking into believing that deficits are bad and surpluses are good and that there is something irresponsible or wanton about a government that is running a continuous fiscal deficit.

Please read my blog – Framing Modern Monetary Theory – for more discussion on this point.

It also begs the question what a healthy ‘budget’ would look like.

Lerner’s statement of purpose – his ‘first law of Functional Finance’ – recognises the basic rule of macroeconomics – that spending equals income and output, which drives the demand for labour.

As noted above, mass unemployment results from insufficient spending – it is a macroeconomic problem. The neo-liberal claims that unemployment arises because, for various reasons, individuals do not seek work hard enough, totally misses the point. An individual cannot search for jobs that are not there!

In other words, the government responsibility should be to adjust its spending and taxation to ensure that all production is purchased and that this level of production generates jobs for all, such that the society cannot produce any more goods and services with its current available inputs.

What are the financial implications of this? Lerner noted that if in fulfilling its responsibilities, the government records a fiscal deficit, then it “would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything especially good or bad about this result” (p.40).

The goal is to “concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation” (p. 40).

Importantly, assessments of ‘good’ or ‘bad’ are defined purely in terms of whether the government is achieving its real goals.

Obviously, moral considerations enter at the stage of setting goals. It is clearly a values-based position to aim for a state where everyone can find work that desires to do so.

Once agreed that this will be the societal goal, then we should be indifferent, if in different circumstances (for example, the strength of private sector spending), a deficit of 1 per cent of GDP or a deficit of 5 per cent of GDP is required to meet that goal.

Thinking in this way flushes out where the ideology lies.

The neo-liberals obscure their disregard for mass unemployment by claiming that the 5 per cent deficit is dangerous and unsustainable. If the public truly understood that the 5 per cent deficit is as sustainable as the 1 per cent deficit, then the neo-liberals would be forced to debate their preference for mass unemployment.

Gittins thinks that a 2.75 real GDP trend growth rate is acceptable even if it associated with a broad labour underutilisation rate of in excess of 15 per cent.

His neo-liberal roots are disclosed.

Which brings me back to John McDonnell in Britain. He once again announced that the British Labour Party would constrain itsself with a so-called “fiscal credibility rule” if elected.

The BBC Report (March 11, 2016) – Labour announces ‘fiscal credibility rule’ quoted him as saying it was an attempt to regain “economic credibility”.

McDonnell was quoted as saying:

We know now from the world’s central banks that the world economy is looking at stagnation, and there needs to be a new rule … And we want people to have confidence in a Labour government. That means we are introducing a new fiscal credibility rule.

First, that a Labour government will always balance day to day expenditure.

Second, that we will only borrow for the long term, and that means for investment – investment in our infrastructure, in the homes that we need, the railways, the roads, the renewable energy.

And in new technology to grow our economy.

Third, debt will fall under a Labour government over a five year period …

And then finally all this will be supervised independently by the Office [for] Budget Responsibility, reporting directly to Parliament.

This is a new iron discipline for a Labour government …

And the path to nowhere for the well-being of the citizens.

Please read the blogs cited at the outset for my criticism of this rule.

But according to the (rude) (Paul Mason, McDonnell is channelling an academic paper – Issues in the Design of Fiscal Policy Rules – written in May 2014 by British New Keynesian economists Simon Wren-Lewis and Jonathan Portes .

As an aside, I used the term rude because Mason promised to host a panel in London last year (which I was on) and he not only didn’t bother turning up but he also didn’t have the courtesy to let the organisers know he wasn’t turning up. A large audience waited some time for him to arrive. Indulgence!

New Keynesian economists, which dominate my profession include Paul Krugman among their ranks are part of the problem not part of the solution. They failed to anticipate the financial crisis because their ‘models’ did not even include a banking sector!

In this blog – Mainstream macroeconomic fads – just a waste of time – I considered so-called New Keynesian models of the macroeconomy which dominate the mainstream of my profession.

Anyway, the “paper is about the search for” a “fiscal rule” to “guide fiscal policymakers”.

The neo-liberal credentials of the authors are immediately exposed when they say:

… one single simple rule to guide fiscal policy may never be found … basic theory suggests that fiscal policy actions should be very different when monetary policy is constrained in a fundamental way, while the reverse is not in general the case. There are two major examples of where this will be true. The first is when interest rates are at the zero lower bound …

There is no difference between a zero-rate state and a non-zero rate state for the conduct of fiscal policy.

Essentially, to think otherwise is to believe that monetary policy is the primary, effective counter-stabilising policy tool and, it is only when that effectiveness is reduced (when there is no more room for rates to fall) that fiscal policy should be more active.

This is a basic neo-liberal belief – which has been pushed into the public debate as a sort of technical claim to hide the fact neo-liberals just hate fiscal policy and want to limit government discretion as much as possible.

Monetary policy is largely ineffective as a counter-stabilising policy tool, irrespective of how much scope there is for changing interest rates up or down.

As an example, please read my blog – The ECB could stand on its head and not have much impact – for more discussion on this point.

Fiscal policy is always effective and should be the primary tool to ensure full employment. That requires a very basic set of policy positions being followed by government, which I outline in this blog – The full employment fiscal deficit condition

I won’t go into the rest of the paper that is apparently underpinning McDonnell’s position. It is GIGO – garbage in, garbage out. A typical New Keynesian piece of irrelevance.

Three low lights in the paper:

1. It extols the virtues of an unelected, technocratic (full of neo-liberals) “fiscal council, with a wide monitoring mandate” which “can provide a backstop against the possibility that a government may start trying to manipulate policy for political ends”.

A basis of democracy is that governments introduce policy that satisfies political ends! That is the nature of a political economy – the economy should work for us.

Having the unelected mandarins on high pay with secure jobs telling us that 15 per cent broad labour underutilisation rates signal time for governments to ‘cut deficits’ (‘repair!’) is the anathema of responsible government in a democracy.

2. There is no mention of what a government should be aiming to achieve other than to achieve either deficit or debt targets within a standard GIGO cost minimisation framework. The only mention of unemployment is to invoke (once) Milton Friedman’s concept of a natural rate of unemployment, which has been used to justify persistent mass unemployment (as above).

3. The authors deliberately conduct their ‘technical’ analysis assuming (in their words) “financing through printing money”. In other words, they set up an artificial situation, where the currency-issuing capacities of the government are suppressed and the state is treated as equivalent to a ‘household’. Ridiculous.

Conclusion

British Labour has until Thursday May 7, 2020 before they have to face the national electorate. More than 4 years.

They could have chosen to use that time to challenge the fundamental tenets of the macroeconomics debate by educating the public on the myths of neo-liberalism.

They could have abandoned their neo-liberal roots and engaged the public in a truly progressive process, which would have sunk the neo-liberal paradigm.

Instead, they have chosen to surrender to the neo-liberal mainstream and in using the language and metaphors of that approach have led the public to believe that deficits are always bad etc.

Then they will just say that they will cut the deficit in more equitable ways. Hopeless.

As I tweeted the other night when I read the BBC press release – “British Labour Party under Jeremy Corbyn back to their Monetarist roots. Healey would be proud of them. Disgraceful”.

The reference was to Denis Healey – the first real Monetarist Chancellor in Britain – long before Margaret Thatcher installed Geoffrey Howe in that role on May 4, 1979.

Modern Monetary Theory and Practice: an Introductory Text

The first version of our MMT textbook – Modern Monetary Theory and Practice: an Introductory Text – was published on March 10, 2016 and is authored by myself, Randy Wray and Martin Watts.

It is available for purchase at:

1. Amazon.com (US 60 dollars)

2. Amazon.co.uk (£42.00)

3. Amazon Europe Portal (€58.85)

4. Create Space Portal (US60 dollars)

By way of explanation, this edition contains 15 Chapters and is designed as an introductory textbook for university-level macroeconomics students.

It is based on the principles of Modern Monetary Theory (MMT) and includes the following detailed chapters:

Chapter 1: Introduction
Chapter 2: How to Think and Do Macroeconomics
Chapter 3: A Brief Overview of the Economic History and the Rise of Capitalism
Chapter 4: The System of National Income and Product Accounts
Chapter 5: Sectoral Accounting and the Flow of Funds
Chapter 6: Introduction to Sovereign Currency: The Government and its Money
Chapter 7: The Real Expenditure Model
Chapter 8: Introduction to Aggregate Supply
Chapter 9: Labour Market Concepts and Measurement
Chapter 10: Money and Banking
Chapter 11: Unemployment and Inflation
Chapter 12: Full Employment Policy
Chapter 13: Introduction to Monetary and Fiscal Policy Operations
Chapter 14: Fiscal Policy in Sovereign nations
Chapter 15: Monetary Policy in Sovereign Nations

It is intended as an introductory course in macroeconomics and the narrative is accessible to students of all backgrounds. All mathematical and advanced material appears in separate Appendices.

A Kindle version will be available the week after next.

Note: We are soon to finalise a sister edition, which will cover both the introductory and intermediate years of university-level macroeconomics (first and second years of study).

The sister edition will contain an additional 10 Chapters and include a lot more advanced material as well as the same material presented in this Introductory text.

We expect the expanded version to be available around June or July 2016.

So when considering whether you want to purchase this book you might want to consider how much knowledge you desire. The current book, released today, covers a very detailed introductory macroeconomics course based on MMT.

It will provide a very thorough grounding for anyone who desires a comprehensive introduction to the field of study.

The next expanded edition will introduce advanced topics and more detailed analysis of the topics already presented in the introductory book.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

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    56 Responses to British Labour Party surrenders … back to its Monetarist roots

    1. Neil Wilson says:

      New Keynesians indulge in non-falsifiable statements that they adjust as required to maintain an aura of authority.

      It’s pseudo-scientific stuff worthy of the finest charlatan, or in the vernacular ‘Woo’.

      “Woo is used to blind or distract an audience from a real explanation or to discourage people from delving deeper into the subject to find a more realistic explanation. You can’t make money if nobody buys your bullshit. (As such, “woo” that has zero paying customers is more like just ordinary batshit crazy.)”

      So these guys are really Woo-Keynesians.

      Or Wookies for short.

    2. larry says:

      I am sorry to say that McDonnell has indicated finally that he doesn’t seem to know what he is doing. In an interview I saw him in last week, he looked anxious, dare I say frightened. He looked like someone out of his depth. It is, therefore, I suppose, not a surprise that someone like that will go back to what is familiar. The unfortunate thing is that it will be so awful for the rest of us. While McDonnell would not himself engage in the class war, he believes it to be an abomination, he seems to be unable to know what to do to arrest it.

      McDonnell and a number of his advisers don’t seem to understand that the phrase “living within your means” is meaningless in the context of the state. Being careful, yes. Although the state can’t run out of money, it can run out of resources. McDonnell and some of his advisers don’t seem to be able to distinguish between the two. It is deeply disappointing. While I didn’t have high hope, I did have some. I now have none.

    3. Christer Kamb says:

      Now when cb has runned out of ammo there is a discussion among mainstream-economist to deploy cb “helicopter-money”. Either as a direct money-transfer to households/firms or tax-cuts. Also as government spending. Cb-financing here means no increase of government debt.

      What is the most striking difference using i.e government spending with MMT? From an accounting perspective there is no difference. During zero interest-rates both techniques don´t need increased government debt to neutralize influence on monetary policy(interbank over-supply of money).

      Possibly I see one difference. MMT want´s to reach full employment by creating jobs more directly while the monetarist want´s to increase demand in-directly by injecting money more generally.

      With Helicopter-money I mean proposals from i.e Adair Turner and Ben Bernanke.

    4. paul says:

      John McDonnell was woeful on television yesterday, a totally incomprehensible scattergunning about balanced budgets, borrowing,UKPLC,wealth creators and entrepreneurs.
      It came across as some discarded presentation notes he found in Peter Mandelson’s waste basket.

      He really has to start talking about things that matter to the 70% who didn’t vote for our current government, not the things that his interviewers’ class are concerned with.

      Paul Mason probably missed your meeting due to proofreading his new book and becoming temporarily disconnected from the world around him.

    5. mark says:

      Purchased x 1 Modern Monetary Theory and Practice: an Introductory Text

      Just waiting like a child on Christmas eve.

    6. Chrislongs says:

      Bill,
      Achieving full UK employment is difficult with EU insistence on individual free movement ( employment?) And this irrespective of Brexit as any trade agreement still requires this (e.g. Norway,Switzerland etc).
      Scare stories of irresponsible governments e.g. Weimar or Zimbabwe and inflation keep the household analogy going – was the Weimar case a way of devaluing war reparations & Zimbabwe’s reaction to corruption and a switch to US$ as a reliable currency ?
      I would appreciate any thoughts on resolving these issues.

    7. Senexx says:

      Hooray Published on My Birthday

      And Happy Birthday for around a week back Bill

      I’d love to order the book but a rough calculation right this moment gives me AUD 97.31 (via US AMAZON) which is beyond my budget

    8. James Schipper says:

      Dear Bill

      I don’t dispute your assertion that the purpose of taxation is to reduce the spending power of the private sector and thereby free up resources for the public sector without causing inflation. However, how many people in government or the media hold that view? The consensus seems to be that government spending has to be covered by taxes or borrowings and that today’s borrowings are tomorrows taxes. Name me one prominent political decision-maker who adheres to functional finance.

      In Canada, the first budget of the Liberal government may have a deficit of 30 billion, which is about 1.5% of Canadian GDP. It has already put the Liberals on the defensive.

      Regards. James

    9. Nigel Hargreaves says:

      paul.

      I also saw McDonnell on the Andre Marr show, and he was closely followed by George Osborne. There was a cigarette paper between what they were saying. I agree McDonnel looked distinctly uncomfortable.

      I went to the London meeting and on the panel was Richard Murphy who at the time was advising Corbyn. There were high hopes, but now they are back to the same old stuff. QE for the People appears to have been dropped. In are “eliminating the defit”, “living within our means” and “reducing the national debt”.

      All very well, Bill, to point out that the Tories have until May 2020, but even in the unlikely event that Labour wins we are still in for more of the same.

      There has to be something going on that is driving all this, and it certainly isn’t the public good. I am 73 and not in the best of health, so it may not affect me, but I despair when I see people pushing babies in buggies. What will be their futures?

    10. Barri Mundee says:

      Dear Bill.

      I don’t know if Ross Gittens is a journalist or an economist but have you contacted him about some of the erroneous analyses he writes? People like him have significant influence so any chance of dialogue might be useful. Perhaps I am being naive?

    11. Averagejoe says:

      Good post. But it does raise an issue for me. My understanding with regard to the UK, is that a significant proportion of the governments Gilts (or bonds) are not bought by private banks but by pension funds. If a gilt is bought by a pension fund, no new money will be created in the transaction. Savings will be transferred to the government for spending. Its only if a private bank buys the bonds that new money will be created. This means that the ability of the government to create new currency is therefore more diluted that it could be. Correct?

      Also my understanding is about 97% of the money supply is now debt, and a heavy percentage of which was created by private debt. Which means that the risk of deflation is much higher if private debt levels start to decline, and in turn would require much greater government borrowing to offset a major downturn. Correct?

      I think the Labour party have made a serious mistake. They have simply reinforced the neoliberal agenda that deficits are a problem, which means they are offering an austerity lite agenda, albeit with infrastructure investment debt. The austerity lite approach failed badly at the last election, as it did not create enough of a divide between the parties. This was their chance to expose the myths and failings of current policy. One of the most important developments in recent years is the student paper by the Bank of England that acknowledges that private banks create the money supply as debt. It totally contradicts conventional economic theory. This is a unique opportunity for the Labour party to pursue a new approach backed up by the BoE regarding money creation. Looks like they have bottled it to me. However, the reason they have bottled it is probably political. Such a major change of stance is probably viewed as going too far. They want a more progressive change, and this recent paper referred to provides them with ‘evidence’ to support their policy. Politics too me, seems to be the art of creating believable ‘narratives’ that can be sold to the public in return for their vote. Whether or not it relates to facts is largely considered irrelevant.

    12. Derek Henry says:

      Simon Wren lewis the mastermind behind this.

      Has already posted 3 posts on his blog mainly macro in a week to try and explain it. He’s got himself in a terrible mess.

      Read them the guy is an idiot who only supports fiscal conservitive framing and propaganda

    13. Mike Wright says:

      “They could have chosen to use that time to challenge the fundamental tenets of the macroeconomics debate by educating the public on the myths of neo-liberalism.”

      This is the bit that rubs. There is no need to set down this kind of nonsense so early (or any other time) in the cycle. Why has it been done? Who is yanking McDonnell’s chain? I can only imagine it is internal PLP politics trying to force a ‘credibility’ that only means anything within the chattering classes. David Graeber suggests McDonnell may be ‘under siege again’.

      I think the Blairite wing has been given more than enough time to get used to the new direction of the party. There are no carrots left. Time for the sticks.

    14. Christer Kamb says:

      @Averagejoe;

      In MMT spending don´t need taxes per se, nor new government bonds. Savings is not transferred to government for spending. It is the opposite. MMT-spending means increased savings in the non-government sector.

      MMT doesn´t involve debt-creation by private banks(loans create deposits and thereby increased money-supply). Government spending according to MMT means the same amount of newly created money as money-supply AND bankreserves.

      Money-supply has to increase(investments and income) in an expanding economy and/or because of inflation.

      This is my understanding!

    15. CharlesJ says:

      Bill,
      I agree with everything you have said above about the UK Labour party, but I notice McDonnell is including “skills” (at least from yesterday) when he talks about borrowing for investment. If they are going down the route of balancing the current budget (day-to-day spending) then it gives them more wiggle room if they can include ‘human capital’ in there definition of investment. That could include all education and training from college upwards. Still, though, they are misleading the public as you say.

      Kind Regards

    16. Neil Wilson says:

      “And this irrespective of Brexit as any trade agreement still requires this (e.g. Norway,Switzerland etc).”

      No it doesn’t.

      Does the EU have free movement with Japan, Brazil or China? No. Therefore it won’t with the UK – which has an economy of similar size.

      The borders are the red-line in negotiations. They know that, and so do we.

    17. Neil Wilson says:

      “I notice McDonnell is including “skills” (at least from yesterday) when he talks about borrowing for investment. ”

      He can talk about it as much as he likes. The current budget is defined by the European System of Accounts and it *excludes* human capital development.

      You can do research and development and you can spend on weapon systems (so Trident would be included), but if you train teachers and doctors, then that is current expenditure.

      So you can guarantee that the Tories will be using the national account definition however much Wren-Lewis goes on about the ‘economist’ definition of investment – which is essentially whatever he thinks it should be this week since he seems to believe he should be in charge.

      The only reason to balance the current budget is that Keynes said it once. Nobody is actually asking the question – why?

    18. Neil Wilson says:

      “Hooray Published on My Birthday”

      You as well :)

    19. paul says:

      I think the Blairite wing has been given more than enough time to get used to the new direction of the party. There are no carrots left. Time for the sticks.

      They are dealing with people more ruthless than themselves, but who have no weapons but the (more than helpful) media.
      They can’t split as the founders of the SDP did because they are unloved lightweights whose oblivion would be inevitable.
      I have sympathy for them, but see no need to indulge Mcdonnell.
      If the corbyn movement wants to get anywhere it has to straighten out how and what they actually want to do, rather than trying second guess/tack around the prejudices they ascribe to the public.

    20. Neil Wilson says:

      “Its only if a private bank buys the bonds that new money will be created. ‘

      That’s not true.

      The problem is putting the cart before the horse. People end up with the money *first* and then swap it for a Gilt, which is just moving their assets from a bank to HM Treasury.

      Imagine the chain. You (or a pension fund) has money in a bank that came from prior public spending (e.g. you get a state pension, or you did some work for an NHS doctor). That bank then has reserves at the Bank of England which match that money in the bank.

      When you (or a pension fund) buys a Gilt, both the deposit and the offsetting reserves disappear from the bank to HM Treasury. You’ve swapped your asset at the bank for an asset at HM Treasury.

      When a bank buys a Gilt, you (or the pension fund) retain the deposit, but the bank swaps their reserves for higher yielding Gilts. The result is you have money in the bank, and the bank has a Gilt asset from HM Treasury to match that money.

      “Also my understanding is about 97% of the money supply is now debt”

      100% of the money supply is debt. All money is a form of debt – a liability of some other entity. That’s why it says “I promise to pay the bearer” on a £10 note.

      Anybody who says differently is push a line of propaganda for their own nefarious purposes. Banks are licensed operators of the state. They are, essentially, outsourcers working for the government. They work in the same way as the outsourcers that empty your bins.

    21. CharlesJ says:

      Happy Birthday, Bill and all,
      It seems quite a few of us have birthdays around the same time – mine was on the 4th.

    22. Franco says:

      Belated Happy Birthday Bill!

      Thank you for the post (and the blog in general).

      Just another reason to get out there and start spreading the word

    23. Keith Newman says:

      RE Canada. As James Shipper notes the new Liberal government is expected to run a $30 billion deficit. Of course they are being criticized by the usual conservative voices. An interestingly aspect though is that the big Canadian banks are part of the pro-deficit choir, calling for aggressive deficits in the 1.5% of GDP range. Traditionally the Liberal Party has been close to the big banks. The new finance minister is from the financial sector (investment house, not a bank) and is unapologetically leading the way.

    24. sam w says:

      Dear Bill
      Happy Birthday.
      Hope you get to play some music with your friends!
      :-)

      For anyone interested here is the Canada approach:
      http://www.thestar.com/news/canada/2015/12/10/bank-of-canadas-stephen-poloz-tells-trudeau-government-to-spend-walkom.html

      British Labor could easily make a case for years of cuts causing impending structural disaster therefore outline a 10 year plan involving high fiscal deficits to reduce unemployment and what not.

      If small children can understand a 3 sector balance equation why cant that be fruitful in the political sphere?
      *hint* everyone with kids get the MMT textbook :-)

    25. Some Guy says:

      Neil:The only reason to balance the current budget is that Keynes said it once.

      Where? I’ve been asking this question for years, but never any satisfactory answer. I don’t think he ever said it, or anything like it, without interpreting his statements in a strained and tendentious way.

    26. SANDRA CRAWFORD says:

      Thanks for this. I found the part about the New Keynesians particularly helpful after the lucid exposition of the purpose and efficacy of government spending as opposed to monetary policy.
      I started a mortgage and saw the decimation of British Industry in the early eighties under Thatcher. The high interest rates I believe was monetary policy. That along with cuts to public spending and privatisations.I think it did much damage by extracting incomes and profits.
      The opposite is true now with lower bounds, but the principles of loans on housing are so large that interest rates might just as well be high. They are still extracting too much of peoples incomes and are even worse, as pay is so much lower relatively. As banks do not lend much to industry any way, bank credit creation is having no effect on jobs, only on debt.
      Like Derek Henry above I should I say unlike him, I thought it was me that was in a terrible mess when reading Mainly Macro. But now I am beginning to see why it is difficult to follow, there is to much smoke and mirrors with fiscal rules and monetary policy.
      “if interest rates hit their lower bound following a recession, the focus of fiscal policy shifts from deficit targets to helping monetary policy support the economy. It reflects the knowledge we have gained since the global financial crisis.”
      He does not seem clear and does not explain things enough. Hopefully it is all wrong so I will not have to worry.

    27. Jeff says:

      They would probably have lost anyway – they will now be annihilated. It was pretty clear 2 weeks after the leadership election it was as you were.
      They’re going to ‘fight’ the battle on their enemies terms, using their pejorative language, their framing, their lies ?
      Good luck with that.

      It’s clear they don’t know what they’re doing. There is a groundswell of opinion out there that is tired of being screwed over by the political class, that is hungry for new ideas and thinking and now has nowhere to go (other than into the arms of darker political forces or more likely giving up hope altogether) – why on earth do they think they were elected in the first place ? Their youthful charisma?

      Economically it makes no sense, politically its suicide. Whether they like it or not they have a lot of baggage in their past political lives that would be enough to lose 50 elections, never mind 1. You might as well embrace your radicalism. The public see you that way, that will not change even if you cram the words ‘fiscal responsibility’ into every sentence you utter from now until the end of time.

      Madness

    28. Kevin Harding says:

      It is not only economic stupidity it is political stupidity!
      He is giving his opponents and the media a big stick.
      Cue all the how are you going to fund this ? Your numbers do not add up questions And comments.
      They will gratefully take that stick and beat him remorselessly.
      Of course if a miracle happens and labour wins the next election it will
      be on the back of a downturn and an even greater imperative for fiscal stimulus.

    29. Simonsky says:

      Neil: ““Also my understanding is about 97% of the money supply is now debt”

      100% of the money supply is debt. All money is a form of debt – a liability of some other entity. That’s why it says “I promise to pay the bearer” on a £10 note.”
      Neil-it’s no good just ‘blurting out’ this stuff without creating a ‘communicative bridge’ in the language framing-this is where MMTers often fail badly in my view. The 97% debt view is, as you know, Positive Money’s stance, who are not using the MMT taxonomy. So, if people are not to be caught up in a ‘Tower of Babel’ talking past each other there needs to be a transition stage between the linguistic usages. You can’t just ‘dump’ an alien Taxonomy onto someone without a transitional stage. I think Bill and Randy Wray get this wrong quite often and resort to a sort of disdainful demeanour which then leads people to think MMT is a ‘cult’.

      What you say is right, of course but the PM people are using the word ‘debt’ in a different way (money issuance by the Government to them =debt free) so the MMT Taxonomy is not there so a stale clash of monologue ensues with no gain.

    30. Neil Wilson says:

      “What you say is right, of course but the PM people are using the word ‘debt’ in a different way”

      Yep and ‘money’. They have redefined both those terms like the Austrians have ‘inflation’.

      The very definition of a cult.

      If you think there is a better way of communicating, then don’t just say there needs to be one. Do the work and come up with it.

      I’ll take any good ideas. I’m not a proud man.

    31. Averagejoe says:

      Simonsky
      I have to confess I get a bit lost in the MMT language, and I have read Postive Money’s suggested solution, although I’m not totally convinced. Personally I’m not bothered what the solution is as long as it works. However, on the issue of the money supply the cash is the 3%, because it is not issued as a debt. The Treasury actually received payment in return for the cash created, i.e. a credit.

      Regarding the other point above, I still stand by my view, that when a pension fund buys a gilt no new (debt) money is created, conversely if a bank buys it new money is created.

      Cheers
      AJ

    32. Neil Wilson says:

      “Where? I’ve been asking this question for years, but never any satisfactory answer. ”

      In a response to the 1945 National debt enquiry apparently.

      Memorandum by Keynes for the National Debt Enquiry – 21 June 1945 in The Collected Writings of JM Keynes, Volume XXVII (27), pp 406-407.

      I don’t have access to the original unfortunately.

      The quote is “It is important to emphasise that it is no part of the purpose of the Exchequer or the Public Capital Budget to facilitate deficit financing, as I understand the term. On the contrary, the purpose is to present a sharp distinction between the policy of collecting in taxes less that the current non-capital expenditure of the State as a means of stimulating consumption and the policy of the Treasury’s influencing public capital expenditure as a means of stimulating investment. There are times and occasions for each of these policies: but they are essentially different and each, to the extent that it it is applied, operates as an alternative to the other”

      But perhaps the quote from pp 323 is more useful to our cause:

      ‘Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action’.

      The problem you have, of course, is that Keynes was writing in the Smokestack era, after the destruction of the Second World War – when capital structures were in ruins – not the information era of the 21st century where finding something worth investing in is like looking for a needle in a haystack. I can’t imagine an 80% service economy was in his mind at the time.

      There are loads of references to this quote in books that then say things like “It must be concluded that there is no foundation for considering budget deficits as a positive part of employment policy”.

      What’s really interesting is the discussion about the positioning of expenditure above and below “the line” in the Exchequer accounts.

      Another writer notes that at the time: “in the best Gladstonian tradition … On the expenditure side, what matter was expenditure above the famous “line in the Exchequer accounts, dating from the Sinking Fund Act of 1875, broadly … distinguishing a revenue account from a capital account – but by no means unambiguously … Only an old Treasury hand could be expected to know the difference between this hybrid accounting framework .. therefore, the simple moral imperative of balancing the budget was in practice wrapped in the esoteric conventions of the public accounts’.

      Fiscal Policy in Economic and Monetary Union: Theory, Evidence and Institutions

    33. Ben Wolf says:

      Simonsky,

      The reserves banks exchange to get that 3% cash is a liability of the central bank and the cash itself is a liability of the Treasury.

    34. Neil Wilson says:

      Looks like that article by Kregel was very influential. It’s quoted regularly.

      (Kregel, J.A. (1985) ‘Budget Deficits, Stabilisation Policy and Liquidity Preference: Keynes’s Post-War Policy Proposals’, in F. Vicarelli (ed.) Keynes’s Relevance Today. London: Macmillan.)

    35. Neil Wilson says:

      “The Treasury actually received payment in return for the cash created, i.e. a credit.”

      It didn’t.

      Cash in the UK is created and distributed by the Bank of England. That’s why they have an ‘issue department’, which is balanced by a load of created assets of the Bank of England. Whatever income those assets earn (if any) is paid over in full to HM Treasury – as opposed to 50% of the banking department. But that’s just an accounting nicety between the parent (HM Treasury) and its subsidiary (Bank of England).

      “Regarding the other point above, I still stand by my view, that when a pension fund buys a gilt no new (debt) money is created, conversely if a bank buys it new money is created.”

      If you wish to maintain that view, then you need to create the balance sheets for all the entities involved and show why it matters.

      Then you’ll discover the truth – it’s just an intermediate form like bank reserves and there is no additional control function.

      In other words – it doesn’t matter a jot.

    36. Simonsky says:

      Neil-my response indicated that there is a better way of communicating-simply elaborate the different linguistic usages rather than ‘dumping’ the taxonomy on someone’s head-bridge the gap .

      For example:

      1) Pm says ‘debt free money’
      2) Identify that it means ‘issuance’ and not the way money functions
      3) So ‘debt free money’ doesn’t equate with ‘money is not a debt’
      4) MMT points out that ALL Gov’t spending is Sovereign money PM say only the 3% cash is
      5) Explain the language usage that is different otherwise you have a dilemma that Wittgenstein pointed out.

      I wasn’t implying that MMT was a cult! I was just outlining that ‘Taxonomy’ bullying won’t help connect people who wan’t positive change.

      What’s hard about that?

    37. Christer Kamb says:

      3% cash are coins and notes in the cb balance-sheet(debt/liability) and represents part of the monetary base.
      Cb must expand the monetary base in an expanding economy(incl inflation). But at a much lower pace compared to money-supply(M1-M3) coming from the banks(loan creates deposits).

      When banks creates a loan and sending the money to another bank there have to be a settlement between banks(clearing). Banks settle in the interbank-market(borrowing/lending their needs) and the net sum for the day(residual) is i.e borrowed from the cb(net change in reserves). When government spends newly created money(MMT)they can do that without issuing debt. In this case the increase in net bankdeposits(spending) are not matched by bankloans which is why the whole sum of deposits becomes bankreserves. If the Treasury issue debt then the bankreserves decrease.

      When cb buy i.e government debt from the public money-supply increase(i reality a money-change because debt is money with interest). But not when cb purchase debt owned by banks. Then only bankreserves increase(bankdeposits at the cb).

    38. Simonsky says:

      … the PM people are using the word ‘debt’ in a different way (money issuance by the Government to them =debt free)

      This is what I could never get about the PM people. All money is of course debt, by rules of accounting. So is the solution with them to force them to state their arguments in an accounting-compatible format (which of course they could never do)?

    39. MrShigemitsu says:

      “I’ll take any good ideas. I’m not a proud man.”

      Neil, as you know I’m a big fan of yours, but sometimes you use – very inventive, often amusing, and sometimes seemingly, and teasingly, counter factual – analogies and descriptions of systems to great dramatic effect, but which require a high degree of MMT and banking knowledge in order to untangle and process.

      Personally, I enjoy the challenge, and that lightbulb moment when it makes sense, but then I’m making a deliberate effort to educate myself on the subject, and absolutely open to un-learning received economic opinion.

      I can sense your frustration when dealing with the obtuse comments of some “civilians’, especially on CiF, and I admire your tenacity and stamina as you continue to comment there.

      But for the unenlightened reader, especially one who is resistant, if not actually hostile, to learning about MMT,
      it would be quite easy for much of what you say to go right over their heads, and as you always appear to be absolutely confident in your opinions, which is attractive, nonetheless I feel it can be alienating to readers who may not be too bright in the first place, or who aren’t quite ready to take the “red pill” without a bit more gentle cajoling.

      There may be some occasions when a gentler, more explanatory tone would serve, but only as a supplement to your usual quick-fire repartee.

      Please accept this in good part, I remain very grateful to you, and of course our host, for opening my eyes to this entire field of thought, so thanks to you both.

    40. averagejoe says:

      Benedict@Large says:
      Tuesday, March 15, 2016 at 21:35

      This is what I could never get about the PM people. All money is of course debt, by rules of accounting. So is the solution with them to force them to state their arguments in an accounting-compatible format (which of course they could never do)?
      ……
      Some interesting comments. I must confess that I find PM explanation far easier to comprehend than MMT. Perhaps that’s a failing on my part, but then again, I am no accountant. As I said referred toabove. I’m not bothered what solution is used, as long as it provides something more workable, than the neoliberal nonsense that is failing so badly.

    41. Neil Wilson says:

      “Some interesting comments. I must confess that I find PM explanation far easier to comprehend than MMT.”

      It’s not an explanation. It’s a lie.

      Like Trump’s explanation of Mexicans and Muslims. Or the dianetics statements that we only use 10% of our brain -designed to pull people into scientology.

      They are trying to persuade you that there is a difference when none actually exists. They do this to the point where they have to redefine terms to fit their narratives.

      Banks are actually licensed outsourcers working under contract from the state – just like your local bin men.

      Interest is simply the wages of bankers, just as profit is the wages of capitalists. You may argue that bankers get paid too much, but you can’t argue that the job of a banker – deciding which projects are worth funding and which are not – is redundant. Somebody still has to be paid to do that job under any system.

    42. Neil Wilson says:

      “There may be some occasions when a gentler, more explanatory tone would serve, but only as a supplement to your usual quick-fire repartee.

      There’s a team of us out there now coming in with several different explanations to move people where we can.

      Generally though on newspaper comment lines it’s more like a set of football supporters who have made up their mind than people enquiring after something new.

      It’s rare to find somebody there who just wants to understand.

    43. Neil Wilson says:

      “Pm says ‘debt free money’”

      PM say ‘debt free money’, when they actually mean interest free money.

      Banks can of course issue interest free money. They just need the state to pay the bankers to do their job of deciding what projects should be funded and what projects should not.

      That being the job allocated to banks in society.

      If you think they aren’t doing a good job in that department then just tell them what they can and can’t provide money for. Which then frees up space for politicians to provide more money directly.

      No need for an elaborate charade that adds nothing but confusion to the discussion.

    44. Kevin Harding says:

      it is a bit strange to still see government money is debt .They are not going
      to give you any silver for the IOUs they give you.Debt is understood as a burden
      to the debtor in wha sense is government spending a burden for the central bank/treasury/
      sovereign power?

    45. Simonsky says:

      “PM say ‘debt free money’, when they actually mean interest free money.”

      Exactly – so why can’t a mode of communication operate like that – define the terms rather than imposing the taxonomy without a transition? It’ll help everyone.

      You see it’s no good saying: ‘you’re wrong’ or ‘it’s a lie’ (‘lie’ usually has intentionality)when what you mean is that it’s a wrongly defined term or just dump the taxonomy on them as if the light bulb will go on like that. You’ve got to be a teacher.

      It’s no good saying ‘people don’t want to understand’ either. If people are not understanding then it usually means the explanations are bad and we have to work harder getting it across.

      It’s really important to educate people but it has to be done with awareness of how tricky abstract thought around money is to most of us. Some people are naturally better at it that others and are really good at combinatoric thinking and grasp whole ‘gestalts’ with relative ease -but many don’t.

      I used to teach music and it would have been unreasonable for me to dump the whole Taxonomy of the Western Tonal system on to people and expect them to grasp it. As a teacher you have to constantly find different ways of getting it across to a learner.

      MMT challenges people because it offers a different ‘gestalt’ involving a shift in perception.

      Neil -you continue to use derogatory terms like ‘lie’/’elaborate charade’ when people like PM are NOT intending to do that ( even if that’s the effect) -you are not going to get a sympathetic hearing if you talk to people like that! I’m sure you’re a very bright bloke who can understand complex networks of relationships with great speed but often, people who have these skills don’t realise that their cognitive skills don’t replicate themselves in everyone-it’s a big mistake to assume this-so try ‘minding the gap’ a bit and creating bridges before opting for the derisory knock-down blow and maybe Randy Wray can stop saying ‘dupe a dope’ when talking to people who don’t get the picture within nano seconds-it doesn’t help and we need things that help.

    46. Neil Wilson says:

      “you are not going to get a sympathetic hearing if you talk to people like that!”

      That rather assumes I’m interested in a sympathetic hearing from them.

      The approach taken by PM from the beginning has been aggressive marketing and propaganda. It is very naive to think that the line taken isn’t intentional. And since their intent is to place monetary control in the hands of unelected individuals, they have to be taken to be as dangerous to democracy as the European Commission and other technocrats.

      This is not a game by a few deluded individuals here. This is a serious attempt to implement a ruling technocracy in the UK. They are potentially as dangerous as the Tories and must be stopped.

      Labour’s pussyfooting around trying to avoid ever upsetting anybody hasn’t stopped the Tories or resulted in a coherent vision. So it’s probably time to take a different approach.

      “It’s no good saying ‘people don’t want to understand’ either.”

      They generally don’t on newspaper comment boards. You can spot the ones that do a mile away, and you can take a different approach with them. Which I have done, numerous times. Taking the time. Identifying the thought pattern and trying to construct an analogy that can hook into that. Coming at it gently from different angles.

      But mostly it is yah-boo-sucks on newspaper comments and you play it for entertainment to see how many times around the track you can get them to go before they give up. Right wing libertarians are particularly entertaining if you’re in the mood.

      You can’t save everybody. You have to identify those you can, and help them, moving quickly on from those who aren’t really engaged at this point. I have limited time to deploy and must choose targets wisely.

      Newspaper comment threads are largely mined out now I think. Those who are on-side are on-side. Time to move on to a new seam.

    47. Schofield says:

      The task is clear it now has to be made a de rigor understanding amongst the intelligent left that you can’t have a truly functional democracy without understanding the core purpose of money and how it’s created.

    48. Eddie Baker says:

      Kevin Harding:

      “Debt is understood as a burden to the debtor in wha sense is government spending a burden for the central bank/treasury/ sovereign power?”

      Burden or promise?

      They promise to accept it back in payment of taxes.

      That may not sound like much of a burden, but then if I owe you £10 and I have £10 million sitting in the bank that £10 debt isn’t much of a burden to me. It’s still a debt though; it’s still a promise.

    49. SANDRA CRAWFORD says:

      Technically, all money is a debt. But as an individual in the private sector, I could view government money as debt free, and bank money as a debt. Especially as I grew up in the eighties and got a grant for my education and a grant for loft insulation. Many industries got subsidies from the government to send there young workers to day release schemes etc. These were gifts. The health service is a gift, a wonderful one, in the UK. (Or was).
      I would see bank money as a debt, as my children have student loans, and if they want house improvements or training, they have to get a loan. The sectorial balances show government money as an asset and bank money as a debt to the private sector. So I think it depends how you express it, we own the government debt, but it is an asset to us. I do not know what PM mean when they say debt free money however. I have been amongst them and found their explanation of bank money and the causes of the GFC useful, but giving private banks 100% reserves does not appeal. I think they are a mixture of the well meaning and the neoliberal.

    50. MrShigemitsu says:

      “Newspaper comment threads are largely mined out now I think. Those who are on-side are on-side. Time to move on to a new seam.”

      Neil, please don’t give up commenting on CiF, etc.
      Despite the ubiquitous and multitudinous paid and interned trolls, there is always a new generation of readers emerging, and, without wanting to appear sycophantic, I think your contributions are always refreshing, concise, informative and assertive, and it would be a tremendous loss to the cause, were you to abstain.

    51. Kevin Hardin says:

      Eddie Baker .
      I understand the history of money as debt ,as an IOU.
      I am suggesting it always come down to power.
      From the perspective of the private sector government promises are obligations to them
      but from the Perspective of the government money is an expression of power
      just as armies and jails are.Monetary soveignity means government’s spending
      transcends debt.
      horizontal monetary transactions between the private sector are always exchanges of debt .
      But vertical transactions within a pure fiat context seem to undermine this historical meaning.
      But a rose is a rose by any other name.My response to positive money arguments is that we
      have positive money already we call it a government sector deficit.

    52. Brendanm says:

      ‘money is debt’

      This seems unlikely from an ontological viewpoint.

      If money ‘is’ debt I should feel it acceptable (if awkward) replacing occurrences of the word money with the word debt.

      However ‘I have saved up enough debt to buy a new computer’ seems to have a quite distinct meaning from ‘I have saved up enough money to buy a new computer’.

      Perhaps all that is meant is that one person’s fiscal asset is another’s fiscal liability? However, as Kevin says this seems better fitted to a gold standard type of money system as far as understanding cash goes. The best I can see is that cash represents a potential tax liability or a capability to pay tax for the entire society. I can sit on cash forever, I will never in practise have to pay tax with that money.

      Even if I have incurred a debt in attaining money, the money is not the debt. If I buy a house with that money, I retain the debt, the vendor now has the money clear of any debt incurred in its creation.

      Saying money is debt confuses the lay person and it collapses many of important relationships, such as the sectoral balances.

      Money is the medium of exchange.
      Money will be accepted as final payment for purchases, debts and fiscal obligations, including tax obligations, within some defined participating community.

      It might be fair to say that the key insight of the fiat currency system is that the issuer of money does not need to back it up with some promise of repayment, rather all that is required is that it be accepted as the medium of exchange.

    53. Kevin Hardin says:

      very good points Brendam!

    54. Christer Kamb says:

      “Money is debt”. Yes it is.

      The sovereign state is the sole issuer of the currency, debt. On the 1929 50-dollar bill you can read the following: “Will pay the bearer on demand” which originally mean you use the bill to pay your taxes.

      In the old days of business-life you used privately issued bills or promissory notes(debt) to buy goods i.e. These bills were resold like bonds between businessmen. Government bonds is money and debt.

    55. James says:

      Thank you to the above commenters who have made the points better than I could’ve done. I’m very grateful.

      Dear Neil,

      “Generally though on newspaper comment lines it’s more like a set of football supporters who have made up their mind than people enquiring after something new.

      It’s rare to find somebody there who just wants to understand.”

      This is of course absolutely true, but the readers far outweigh the commenters, and it is not the commenters who are seeking understanding of the issues/topics/subjects, it is the bulk of the readers.

      I’ve seen exactly the same problem occurring in various fields: experts, used to talking on websites/forums such as this one, develop an aggressive, dismissive, superior tone and a rigid set of justifications that go along with it, giving themselves free reign to be abusive to whomever they choose all in the name of fighting the good fight. Meanwhile, the majority of the public can’t turn to the experts anymore because they’ve self-justified their way into being a major turn-off. Thus the battle is lost, not won.

      It’s desperately sad.

      So I say, if you wish to communicate how you wish to communicate, that is your right and prerogative, but please do recommend people who communicates the same facts but in a way in which the general public will warm to instead of being repelled by.

      Make no mistake, the public are not impressed by rudeness, gladiatorial or bear-pit-style writing, no matter how full of truth and rightness they are.

    56. Bill Haymes says:

      Its surely Varoufakis and Mason who are pulling McDonnells strings and have urged him into this disaster …. the Tories will never let them forget this even if he and Corbyn see the light….
      I will be resigning shortly with a heavy heart

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