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Why don’t mainstream economists get modern money if it is right?

Today, I am in Sydney giving a talk at the ACTU Jobs Summit and pretty short of time. I was also motivated by the Temporary Leader of the Opposition who announced on his Twitter site yesterday that his dog, Mellie had just updated her Blog. Yes Malcolm’s dogs blog keeps us up to date with all their goings on including watching the Tour de France. So if he can do it so can I except I don’t like pets. So I thought I would introduce a Guest Blogger spot so that whenever someone I know, who doesn’t want to create their own infrastructure has something interesting to say, they will be able to say it. So today’s guest blogger is Victor Quirk. This is what he has to say. I’ll be back tomorrow.

If CofFEE’s economics is right, why isn’t embraced by mainstream economists?

Victor Quirk

There is always a nagging doubt about the CofFEE/Modern Money arguments that debunk the supposed constraints governments say they have in relation to their spending which preclude, among other things, the use of public sector employment to eliminate unemployment. Its logic begs the question ‘if it is as comprehensible and as coherent as it appears, and if it implies solutions to dire social problems that public authorities claim they would fix if they could, why is it that economists in positions of authority remain so unconvinced of the efficacy of this analysis?’ There is a lingering suspicion that more competent authorities know some step in the argument that is being omitted by advocates of the Job Guarantee that makes nonsense of what they claim to be possible using the non-convertible fiat currency most modern sovereign states currently use.

As a sociologist/political science post-grad working and studying at CofFEE since 2002, I’ve had the chance to regularly explore this issue with Bill, Randy Wray, Warren Mosler and others over the years, and I’ve always been met with what I can best describe as a professional academic position in which they seem most reluctant to offer more than the suggestion that the mainstream economists keep missing the point or ‘just don’t get it’. Bill will usually argue that mainstream economists, and even the bulk of economists who consider themselves non-mainstream and progressive, have unquestioningly adopted certain foundational assumptions that were instilled in them as novice economists, that have constrained their analytic perspective ever since.

Randy Wray gave a very interesting response to the question when he was visiting Newcastle a few years ago, when I asked him why it was that I (a non-economist) could get the point he and Bill were making, could appreciate the empirical evidence they were presenting, yet many of their economist colleagues could not. Bill, who over-heard the question, leapt on the opportunity to be flippant and suggested ‘oh that’s because you’re such a genius Victor’, which wasn’t helpful, despite affording our William great amusement. Randy (more constructively) suggested that a great deal of macroeconomics is about explaining observable relationships between economic phenomenon. While they might agree that the evidence is that ‘X and Y increase together’ or ‘X increases and Y decreases’, often the direction of causation boils down to the narrative one uses to explain economic processes, so where Bill and Randy argue X causes Y, the others argue Y causes X. A classic example is where the conventional view is that deposits create loans, while the CofFEE gang argue (persuasively in my view) that loans create deposits.

A sociologist would probably suggest that to be accepted as a competent economist by one’s peers, one would need to demonstrate comprehensive fluency in the conventional narratives economists use to explain the world, hence the reluctance to entertain major revisions to the narratives they embrace. It is probably not a conscious process, it is just that there are too few rewards for deviance to encourage deviation from the norm. This would, I think, largely conform to Bill’s stated view.

It needs also to be acknowledged that macroeconomics has many counter-intuitive notions until the process is adequately explained. The fact that the Commonwealth of Australia (to use it as an example) does not have the same financial constraints that all other economic actors share (firms, households, individuals, community agencies, state & Local governments) has a slightly surreal quality to it, that is not fully dispelled by the explanations. It reminds me of how counter-intuitive the notion is that if you could keep walking east in a straight line from a given point you would eventually come back to the same point from the west. I fully understand that the world is actually a globe, as images from space reveal, but that is not how we picture it in order to navigate our way around the place everyday – we operate on the basis it is flat. The curvature of the Earth becomes more relevant as you shift from the micro to the macro. But to the extent that people believed that it was flat and feared falling off its edge, it may as well have been true, because the belief kept them from venturing far just as effectively. It was an imagined constraint that seemed very plausible given the evidence of everyday experience and conventional belief at the time. In the case of the fiscal constraint, the assumptions underpinning an understanding of your household finances differ from those underpinning Commonwealth finances in important respects: the Commonwealth can legally buy whatever it wants by issuing new money while if a household does it and gets caught they are charged with forgery. The Commonwealth therefore doesn’t have to earn, steal, borrow or tax before it can spend – as everyone else does.

Its spending is still constrained, but in other ways that are unique to the situation it is in as the issuer of the sovereign currency. For example, if it continues to spend past the point where the nation’s productive resources are fully utilised, it will be competing for various factors of production, bidding up their price and transmitting inflation throughout the economy. These sorts of ‘real economy’ constraints have shaped the design of the Job Guarantee proposal, which (again, for example) triggers a wage and a bit more of public expenditure when a person is unemployed, and stops when they get a job in the private or mainstream public sector. The point is that because these are not the same as the spending constraints faced by all other economic actors, a sovereign government with a monetary system like the one Australia and most other modern nations have can mobilise unutilised productive capacity (such as unemployed labour) and thereby organise their people to provide a higher standard of living for themselves.

While it is undoubted that the bulk of working economists and policy advisors accept the implied fiscal constraints of conventional macroeconomic theory in good faith, and seek the best policies they can within those constraints, there is plenty of evidence of more malevolent intent in certain quarters, where certain narratives have been manufactured and marketed to achieve certain strategic objectives, the prime example relating to the preservation of unemployment. Several of my working papers on the CofFEE website report instances where unemployment has been deliberately induced or preserved in order to strengthen the position of employers vis a vis workers. There are various instances on the public record where full employment has been criticised as undesirable because of the bargaining power it confers on workers, and instances of well resourced campaigns either to prevent its establishment (eg., Menzies’ opposition to it during the war) or for its abandonment in the 1970s. The myth that governments are fiscally constrained is most energetically preserved by the more self-conscious ruling-class-warriors of academia, media, government and business, providing them with a ‘fact’ that preserves poverty and unemployment without needing to state the desirability of this objective, which would inevitably produce public censure and electoral backlash.

The whole tenet of the economic education campaign rolled out in the USA and Australia in the 1970’s and 1980’s (documented by Alex Carey and others) was to inculcate the teaching of what is now considered ‘mainstream’ economics, with its advocacy of ‘markets’ over ‘governments’, and we know the vast amounts of corporate funding that were invested in that project. Why would they do this? Unemployment weakens the bargaining power of labour, creating a cheap, compliant and willing labour force – a phenomenon understood by British employers since the plague produced full employment in 1349 and labour shortages drove up the price of labour.

So I believe that, in addition to those who sincerely adhere to a conventional wisdom, there are some with a vested interest in the marketing of the belief that we cannot afford full employment. Considering the trend in labour market policy these past 35 years, adherence to the notion of the state being fiscally constrained from establishing and maintaining full employment is how this situation has been maintained without an electoral backlash.

So among the think-tankers, corporate economic spokespeople, mainstream academic economists, mainstream economic journalists, who substantially ignore the challenge Bill and his international colleagues are posing to their understanding of macroeconomics, I suspect there are a mixture of people who fit into one or more of these categories:

  • People without the intellectual honesty to accept the evidence and acknowledge that it contradicts what they have long held to be true.
  • People who are personally very sympathetic to, and interested in, the alternate paradigm but who cannot see how they could continue to operate in their present role were they to openly adopt it in their work.
  • People with an interest in preserving poverty and unemployment and in the marketing of the propaganda that sustains it.
  • People who have not had the alternative paradigm explained to them in such a way as they could reasonably be expected to understand it.
  • People who don’t care, who are not interested, and don’t want to know.
  • People who are taking these ideas on board and using them and finding they explain more than the conventional economics offers.

Working within the paradigm of (I’m never sure what to call it) ‘CofFEE’s economic perspective’ (?), requires a constant effort to first explain the underpinning assumptions of the work, which adherents of the conventional mindset are never expected to do, before discussing the actual research that is engaging our minds at the time. This, of course, becomes more frustrating the more excited we are about whatever it is we happen to be researching. This is the price we pay for not being mainstream and conventional. The appropriate response to this situation, certainly the only one I can see for myself to adopt at any rate, is to keep working on clear, concise, explanations and understandings of the ideas and what they imply in terms of better public policy, and exercise patience and self discipline when met by the usual initial reactions. One has to admire the stamina of the leading advocates of this school of thought like Bill and Warren and Randy given how long they have done this.

The upside, of course, is that whereas for years we have been told by the managerialists, monetarists, economic rationalists, and all the rest of them that have dominated public debate in this country and others for 35 years that there are no viable alternatives to policies that make us poorer, unhealthier and unhappier, we now see that a very much richer, more humane, more decent society has always been possible. So many otherwise intractable social and environmental problems are begging for the application of extensive public sector intervention to resolve, and this economics says it is all do-able. The weight of a sounder, empirically grounded, robust economics is now on the side of social progress. Until it becomes a conventional view, the question of why it is not the conventional view will continue to be raised in objection to it. Frustrating though this is, I think there are rational reasons as to why it will remain unconventional wisdom for some time to come, and we should simply deal with it by getting better at explaining it.

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    This Post Has 28 Comments
    1. Victor

      Nice concise blog. It sums up what has been my experience. you are right. all these ideas will probably be unconventional for some time to come.

      Vinodh

    2. “Working within the paradigm of (I’m never sure what to call it) ‘CofFEE’s economic perspective’ (?)”

      … “the modern monetary economics”, as I’ve seen Bill Mitchell put it recently, is fine.

      (BTW, shocking news that Monsieur Mitchell would be flippant.)

      One thing about the modern monetary economics is that when we have internalized monetary institutions, we feel AS IF money is something that is valuable in its own right, rather than something that gains its value from the system of rules of behavior that we operate within, and the most egregious of the false theories of money gain aid and comfort from that false intuition.

    3. Well Put Victor,

      I suspect though, as sad as it may be that there is another group of people who actually take pride in being better then others, in a melevolent way and or simply deep down want others to suffer. It strikes me as interesting and sad that when I have put the idea of a job for everyone that wants one to people, one of their first reactions is, Why should they just be given work? There also seems to be an ingrained kind of masochism within much of society. The idea that we need to do it tough, tighten our belts, and that a solution which helps without pain, must be false.

    4. Here you see. Another reputed economist against the stimulus or any more spending
      http://economix.blogs.nytimes.com/2009/07/15/forget-a-second-stimulus-stop-the-first-one/

      Here Casey Mulligan says

      “But fiscal policy is not merely a dial that can be turned to any desired amount. If it were just a dial, then those of us who thought the stimulus bill would have a tiny effect would be supporting an even larger stimulus than the Obama administration proposed! An impotent fiscal policy dial would have to be turned a lot to have a given effect.

      This faulty logic comes from ignoring the costs of fiscal stimulus, and failing to ask whether the costs are commensurate with even the most optimistic estimate of the benefits.”

      Either they are so dogmatic that they dont want to see it or they genuinely have trouble unlearning what they learnt back in school

    5. The problem with the current system is corruption / collusion between the machinery of government and big business. I don’t see that changing anytime soon regardless of whether we have a Jobs Guarentee or not.

      What Coffee is proposing is effectively more of the same through the Jobs Guarentee.

    6. My thanks to the respondents of the blog.

      James: I think this is a very important observation. I seem to recall George Orwell noting that Hitler understood this willingness of people to accept a promise of hardship and struggle before a promise of a happier, kinder, gentler life.

      It touches also on a propensity the political psychologists describe in ‘System justification theory’, where poor and impoverished people think of the social injustices to which they and others are subject as ‘right and proper’, because it is more harrowing for them to accept that the system that can crush them at any moment is blindly arbitrary in the dispensing of suffering. They tell themselves that the system is right to make people beg for work because they need to believe the system is good, rational and just because otherwise, being as vulnerable as they are, they are in deep trouble.

      A reasonable overview is available in this paper:

      http://www.psych.nyu.edu/jost/Jost,%20Banaji,%20&%20Nosek%20(2004)%20A%20Decade%20of%20System%20Justificati.pdf

      Wikipedia has a useful primer on it also.

      Vinodh: Economists of the Chicago variety are a very good example of the ‘class warriors’.

      Alan: Hi – I’ve known thousands of people who would have loved a job under the Job Guarantee if they could have had one. I remember the long term unemployed and disabled jobseekers who scored work under C.E.P. in the 1980’s whose lives were absolutely transformed by the experience. A Job Guarantee will not stop the money gatherers from pursuing their industrialised farming of humanity, but I believe it will limit the damage they do to us in the process.

      Bruce: Yes its shocking – You have no idea what I have to put up with associating with these CofFEE ratbags.

    7. @jonathan davies

      there has to be some pain, that pain has to be borne by a private sector which has got high on cheap credit, we’ve had a lot of malinvestment and there’s occuring an inevitable deleveraging from this excessive build up of private debt.

      without pain how do you get a downside risk to speculative activity ? IF you don’t have a downside risk to something, if we dont’ worry about affordability then the psychology will not be one of tightening our belts…we’ll go out and borrow as much as we want and bid up the prices of assets. irrespective of whether we are in a recession or not in recession, guess that’s a fundamental flaw in an economy that needs to continue to expand, irrespective of natural resouce limits and private debt buildup.

      People talk more about the policy response failings of the 30’s which caused a lot of pain, while not focusing on the conditions that led to the crisis, the conditions leading up to the crisis were the ideal scenario for some. Lot’s of spending, lot’s of debt buildup and malinvestment. They’d like nothing more than to return us to that via govt. intervention the stepping stone in the meantime.

    8. Dear Victor,

      Your assumptions that the Government is not constraint in the amount of deficit it can run is completely false.
      Yes, you could say they can always print more money to pay back the debt, but, the value of money when it is a FIAT currency is based on “faith” from the public that the Government will never do precisely what you propose, monetize the debt.
      If they start doing it, and enough people notice it, then all of a sudden the FIAT currency loses ALL its value and it is cheaper to use it as toilet paper.
      See Zimbawe now and Germany Weymar republic in the 1920’s with their Hyperinflations of millions %.
      USA being a reserve currency can have a bigger deficit without this problem but also this has a limit. Do you remember the Russian and the Chinese telling not so long ago that they want a new reserve currency?

      And you could also see two examples where the governments are constrained and can not borrow for ever incrising amounts of money, one is California, the other is each of the countries in the European Union that have the Euro as currency.

      If you have the Euro as currency and you are for example Portugal or Ireland, then you can not print more Euros (Germany would not let you do that) and there is a limit to the amount of deficit you can have.

      Anyhow, countries can also go bankrupt, there are many examples in history, you could look at Argentina for example and even the first big bankrupcies like Spain in the XVII and XVIII centuries.

      If you are interested we can also discuss about the thruth in the Maths used in Mainstream economy. I do not see any truth in them, I mean they are valid only for a constrained area around that were they were calculated, meaning they are very fragile and if something unusual happens they lose all their validity. If not, why this very low interest rates that we have are not proping up the economy as this maths assume they would?
      And mainstream economist lack a connection between micro and macro, this looks like physics where there is no complete theory yet to connect Quantum physics with General Relativity. But that does not mean that there is not one real connection.

      Best Regards

    9. Kokoliso said: Your assumptions that the Government is not constraint in the amount of deficit it can run is completely false

      Thanks for your thoughts, though it is important to note that in the blog I said:

      “Its spending is still constrained, but in other ways that are unique to the situation it is in as the issuer of the sovereign currency. For example, if it continues to spend past the point where the nation’s productive resources are fully utilised, it will be competing for various factors of production, bidding up their price and transmitting inflation throughout the economy. These sorts of ‘real economy’ constraints have shaped the design of the Job Guarantee proposal”

      The value of a fiat currency is not purely a matter of confidence, there is an element of coerced compliance involved. The ultimate driver of demand for the fiat currency is taxation. Because the Australian government, for example, only accepts Australian dollars for the payment of taxation, people must obtain Australian dollars in order to discharge their liability to the state. This underpins the more generalised demand for the currency whereby we all expect to use it to buy stuff in Australia. This is a central proposition of the ‘modern money’ proponents.

      The question of an expansionary use of fiat currency needs to be understood also in the context of what the money is to be used for – a specific policy initiative we call the Job Guarantee. The job guarantee is an inflation control strategy that uses minimum wage public sector employment rather than unemployment as the expanding and contracting buffer to the private sector as it moves through the business cycle and structural adjustments

      Confidence in a currency may erode if there were a sharply rising inflation, but an economy in which a large proportion of its productive potential is laying idle, eg. underutilised labour, for want of effective demand, has some distance to go in mobilising these resources before this happens. Inflation occurs when there are rival bids for something, driving up its price. If there were already rival bids for the labour we are proposing to employ under a job guarantee, there would be no unemployed for us to be having this discussion about. It is a crucial element of its design, that when a private sector or mainstream public sector employer bids away the Job Guarantee worker, the Job Guarantee makes no counter bid.

      Another key counter-inflationary element is that the Job Guarantee raises the productivity of the workforce where unemployment causes it to deteriorate. The Job Guarantee is designed to raise the speed limits of the economy – through modernising infrastructure, facilitating skills formation, and removing frictional barriers to private sector employment arising from the coercive methods used to manage the deteriorating pool of unemployed workers. .

      And, as I mentioned in the blog, there are constraints on currency issuance, they are just not the same constraints as applying to economic agents who are not the issuer of a sovereign currency. You need to appreciate the context here – that the recurring argument of opponents of the ‘Right to Work’ – a proposition that goes back to the 19th century that the state should act as an employer of last resort to prevent chronic unemployment – was that if you tax more in order to provide public employment, the burden of the taxation will cause more unemployment than you cure. The implication here is that the taxation would have to precede the expenditure. The realities of a fiat currency dispel this argument, in that the expenditure precedes the taxation.

      I have less patience with critiquing the supposed economic justifications for preserving a pool of unemployed than my economist colleagues, I have also to admit, since I’ve spent 6 years researching instances where unemployment has been deliberately induced, or the elimination of unemployment fought tooth and nail by business interests, because unemployment determines the balance of power in the labour market. That full employment (2% UE with negligible under employment) was maintained in Australia from 1944-1974 proves it is possible. The fact that industrialists such as Sir Colin Syme, Chairman of BHP, actively campaigned for the abandonment of full employment in the early 1970s, in line with an OECD program to restore unemployment as a hedge against profit squeeze, highlights to me that it is less to do with mathematics and more to do with politics.

      Tricky: If you are suggesting that some sort of aversive therapy is needed to stop corporate fraud and reckless speculation, you are probably right, but this would be more effective if directed at those who engage in such behavior, not their innocent victims who did not engage in it. I support a very specific mechanism for the elimination of unemployment that does not involve bailing out fraudulent financial institutions and speculators.

      Considering the magnitude of the stimulus packages around the world it seems ridiculous now that we were told that spending 8 billion per year to eliminate unemployment in Australia was too expensive. In the 1930s unemployed Australians were told there was no money to provide them with public works jobs, yet as soon as the rich were threatened by immanent invasion, the money was found to employ everyone in war production and defence within months.

      Many thanks for your thoughts, and please peruse the working papers on the CofFEE website for the specifics on the Modern Money and Job Guarantee proposals and their empirical support.

    10. Kokoliso,

      Welcome to the blog! I haven’t seen you making a comment before and reading your comment above, I am assuming that you are new here. This blog is based on the Modern Monetary Theory and hence lot of things may sound strange to you. However I can assure you that each sentence in this blog is written with Logic (note the capital L in Logic). Repeat – you will not find a single illogical statement in this blog.

      Firstly, I would recommend you go to Complete Billy Blog on one page – http://bilbo.economicoutlook.net/blog/?page_id=1667. You can start with “Money multiplier and other myths”, “Gold standard and fixed exchange rates – myths that still prevail”, “Deficit Spending 101”, “Fiscal Sustainability 101”.

      Now to your points (in random order)

      1. Bill has been mentioning over and over again in this blog that low interest rates do not help.

      2. Hyperinflation happened in countries with fixed exchange rates and in countries where the government acted irresponsibly. The fact that government is not constrained doesn’t mean that it can spend endlessly and neither is this blog saying that.

      3. Quantum Physics and General Relativity really have nothing to do with Economics. I understand why you brought that out (I know these subjects well!). A complete theory which has the psychology of each consumer, each firm and each bank in a country is clearly a difficult task and hence we have to study such stuff as Macro. It however does not mean we abandon studying Economics.

    11. ;-)
      Well, I really do not know your theories yet, I will read this Billy Blog.

      But in the meantime, you must know that there really IS a money creation when the fractionary reserve bank lends money.
      So, if the financial system works with fractionary reserves, say a 10% of the deposits and they can lend the other 90% than for each Dollar someone deposits in one bank, another 9 are created out of thin air. Because each new loan brings a new deposit in that bank or in another that brings new money out of thin air.

      So this is real inflation, and leads to the bubbles such as the one we have suffered until last year.

      If someone default on his credit, each unpaid dollar destroys 8 dollars that were created out of thin air.

      When the bubble breaks, there are a lot of defaults, and lots of money dissapear, creating deflation…. but here come the central banks and governments creating new real money and deficit to expand the money and do not let it deflate….

      Well this is a very fragile equilibrium that can really lead to hyperinflation or if we are lucky just high inflation. If the taxes should be paid in this money or not does not matter in the end, as if you for example own a ton of silver, and the taxes should be paid in inflating money, you will sell just the exact amount of silver you need to pay the taxes each time you need to do it, and you would not want to have any surplus money that is losing value by the hour.

      About fixed exchange rates, allways when there is this kind of problem a Black Market appears, to mantain a fixed exchange rate was the MAIN cause for Argentina DEFAULT in 2002. The Fiat currencies must flotate or they would ruin the state trying to fix the exchange rate. Only China, thanks to its buying USA debt has been able to mantain its Yuan so low, but it can not go on forever.

      What leads you to think that the government will act responsibly ;-) politicians usually act only based on two things, their reelection and their own wellfare if acting responsibly goes against that they will act irresponsibly. I think Ben Bernanke is acting very irresponsibly and Obama is doing nothing to stop him the FED created the Bubble by keeping low interest rates for so long.

      Also you can see how Mr.Governator is doing California, and how the continous use of referendums is leading that state to Default, not letting the taxes to be rised because 2/3 of the state parliament should vote for the tax increase for it to be legal.

      About the Unemployment rate having to do with the government spending and all that I will need more time to read your comment, and digest it, maybe later I will tell you what I think. But I see government employees as a market ineficiency, wherever you find one of those, he is employing more resources to do less than a private industry employee doing the same work.

      One question, I think Australia has a much more liberal economy than those in the European Union, am I right? I do not really know so much about Australia. What is the percentage of civil workers there? I live in Spain and here we have over 3 Million civil workers for just 46 Million people and only 18 million workers(including the 3M civil workers) and over 4,5 Million unemployed.

      That is crazy, and a high number of civil workers is doing nothing to decrease the unemployment, quite the oposit.

      Our country is driving a high deficit with high spending the previous 5 years surpluss is gone. An our taxes amount to 50 plus percent of the income, being it for a normal worker around 24 % income tax 30% social security and VAT 16% (sells tax lower than UK they have 20% I think). But for incomes above 30,000.00 Euros/yearly we should pay 43% income tax.

      But the taxes have not increased since we had “only” 2.5 Million unenployed, only the deficit. So, many more civil workers a lot of expenditure without tax increase from the government have done nothing to prevent almost 2 Million more unenployed. And later when the taxes should be raised to pay this deficit, it will bring even more unenployment and will decrease the speed of the economic recovery.

      But all this we will see in 2-3 years who is right. I hope you were right. It would be much better and easier to stop unenployment.

    12. “But in the meantime, you must know that there really IS a money creation when the fractionary reserve bank lends money.
      So, if the financial system works with fractionary reserves, say a 10% of the deposits and they can lend the other 90% than for each Dollar someone deposits in one bank, another 9 are created out of thin air. Because each new loan brings a new deposit in that bank or in another that brings new money out of thin air.

      So this is real inflation, and leads to the bubbles such as the one we have suffered until last year.”

      However, the banks are not passive transmitters of the creation of fractional reserves. Indeed, in the face of current deleveraging … not at all unusual in the aftermath of the bursting of an asset bubble, never mind the kind of shock the Finance Sector received in the latter part of last year … a substantial amount of reserve creation goes to offset the declining money multiplier.

      And, indeed, this is one of the most serious internal contradictions of the common received wisdom … that in the midst of microfoundations of the model of business activity involving the pursuit of maximum profit, the theory of exogenously determined money supply required to undergird the assumption of neutrality of money over the long term requires that bank money-creation activity be a passive response to Central Bank activities, rather than the pursuit of profits in the face of genuine uncertainty.

      Take the most simplistic theory of inflation, thought surprisingly commonly accepted in financial markets, is that MV=PQ, Q is determined by real factors, V is determined by institutional factors, dM% => dP%. However, “Q” is not an actual observable, but is a synthetic index determined from (Y/P), and “V” is not an actual observable, but is a synthetic index determined by (Y/M), so while it is certainly the case that:
      Y=Y
      => (Y/M)M = (Y/P)P
      => “V”M = “Q”P

      … the actual pricing and production decisions in the productive sector in anticipation of market conditions and liability and asset management decisions by commercial banks introduce a wide range of real world scenarios that lie outside the scope of the simplistic monetarist model, including dM% =>dY%{dP%=0}=>d”Q%, and {dM%=-dV%}=>dY%=0=>{d”Q%”=-dP%}.

    13. Kokoliso,

      You have written various things but I will just comment on money creation. (But good to know you know how bad the unemployment level is)

      Money creation by banks doesnt happen with multipliers. The money multiplier is just an ex-post number and is roughly the ratio of deposits/reserves. If the reserve requirement is 10%, then a standard text will tell you that the multiplier is 1/(10%) = 10. However, to get you thinking, countries like Australia, NZ, Canada and the republic of Great Brown have no reserve requirement!

      So in reality, what happens is that banks are allowed to expand both sides of their balance sheets. When they give out a loan, they record the loan L as an asset and create a deposit L.

    14. This idea of money creation is what I’m still trying to get my head around.

      All I can see is an increasing number of promises to pay back an increasing amount of debt. Since that can’t create any net new financial assets, how are these promises to be fulfilled in the long run if the currency monopolist insists on running up ever expanding surpluses and thereby creating a net drain of financial assets from the system?

      Obviously, this “money” that is created by this process is a completely different thing to when the government spends.

      It would seem that what comes directly from government spending is “real” while anything created by any other process is somewhat illusionary.

    15. Dear kokoliso

      Whenever I encounter a new idea I approach it with caution and attempt to understand it from first principles. Especially if it is contrary to my current version of what happens. I don’t bound in with reactions like “Your assumptions that the Government is not constraint in the amount of deficit it can run is completely false” or “you must know that there really IS a money creation when the fractionary reserve bank lends money” or pushy sort of rhetoric like this. Better to try to understand what the idea is – its basic principles and then see where you go after that.

      From what you write I can see you have an understanding of macroeconomics derived from the standard text books out there. I would caution you to not rely on the theoretical structures in those books. Which of those text books even remotely can explain what happened in the real world over the last 10 years. None. I have spent my life studying, teaching and researching macroeconomics – none of the orthodox textbooks can explain what is happening. How do you explain Japan, for example? Huge daily budget deficits, huge public debt issuance every day, zero interest rates, deflation – for 15 years!

      So before you write longer comments than most people berating people for being stupid, I would urge you to read a bit more of my blog – read my academic papers which establish the propositions formally and read my econometric papers which bring the empirical dimension into play. Then once you are sure you know what the first principles are – including that we abandoned the gold standard a long time ago – then if you still have issues make some comments then.

      There are enough civilised people who frequent this blog who will help you understand these first principles and who will engage with you on the ideological level – that is, how we might apply the basic principles in a policy space. The latter is of-course the contested terrain in my view.

      best wishes
      bill

    16. Thank you all for your attention.

      If I understand correctly this CofFEE means that government give anybody a minimun wage workplace as last resort employment.
      Is it correct?
      That is more or less like the unemployment wages we have in Europe but having to work to get them and being eligible also not having worked ever before.

      Well I think it is nice, but it is only cosmetic for unenployment rates. They are not real workplaces. If we wrote out of the unemployment figures everybody that has an unemployment salary or a social salary(here you get 400 Euros/monthly if you and all your family earn nothing to keep you from poverty) then unemployment rate would be 2-3% but the costs for the system in taxes are exactly the same.

      But I agree that it is better to have the people working to get the social salary instead of just giving it for nothing and letting them work in the black market economy at the same time.

      Best Regards.

    17. Dear Kololiso

      What exactly is a “real workplace”? Has any checkout operator, cashier or any shop assistant ever asked you whether you work in a “real workplace” or have a “real job” when you are buying something? No one has ever asked me that.

      Maybe read = Boondoggling and leaf-raking … for more about this point if you are interested.

      best wishes
      bill

    18. Dear Bill

      As English is not my native language maybe this “real workplace” thing might just a misunderstanding.
      I was meaning jobs not entirely subsidized by the government. That kind of jobs that if the government did not spend on them they would not exist at all if it weren’t for this CoffEE. If anybody is working in those jobs, he or she is completely respectable.
      But if this he or she is getting a social salary not working for it they are also respectable and no cashier asks you if you pay with a social salary. (Maybe if this social salary receptor has to work to get it he would quit and would not be then entitled to get it, so that this is an advantage from my viewpoint for your proposed system against the social salary system).

      And even if you are a bank robber nobody would ask you if you have a real job if you have the money to pay when you go to a shop.

      Best regards, Saludos.

    19. Kokoliso:

      it looks like these “unreal” jobs that you mention have created much of the infrastructure in the world. Think of Highway systems in the US/airports/ports etc. Private sector rarely has the means to spend and create infrastructure of this sort and this infrastructure would cease to exist if the public sector didnt create it, so per your definition the people that worked to create these didnt have “REAL” jobs?

      Thanks
      Vinodh

    20. kokoliso,

      There are many jobs completely subsidised by government without which a country would more or less collapse in a heap.

    21. I was meaning that even if a little of something is good, maybe too much of it can kill.

      So if you build a road and there is need for it that is very good, but building roads in places where nobody live and nobody would need to use is nonsense.

      If you do not plan very well much of this work would be completely worthless and I do not have faith that the politicians are good planners.

      Many workers would end making trenches ore holes in the ground just to fill them up later just to keep them occupied.

      Then the capital resources they would be using to work would be wasted in pointless projects.

    22. Dear Kokoliso

      There are hundreds of thousands of productive jobs that the capitalist market place will never provide (no private return) which deliver immense social returns to public space. The jobs of the future will be in personal care services and environmental care services. The number of jobs available to be done are limited only by your imagination.

      best wishes
      bill

    23. “even if a little of something is good, maybe too much of it can kill”

      Logically, this would also apply to market liberalisation.

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