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A surplus of trade discussions

It is Wednesday and so I am only writing a few thoughts today for the blog, preferring to spend the day writing other more detailed academic material and doing final edits on our next Modern Monetary Theory (MMT) textbook (current publication date with Macmillan, November 2018). But I wanted to briefly reflect on the discussions over the last week about trade which seem to have sparked some emotion and disagreement. In particular, there has been a lot of misrepresentation of the MMT position and also a lot of mistaken reasoning. After that I will go back to listening to some post minimalist piano music.

Trade, trade, trade

MMT economists are not unique in their focus on real things rather than nominal things, although we certainly differ from the mainstream in that there are situations where the nominal level is crucial to understanding the consequences of a change.

Let’s start with that statement.

When we talk about material living standards, we tend to consider the real domain.

So, for example, if my income is $1,000 per week and the one good I buy to satisfy my consumption pleasure is $100 per unit, then I can by 10 units a week.

The nominal is the $1,000 and the $100, the real is the 10.

Now, if the price goes up to $200 per unit and my income doubles, then the question is: Am I better off?

The answer in material (real) terms is no. I still can only access 10 units per week. I am abstracting here from any long-lived effects (negative mostly) of producing those 10 units.

The link between mass consumption and environmental decay is clear and a separate discussion.

So while the nominal aggregates have doubled (including my income), the real equivalent has stayed unchanged.

Now imagine that the price remains at $100 per unit and I am forced to take a pay cut to $500 per week. I am clearly worse off in both real and nominal terms and would resist that cut.

If all people were forced to take that cut then total spending would fall – and recession would eventuate unless some other spending source (for example, government) filled the gap.

Now imagine that two scenarios:

1. My nominal income remains at $1,000 and the price goes up to $200 per unit.

2. My nominal income falls to $500 and the price remains at $100 per unit.

Which option would I prefer?

Both are equivalent in real purchasing power terms.

Mainstream economists believed that the two cases are equivalent because of the purchasing power implications.

However, Keynes (and Marx before him) and then later Post Keynesians (and MMTers) disagreed with that conclusion.

And in doing so, had to argue that there are nominal considerations that transcend a simple focus on the real.

Which are?

In Scenario 1, the nominal income remains at $1,000, while in Scenario 2, the nominal income has fallen to $500. Yet because my real purchasing power is seemingly the same in both cases why would I prefer Scenario 1?

The answer lies in the way financial contracts are typically expressed.

If I have, for example, a home loan mortgage which sets the weekly payments as $X per week (that is, in nominal terms) then irrespective of the real equivalent of my nominal income, I have to deliver $X per week before I can do anything.

So a cut in my nominal pay will squeeze my capacity to service my outstanding nominal liabilities, and may render me insolvent.

In Scenario 1, that still might happen but at least it gives me greater discretion to cut out other non-committed spending choices and maintain my financial solvency.

Both cases involve real cuts to my standard of living but one of the cases gives me much more latitude in the context of my nominal financial commitments than the other.

This is why Keynes (and others) said that workers might be preparated to acccept a real wage cut but resist cuts to their money wage levels if it was rendered by a rise in the general price level rise.

They resist cuts to their money wages because it compromises their nominal commitments more.

There were other reasons Keynes believed it was preferable not to cut money wages but that is another story (relativities etc).

So, there are circumstances where nominal aggregates matter.

When it comes to trade, MMT focuses, initially on the real layer of the analysis.

Thus is is undeniable (and I am surprised to read all those who are torturing themselves trying to deny it) – exports are a cost and imports are a benefit.

Giving some real thing away is a cost. Getting some real thing is a benefit.

That doesn’t equate, as I have been reading the last few weeks, in a conclusion that MMT’s preference is for a nation to have a current account deficit.

It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use.

Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.

In a world where we produce to consume – not for its own sake – then receiving goods and services is better (real terms) than sending them elsewhere.

Now, I understand that we can have a spiritual debate about mass consumption. Is is really an appropriate path to happiness?

I wrote a bit about that in this blog post – The mass consumption era and the rise of neo-liberalism (January 7, 2016) – so my views are known on that issue.

The religion as the opiate in Marx’s day has been replaced by mass consumption in our era.

The era of mass consumption after the Second World War diverted attention of workers from the production process to the shopping centre, which took over where religion left off.

There was an abundance of mass produced goods like never before and the new consumption boom also meant that the distribution of national income had to shift so that workers could purchase the ever-growing flow of goods (and then services) into the shops.

In this sense, real wages grew with productivity and the problem of capitalist realisation was averted. A period of relative calm emerged and the shopping centres crammed with all manner of goods functioned as the sedative.

This was the period before the financial deregulation began and capital had yet to discover that it could have it both ways: it could suppress real wages growth and still realise the surplus value on the ever-increasing volume of output it was producing by simply loading households up with debt.

The financial engineers would come along a little later to facilitate that new era of financial capital. But during the full employment era, capitalism was forced to share the spoils more evenly and mass consumption and real wages growth was the manifestation of that accommodation.

And then we entered the neoliberal era and all that follows.

So, while I can easily say, that in real terms, exports are a cost and imports are a benefit, I am fully aware of how that plays in to these broader social change issues.

Which then brings me to the next claim that has been raised to challenge the exports are a cost and imports are a benefit story.

How can I say that a nation is ‘better off’ if it is digging up valuable minerals and shipping them to foreign destinations in return for plastic junk from China?


First, I agree that there are massive environmental considerations that have arisen in the era of mass consumption. I do not personally support a mass consumption mentality.

The plastics in the oceans are proving to be a crippling problem for the World with little solution other than to stop using the products.

But then I could easily say that eating animal protein is massively destructive for the planet not to mention the cruelty and subjugation of the animals themselves to satisfy an unncessary human craving.

So, if we are going to ban plastics and make judgements about the ‘quality’ of imports, then I hope proponents of that view become vegetarian, if not vegan, immediately.

I don’t mean to trivialise the issue of ‘bad’ production.

I clearly support tight regulation and environmentally sustainable resource allocation.

I also clearly advocate rather tough tests on trading relationships – the fair rather than free trade stance.

For example, I would not trade with China at all given its appalling human rights record. But then I live in a country which, itself, tortures refugee status applicants and has tried its best to wipe out our indigenous citizens. So it is complex.

Second, there is a sort of elitism in the argument that these imports are just junk and cannot be considered benefits.

Who is making that judgement?

I am sufficiently an economist to think that people buy things that they think will give them ‘benefits’ and giving up the nominal notes and coins (or digital transfers) voluntarily involves then swapping something they value less for something they value more – the real thing.

If all these imports are not beneficial, as some commentators are asserting, then why do people give up income to purchase them?

I can pontificate from on high and make all sorts of moral claims that these goods and services are not beneficial. And presumably I won’t be buying any of them.

But what right have I, in a ‘free’ society, to then make claims about the judgements of others in these sorts of transactions?

Okay, I know all about the literature on supply-determined demand. Deceptive advertising, social conformity and all the rest of it clearly influences what we purchase and so we don’t really act independently of how the supplier wants us to.

I agree.

But if that is the logic then all goods and services, whether they be imports or not are clearly not beneficial because we have been duped into thinking they are good for us by advertising and the like.

That is not a very fertile path to follow because it really gets us nowhere.

The next argument presented is that by saying exports are a cost it means the same thing as saying they are a loss.

Well, in the obvious way, again thinking in real terms, they are a loss because the real resources embodied in the exports are not available for use by the nation.

Which suggests the motive to export. The only reason a nation would want to export and incur the costs involved is to generate a higher rate of return.

Why else?

Which means that the cost is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.

But it could also be for different motives – to accumulate financial claims in the currency of the nation.

One might argue though that there is an irrationality in the second motive. Why would a nation, once it has satisfied its penchant for imports continue to pursue a strategy that generating ever increasing external surpluses?

If that is the government’s strategy (and one could suggest Germany fits that bill) then they are deliberately depriving their citizens of a higher material standard of living. They are either working too hard, being paid too little and underconsuming.

But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal with trade.

In general, a nation hopes the costs of using our resources as exports will not become terms of trade losses – in real terms.

A trade deficit is a sign that the real terms of trade are working in favour of the deficit nation. That is standard MMT and, in my view, unassailable.

Unless you adopt the view that imports are not beneficial. And good luck running that line.

Sure enough there are nominal consequences.

Foreigners (surplus nations) build up financial claims in the currency of the deficit nation.

They might buy up all the real estate. Well, only if the government lets them.

Many nations have rather strict rules about what foreigners can buy. In Australia, for example, it is difficult for a foreigner to purchase existing real estate. There are loopholes and the laws should be tighter but they do currently constrain foreign purchasing.

The point is the nation state can legislate whatever restrictions they like.

They might sell all their currency holdings in one fell swoop and destroy the currency. They might. But then they would be deliberately creating massive losses for themselves, which I am confident they will not.

And if these funds end up in the hands of speculators the nation state can lock them with capital controls if it so chooses. Even the IMF supports that strategy these days and acknowledges it is effective.

More problematic is that foreign interests may seek to use their financial clout to manipulate the political system and the public narrative view media domination etc.

Again, regulations can militate against that sort of trend. Strict campaign funding rules, media ownership rules etc are required to prevent these sorts of complications.

And finally, what of the claim that external deficits automatically lead to a hollowing out of the industrial sector and the nation ends up a consumption unit (consuming junk) and sedating its population with a Job Guarantee, once all the skilled jobs shift to Country X?

The corrolary claim is why would MMT advocate that sort of destiny?

First, MMT does not advocate that at all. MMT provides the framework for understanding the consequences for macroeconomic policy choices.

The centrality of the Job Guarantee in MMT does not equate to it being held out as the panacea for everything. We have been clear on that for 20 or more years now.

The Job Guarantee is the basic macroeconomic stability framework upon which other policies are then designed and implemented.

Second, having said that, there is nothing in MMT that says we support a deindustrialisation process and perpetual current account deficits.

MMT helps us understand very clearly, clearer than previous economic theories, what sort of things will be possible when there are current account deficits.

For example, as a result of our work, people should now realise, that if a nation has a current account deficit and the private domestic sector desires to spend less overall than their income, then the government sector has to run a fiscal deficit at least proportional to the external deficit.

Otherwise, recession will occur.

As that understanding permeates the political debate, it will discipline the communications within the nation and purge some of the ridiculous statements that are made.

For example, a politician would not be able to say that the government can run a fiscal surplus in that context without also acknowledging that the only way the economy could continue to grow would be for the private domestic sector to be accumulating ever increasing levels of debt (once other stock adjustments were exhausted).

But there is nothing in MMT that precludes a very forward-thinking industry policy being developed and implemented to expand domestic industry, spawn innovating research and development, upskill the workforce, build export capacity and all the rest of it.

A nation can do all of those things if it has available real resources or can get them from abroad.

MMT tells us that in those circumstances, there would be no financial impediment for a government building national industries, funding research and development, providing first-class universities and apprenticeship training and the rest.

If a nation with its own currency slides into oblivion by closing its manufacturing sector, cutting career public sector jobs and relying on low-paid and precarious service sector jobs for employment creation, then that has nothing much to do with enjoying a positive real terms of trade (that is, running current account deficits).

It has a lot to do with the political choices made by the legislature.

I might not write about trade for a while.

Music while I am working today

I have been playing the 2010 album (FatCat Records release) – Infra – this morning by post-minimalist composer/pianist Max Richter, who I have featured on this site before.

The album intersperses Outer Limits-style static audio with single piano and his usual array of melodic string orchestration.

This is the track called Infra 6 and is hauntingly simple yet very evocative.

I love playing it on my own piano (minus the Outer Limit-type infra sound effects!).

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

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    This Post Has 117 Comments
    1. Henry, if the numbers just jumped around like your examples then the identity would be useless like you say. But it would be a very strange set of circumstances where imports for an entire economy went from 20 to 80 in one year, or taxes went from 20 to 50, or Consumption went from 80 to 150.

      “Only if you simultaneously specify the behavioural model can you derive a useful result.” I’m fine with that statement.

    2. Jerry,

      “…if the numbers just jumped around like your examples then the identity would be useless like you say.”

      I think you have missed my point.

      I am not saying necessarily that the numbers jump around year to year as shown.

      I am saying, that behind a given set of sectoral balance numbers, is a universe of possible economies. When you assume a set sectoral balances , you have no idea of the economy that you are playing with (ex ante).

      And I ask you, do you think that if investment moves in some direction, the (ex ante) income response in Case 1 will necessarily be the same as in the Case 3 economy, given the size differences and the structural differences?

      Do you seriously believe this?

      How do you know (ex ante) what response a $1B change in one variable will induce in any other variable without a behavioural model?

    3. Jerry,

      ““Only if you simultaneously specify the behavioural model can you derive a useful result.” I’m fine with that statement.”

      If you are fine with that statement, how can you ever contemplate doing ex ante analysis solely with an accounting identity?

    4. Henry, I really do like to argue with you. But where did you come up with the idea that I espouse using sectoral balances or other identities without any sort of behavioral assumptions? I don’t think I said that. I certainly never meant to say that and if I did say that somewhere then I admit that would be wrong. I guess I might as well copy JKH’s other response to you since you seem to have forgot it even though it applies so well to this discussion.

      April 28, 2018 at 9:27 pm
      “What generates the results is a behavioural model. Otherwise, with a pure accounting model you can argue anything you want without having to demonstrate or justify how you got there. You could say revenue equals X – you have generated your record of anticipated results – i.e. your accounting model. But where does “X” come from?”
      Who said anything about the absence of behavior or the absence of behavioral assumptions or the absence of behavioral “models” in generating simulated future results? Not me. Check it. If that were the case, I’d have to believe that behavior was not a factor in producing actual accounting results ex post – in order to be consistent in my ignorance of this aspect across time. I’d like to think that at least in this limited application I’m not quite that thick.”

      As far as your specific example about investment changing and then trying to figure what else would change- I don’t know. But whatever guess I came up with would probably be more likely if it fit into the range of possibilities allowed by the identity than if it didn’t. Better to ask Bill about this than me though. I just don’t know enough on this.

    5. Jerry,

      Seeing you started this with JKH’s comments you might want to remember his first comment began with the following:

      “I’m always amused and revolted when the economist says something like:

      – Never reason from an accounting identity –

      It is inevitable that those who say it don’t know accounting, don’t know its proper place in economics, and don’t know what they are saying.”

      He was very dogmatic in his beginning comment and then wound back from this position in subsequent comments. It was this first comment that got me going.

      His comments that you have referenced in earlier posts above were subsequent to my initial post in response to his. And the way you have reported them neither does justice to what he said or to what I said. He also says a few things about MMT.

      Anyway, this is all a diversion from what we are discussing.

    6. Yeah Henry, I guess it is a bit of a diversion. We were at some point arguing Bill was wrong to discount some benefits of running a trade surplus I think. I’m not going to win that argument even though I’m convinced I made some good points and that you did too. I don’t enjoy arguing with Bill- he’s usually right to begin with so that makes it tough to argue. I still argue he has been wrong occasionally but it is difficult. Once in a while I catch him with some typo-type error which he corrects, but other than that nothing I have ever written has had any impact. That’s ok with me though. And I like arguing with you :)

    7. Henry Rech:We have to remind ourselves that it is ex post
      JKH:It is not just ex post.
      It is ex post, current, and ex ante.

      Henry Rech: I more or less disagree with this statement.
      For me, accounting is about recording what has happened….

      I agree with Jerry & JKH. Here are some relevant papers and explication.

      I=S (the simplified “original” sectoral balance identity) in the Keynesian, institutional, heterodox framework is an accounting identity and more, as it has a direction of causation. I causes S. Saving is the “pecuniary accountancy”, the “financial counterpart” of Investment. (A point that Henry Rech is making when he considers saving as not real, as a residual) And the identity is necessary, instantaneous, individual and aggregate. It is “not just ex post” in JKH’s words.

      Wray’s “The Reality of the Present and the Challenge of the Future: Fagg Foster for the 21st Century” at economonitor refers to two papers of John Fagg Foster reprinted along with several others by Foster in an issue of the Journal of Economic Issues. Note Foster’s paragraph (relevant to this discussion on identities) that Wray comments “An entire course in macroeconomics is contained in that paragraph.” Imho some papers by Gladys Parker Foster (JFF’s wife) also in JEI (Financing Investment; Keynes & Kalecki on Saving & Profit: Some Implications etc) have additional explanation and are just as good.

      Claude Gnos’s A Methodological Issue: Ex Ante and Ex Post Analysis Irrelevant to Keynes’s Theory of Employment
      explains how an accounting identity+ like I(nvestment) = S(aving) “is not just ex post” with much historical detail.

      Gnos notes how later authors thought that Keynes should have used Gunnar Myrdal’s ex ante / ex post distinction & probably the majority interpret or redefine accounting identities that way. But Keynes tried out but consciously rejected ex ante / ex post and reasoned along the Foster/JKH lines.

      So after writing out many chapters along what were evidently the Swedish lines, I scrapped the lot and felt that my new treatment was much safer & sounder from the logical point of view” (Keynes 1937)

      I could ramble on, but need to go to sleep! Thanks, Henry & Jerry – rereading and discovering those Gladys Foster papers and JKH’s comment and others helped me get these things clearer in my mind.

    8. Some Guy,

      “It is ex post, current, and ex ante.”

      JKH was talking about accounting in general. Ex ante accounting is just recording the future results of behavioural models, it is not the model itself.

      “And the identity is necessary, instantaneous, individual and aggregate.”

      It may be all those things but it is still ex post.

      ..”saving as not real, as a residual…”

      It’s not even a residual.

      “I=S (the simplified “original” sectoral balance identity) in the Keynesian, institutional, heterodox framework is an accounting identity and more, as it has a direction of causation.”

      It is just an identity. The causation is in the behavioural relationships that entangles the income variables.

      “Claude Gnos’s …”

      Link not working but I found paper anyway. Thanks.

      The Fosters – a new one on me – I will check them out.

      “But Keynes tried out but consciously rejected ex ante / ex post …”

      You have taken the quote from Keynes’ letter to Ohlin out of context. A few lines above your quote he said:

      “As regards the ex post and ex ante method, I shall give further thought to its advantages.”

      Not that that changes anything in this discussion.

    9. Some Guy,

      “I agree with Jerry & JKH.”

      BTW, JKH ended up essentially agreeing with me, at least that’s the way I see it.

    10. Some Guy says I=S is an accounting identity and more- it has a direction of causation. I causes S. This is true, or at the least it seems to be the best way to look at it. At least to me. And in this case it is not dependent on behavioural assumptions at all or entangled in them as Henry says. At every point in time, intentional investment expenditure causes ‘S’ to occur immediately. That statement does not work backwards. And whether it has to be considered as ‘ex post’ or can be described as ‘ex ante’ doesn’t even matter. Now I don’t want to be accused of quoting people like JKH out of context or unjustly anymore so I will just mention that this is explained very well by JKH in comments at David Glasner’s Uneasy Money blog in a series of posts dating from March and April of 2015.

    11. Henry Rech:It is just an identity. The causation is in the behavioural relationships that entangles the income variables. No, agree or not, that it “is more than an identity” (Wray) is a major MMT/Keynesian thesis. Alain Parguez, cited in those papers, says that the heart of the (unfinished) Keynesian revolution was that I=S with the direction of causation, from I to S, not from S to I (the neoclassical assertion). [I think that that isn’t even the only way that the identities are more than just identities] It’s not a behavioral relationship that could be otherwise, it’s deeper than that. It couldn’t be any other way. So those papers help explain why MMT gives the “sectoral balance equation more attention than is justified”.

      As Gladys Foster says:

      “. . . as Keynes and Kalecki argue, it is investment that generates saving and profit rather than the other way around, investment cannot be financed by prior saving or profit. There is no saving or profit not generated by investment and thus there can be no saving or profit preceding investment.”

      Sorry about not giving links. The software rejected them as spam last night. I can send links or pdfs to anybody interested.

    12. Henry @1:35, I’m all for being optimistic and such, but saying someone essentially agreed with you when they tell you something like “But I think your comment also embeds what I consider to be a pretty big category error that misses the more fundamental role and value of accounting in finance and economics” is pushing the limits.

      None of that went away or disappeared or was taken back that I can see. There was some mention that identities can be misused (probably by people like me no doubt), but “pretty big category error that misses the more fundamental role” is kind of apparent as to what it means. And it isn’t essential agreement as far as I can tell.

      Just so you know, JKH has corrected me in the past also. Its never fun to get corrected but JKH is almost always right as far as I can tell. It is almost an honor to have JKH tell you you are wrong- it means you wrote something close to the truth or worthy of discussion to begin with :) That’s how I look at it at least.

    13. Jerry,

      You said:

      “Now I don’t want to be accused of quoting people like JKH out of context or unjustly anymore ..”

      Really? :-)

      You quote JKH:

      ” “But I think your comment also embeds what I consider to be a pretty big category error that misses the more fundamental role and value of accounting in finance and economics” ”

      You have quoted him out of context, in defence of a point you are making.

      What JKH calls the “category error” is calling accounting just an ex post activity. He wants to stress it can be ex post, current and ex ante.

      He goes on to say:

      “Accounting is ex ante in the sense that any projection, simulation, scenario analysis, etc. that attempts to consider the future must be exhibited within a framework of accounting coherence that links past, present, and future.”

      Which I agree with but only to the extent that it can only represent the ex ante results of modelling. I would not say that it can be ex ante in the behavioural/causality sense. Accounting is just arithmetic governed by a set a pre-agreed rules, but rules which do not specify any behavioural/causal relationships. That is the job of economic theory. The only place accounting and economics intersect is at the income identity.

      Then of course he (still don’t know if it’s she) goes on to say:

      “Who said anything about the absence of behavior or the absence of behavioral assumptions or the absence of behavioral “models” in generating simulated future results? Not me.”

      Which I agree with and which is in agreement with what I said above.

      So JKH and I are essentially in agreement.

    14. Henry,

      The sectoral balance equation is usually presented, as you know, suchly:
      (S – I) = (G – T) + (X – M) (let’s forget about FNI as a simplification)
      And remember that S is actually not real so let’s replace it with what is real:
      S = Y – C – T
      So we have:
      (Y – C – T – I) = (G – T) + (X – M)

      That certainly is some creative algebra……

      I`m curious, how did you get there from…. Y=C+I+G+(X-M)=C+S+T

    15. PhilipO,

      Are you disputing the definitions?

      S = Y – C – T is just the definition of “saving”.

      Anyway, let’s start from your equation:

      Y = C + I + G + (X – M)


      Y – C – I = G + (X – M)

      Deduct T from both sides:

      (Y – C – T – I) = (G – T) + (X – M)


    16. PhilipO,

      Or you can come at it another way.

      Starting with your equation (all of it this time):

      Y = C + I + G + (X – M) = C + S + T

      Rearrange for the T:

      Y – T = C + I + (G – T) + (X – M) = C + S

      We don’ t need = C + S and rearrange for the C and I

      (Y – C – T – I) = (G – T) + (X – M)


    17. With regard to the following statements in your narrative:

      The next argument presented is that by saying exports are a cost it means the same thing as saying they are a loss.
      Well, in the obvious way, again thinking in real terms, they are a loss because the real resources embodied in the exports are not available for use by the nation.
      Which suggests the motive to export. The only reason a nation would want to export and incur the costs involved is to generate a higher rate of return.
      Why else?

      One reason is to keep your people employed. China runs a huge budget surplus as it exports goods and services around the world because it needs to keep its people working. If it didn’t export those goods and services, they wouldn’t get produced because the Chinese people are not wealthy enough to afford them. When Milton Friedman visited China a number of years ago, he observed the people building a highway. He said to his tour guide, why don’t you use Caterpillar road building equipment. The response was that they needed to keep people employed. His response was, why don’t you give them spoons.

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