The battle Richard Murphy refers to is about the institutional design of a better money order. The discussion, though, suffers from the odd fact that economists have until this day no scientifically valid theory of money. But this has never hampered the enthusiasm of economists. After all, they are in the political business and not really in the science business.
So, Richard Murphy argues: “… in the process Wolf, and those who promote this idea show that they have no idea what money is. Money is debt. It is only created by government spending and bank lending. It is literally the double entry that surrounds those two processes that create money: there has to be a debt and a creditor accepting obligation to each other for money to have value.”
This is what all MMTers sermonize from their soapboxes and it is provably false. The fact is that MMTers have no idea how the monetary economy works.
To get economics right, it has to be consistently reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#1
The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest. At this juncture, Friedman et al. are buried for good.
What is needed for a start is two things (i) a central bank that creates money on its balance sheet in the form of deposits, and (ii), a legal system that declares the central bank’s deposits as legal tender.
Deposit money, which is a generalized IOU, is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw.
Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.
For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#2
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.
The transaction equation reads M=κYw=κPX=κPRL (2) in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.
As long as the central bank finances a growing wage bill Yw=WL with money created out of thin air and with wage rate W and productivity R fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/decreases according to (2) but there is NO inflation/deflation.
This is the correct way of bringing money into the economy. However, this is NOT the MMT way. MMT injects money into the economy by government deficit spending. This has an immediate effect on macroeconomic profit.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
The complete Profit Law reads Qm≡Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.
Needless to say that Richard Murphy does not mention the profit effect once. Worse, MMTers regularly make this effect disappear.#4 It does not sit well with their image of social Progressives.
To sum up:
- MMT policy is NOT in the interest of the ninety-nine-percenters.
- MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
- The profit effect of MMT money creation/deficit spending reinforces the transformation from democracy to oligarchy.
- Politically, MMT is a fraud and scientifically it is garbage.#5
* Tax Research UK
#1 Wikimedia AXEC31 Elementary production-consumption economy
#2 Wikimedia AXEC98 Idealized transaction pattern, household sector, balanced budget
#3 MMT: Just another political fraud
#4 MMT and the magical profit disappearance
#5 For the full-spectrum refutation of MMT see cross-references MMT
Related 'The Third Way: Towards the happy zero-tax economy' and 'The ultimate ― analytical ― origin of money' and 'How money emerges out of nothing ― the functional account' and 'The creation and value of money and near-monies' and 'Reconstructing the Quantity Theory (I)' and 'It's about institution-building, stupid' and 'Money and time' and 'Basics of monetary theory: the two monies' and 'Richard Murphy: the MMT fraudster dressed up as realist'.
You say: “This is so ridiculous I can dismiss it in seconds. There is apparently no government in your model. And no overseas sector.
Obviously, you cannot read.
I clearly stated: “The complete Profit Law reads Qm≡Yd+(I−Sm)+(G−T)+(X−M) and reduces to Qm=G−T for Yd, I, Sm, X, M = 0. Legend: Qm monetary profit/loss, G government spending, T taxes. In other words: Public Deficit = Private Profit. This way of money creation is NOT neutral with regard to distribution but is clearly for the benefit of the one-percenters.”#1
It is all there, government deficit/surplus (G−T) and the trade surplus/deficit (X−M).
Because of Public Deficit = Private Profit, MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
Your assertion: “Money is debt. It is only created by government spending and bank lending.” is provably false. Money is in the most elementary case created by the central bank financing the wage bill Yw.
MMT’s money-creation/deficit-spending is profit-making for the one-percenters.#2 Politically, MMT is a fraud and scientifically it is garbage.
#1 MMT: Richard Murphy’s battle-for-money hoax
#2 For the full-spectrum refutation of MMT see cross-references MMT
REPLY to Ralph Musgrave on Jun 9
You say: “Central bank created money (base money) is supposedly a liability of a central bank: it appears on the liability side of the CB’s balance sheet. But if you go along to the Fed with a $100 bill and demand that they pay you the $100 they allegedly owe you, you’ll be told to shove off. So in what sense is base money a debt?”
The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money.
So, how comes money into existence in the elementary production-consumption economy with pure fiat money? Schematically as follows:
(i) The workers work for some time L in the fully integrated mega-firm = business sector.
(ii) The firm owes the workers the amount Yw=WL. The wage rate W is given.
(iii) The firm could hand out IOUs to the workers but instead turns to the central bank.
(iv) The central bank creates money by lengthening its balance sheet, i.e. by entering an overdraft for the firm on the asset side and a deposit of equal amount on the liability side.
(v) The firm transfers the deposits = Yw to the workers. Thus it discharges its liabilities vis-a-vis the workers. The firm has now a liability vis-a-vis the central bank.
(vi) The workers spend their whole income C=Yw and buy the total output X=O. The workers’ deposits are fully transferred back to the firm.
(vii) The firm’s overdrafts and deposits are exactly equal and are canceled against each other. Money is fully destroyed. The central bank’s balance sheet shrinks to zero = initial state.
(viii) The money creation-destruction cycle starts again.
Money is not a thing, money is not a fixed stock, money is information. The information is stored on a medium, e.g. magnetic data carrier, clay tablet, paper, coin, etcetera.
Money = deposits at the central bank is accepted (i) by the workers as wage payment, and (ii) by the firm as payment for handing over the consumption good. There is NO state and NO taxes needed to enforce the acceptance. Central bank deposits are defined as legal tender, they discharge all kinds of liabilities/IOUs.
The central bank is tasked to support the autonomous transactions between the firm and the workers. In other words, the central bank creates exactly that amount of money that is needed to pay the wage bill which steadily increases with growing employment and a constant wage rate.
The point is that there is NO such thing as monetary policy or an inflation target. In the elementary production-consumption economy, the central bank simply supplies the means of transaction = money = deposits. Nothing more, nothing less. The central bank does not interfere with the autonomous transactions between the business and the household sector.
There is NO government deficit-spending needed to bring money into existence and NO taxation in order to enforce acceptance. The MMT money creation story, i.e. government deficits and taxes drive money, is a myth just like the barter and goldsmith stories.#1, #2
#1 The Third Way: Towards the happy zero-tax economy
#2 The objective value of money
You say: “You have not shown there is a thing wrong with MMT, which is wholly familiar with and uses (I use in my theoretical work) the type of analysis you are doing.”*
Actually, this is the case:
(i) MMT is built upon this macroeconomic balances equation (X−M)+(G−T)+(I−S)=0 which is shown at any MMT presentation and is to be found all over the econblogosphere including Wikipedia.#1
(ii) The MMT balances equation (i) is provably false. The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0.#2
(iii) The MMT balances equation is false because MMTers are too stupid to understand the elementary mathematics of macroeconomic accounting and do not know how the monetary economy works.
(iv) Because the foundational equation is false the whole analytical superstructure is false. By consequence, MMT policy proposals have NO sound scientific foundations.
(v) The main defect of the MMT policy of money creation/deficit spending is that it produces a distribution that is generally regarded as socially unacceptable.#3
So, MMT is proto-scientific garbage and political fraud.#4 That’s what is wrong with MMT!
Richard Murphy and the rest of the MMT crowd (Kelton, Mitchell, Mosler, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine, Ehnts, Hickey, Pino, and so on ) are snake-oil sellers.#5
* Tax Research UK
#1 Down with idiocy!
#2 Rectification of MMT macro accounting
#3 Keynes, Lerner, MMT, Trump and exploding profit
#4 For the full-spectrum refutation of MMT see cross-references MMT
#5 MMT: Academic snake oil for the people