With apologies to RFK. Cullen Roche makes a cogent observation about the state of economics:
It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches. Warren Mosler, widely regarded as the founder of MMT, created the theory because he was in the trenches and recognized that what his textbooks taught him did not reflect the reality of the operations he was involved in on a daily basis. And while no economic theory is perfect, I think this is by far MMT’s greatest strength. We can all theorize about how best to implement our conclusions from MMT, but the heart of the operations of our autonomous currency issuing fiat monetary system are undeniable.
That is why I am astounded by recent comments such as Scott Sumner’s, who today writes:
“I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon.’”
That’s exactly right. We don’t create Crusoe Islands (as Robert Murphy does) or monetary systems without banking systems (as Sumner does). We are working within our reality and applying analysis and solutions based on that which is visible, concrete, provable through accounting and obvious through the institutions who implement these operations. If you want to know why we’re in this current mess look no further than the thought process above which claims that we need to focus less on reality and more on mythology.
Lest you think Sumner is taken out of context (and, for the record, he’s pretty bright), he concludes:
The best way to understand modern sophisticated central banking is to study the most primitive monetary system possible-a medieval king debasing his money in a country lacking banks.
Sweet Baby Intelligent Designer. That statement does make it clearer how this post I wrote came to be.
I get Sumner’s concern about prices–I think some MMTers are far too sanguine about prices, stickiness, and inflation (not to mention human psychology–most people don’t think in terms of inflation-adjusted prices). But this is a misdefinition of the problem we face right now:
The easiest way to see the process work is to imagine an economy without banks, where the new money goes right into circulation as currency. Most people can instinctively grasp that more currency, without any increase in real goods being produced, will lead to inflation.
What most MMTers would argue is that the limitation in the production of real goods is often due to a lack of currency. Right now, the demand for–and thus production of–goods is weak. Certainly, that’s the case right now with industrial capacity hovering around 80% utilization in most sectors, and under- and unemployment affecting one in six Americans (and that would be worse, were it not for record high levels of incarceration).
Reality is a good thing, even if it’s depressing and hard to quantitatively model.