Saturday, January 28, 2012

Market Monetarist-MMT Smackdown 2.0

      In our first attempt at a smackdown we lead with Market Monetarist extraordinaire Scott Sumner's attempt to take down MMT by proving that you can't explain the price level without the Quantity Theory of Money (QMT).

      Implicit in this is the assumption that MMT rejects the QMT. However in reading Scott Fullweiler's answer to Sumner it becomes clear that Sumner had made this assumption much too hastily as Fullweiler revealed that MMTers don't actually reject QTM as such. Incidentally this is not at all atypical of Sumner who always claims that his views have been misconstrued to misconstrue the views of "fiscalists" of various stripes and then argue against a straw man.

      With the considerable heavy weather he built up in defying anyone to explain the price level without QTM it sure was anticlimatic to discover that MMT doesn't deny QTM. As a MMT reader named Rodney

      "In the long run, The qtm theory holds true. the point is, money creation in itself does not affect the price level. Spending does. If you leave a trillion dollars on times square and nobody spends it does it affect teh price level. no. not until someone spends it. Thats why the fed cannot create inflation. It doesn't spend, it just swaps one form of asset for another. Bonds are money people are saving not spending so is it going to be inflationary. Probably not."

       My point in the "smackdown" idea is to get to the bottom of what really are the different monetary visions of the two unorthodox systems that the Economist recently featured-along with Austrianism but that of course has been around a long time.

       As we saw in the first "smackdown" Sumner believed he achieved a TKO but was wrong as MMT doesn't deny QMT "over the long run." Still Rodney's claim that the Fed cannot create inflation is certainly a very provocative claim and flies in the face of everything that Market Monetarism believes in.

        Today I read a working paper written by MMTer Stephanie Bell in 1998 called "The Hierarchy of Money" which gave me a much better idea of the true differences between MMT and MM. It turns out they are profound.

        Interestingly I had sort of touched on this issue myself the other day in another post about MM regarding a post written by MMer Lars Christensen in his Market Monetarism blog.


         What I found very interesting is that Christensen in his post that declared there is no such thing as fiscal policy indicated that the idea of money neutrality is a cardinal pillar of MM's understanding of the monetary system.

          ""in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand"

            "for fiscal policy to influence aggregate demand we need to introduce money and sticky prices and wages in our model. This in my view demonstrates the first problem with the Keynesian thinking about fiscal policy. Keynesians do often not realise that money is completely key to how they make fiscal policy have an impact on aggregate demand."

            This radical belief in money neutrality is the locus of the really important difference between MM and MMT. What Market Monetarism-and all monetarism in reality-comes down to is the belief that money is wholly neutral or should be-it's the job of the Fed to eliminate the intermittent distortions in the monetary system.

            Strange then as it sounds for these apologists of unfettered libertarian capitalism, to regard money itself as the root of all evil.  So I wrote,

            "It's kind of like the old Catholic church that loves children but hates how they are created. The MMers are also like the academic philosopher who believes that apprearance is be the basis of evil in the world. For the monetarist: money is this distorting appearance. What you always get with docrines of Original Sin is the vexing question of casuality: in a world run by an All-PowerFul, Beneficient God how is evil possible? In our case how did money get into the world?  What I also find interesting is to imagine a debate between the Market Monetarists and the Modern Monetary Theory people."

            I was interested in the debate but only now in reading Stephanie Bell';s paper do I see what the important sticking point is. It is this whole notion of money neutrality, that without money our economy works the same as a barter economy.

           What emerges from reading Bell is that this idea must be wrong in part because it is open to question that barter economies ever existed.


            As Ms. Bell shows the debate between Market Monetarism and Modern Monetary Theory goes back to a debate that started in the 16th century between Metallism and Chartism. Essentially Metallism believes that there was an age of barter and money was invented to correct for inefficiencies form the barter system. This development is supposed to have occurred spontaneously in the private sector.

             Metallists (the modern day Metalists are the Monetarists of all stripes) believe that money is able to function as the medium of exchange based on it having an intrinsic value beyond its function as money.

              The Chartists' view is fundamentally different. There never was a barter economy. Money derives its value not by having independent intrinsic value on the private market but because the government declares something money, the proper mean of exchange in order to be able to pay government taxes.

              The Chartist view therefore gives the government a large role indeed the directing role. The government kind of functions like the God of Hegel and Kant who gives money its value by simply positing it. For the Metallists the government's role at most is limited to codifying the social custom of exchanging money.





  1. See economic athropolgist David Graeber's Debt: The First Five Thousand Years (2011) for a thorough smackdown of the barter/metallism theory. According to Graeber's research there is no good evidence that a barter economy existed anywhere, and that are a lot of compelling reasons to think that there was never one.

  2. Appreciate it Tom. I got to admit this never occured to me but it makes a lot of sense. I'm glad as I have felt for awhile there's something of with metallism-monetarism and when I saw that they actually think the point is to take out the "distortions" of money to make the economy run like a barter system I saw that libertarianism of any kind is as bankrupt as I suspected.