Modern Money Theory, Social Sustainability, and Nick (borrowed from a blog piece by Joe Firestone)

This post was originally posted at correntewire.com and written by Joe Firestone (aka letsgetitdone), dated May 9, 2010.

Joe Firestone’s post is a response to the following video made by Nick (aka Mystic) back at about that time. (To further spice things up, Nick’s video was originally made in response to another Joe – Joe Bongiovanni of economicstability.org and whom some of you may know from his posts here and elsewhere as joebhed.)

I’m posting it here because it opens up the discussion of MMT a bit more – to include sustainability topics, and the like, and so, keys further into our site here. Joe Firestone’s full post (including quotes from an email by Randall Wray) follows Mystic’s video below:

[youtube]http://www.youtube.com/watch?v=xjzYY0rxB4A[/youtube]

In the above video, Nick, otherwise known as The Modern Mystic, has raised an important question about applying Modern Money Theory (MMT) -based economics. He asks whether if all nations used MMT-based economics to achieve full employment, truly universal health care, and free public education for everyone, whether the world wouldn’t run up against resource limits, and whether these limits along with competition for resources from everyone wouldn’t cause resource price inflation?

Put another way, he is asking whether even if MMT-based, or as he calls it, “chartalist” economics, is rational at the “micro” level of the nation, it is also rational at the “sub-macro” level of a world system made up of interacting economies, national governments and interacting sovereign currencies, but no world fiscal authority? Or put still another way, is MMT-based economics, which may be fiscally sustainable in the short run in a single nation, both fiscally sustainable and socially sustainable in the longer-run in an international system of interacting, nations, currencies, and economies?

L. Randall Wray, Professor of Economics at University of Missouri, Kansas City kindly called my attention to Nick’s youtube in an e-mail, and had this to say in answer to his question.

. . . . Yes, every sovereign currency country in the world can use its monetary system to achieve full employment of all resources domestically, most importantly labor. Yes, if it tries to go beyond full employment it will drive up domestic resource prices; hence the Job Guarantee is the best way to get to full employment because it cannot go beyond.

That is, as I interpret it, the Federal Job Guarantee (FJG) proposal of MMT thinkers contains a built-in normative constraint on government spending at the full employment level. In addition, since the movement to full employment will increase aggregate demand in the non-Government sector, jobs created there will move people out of FJG jobs and into those jobs, since they will need to offer better compensation than FJG jobs. As non-government sector employment increases and FJG jobs decrease in number, Government spending will also decline, making room for increased non-government sector spending without causing inflation. Randy Wray continues about Nick and his views:

His question about exceeding resource constraints globally is legitimate but what he forgets is that we all have different currencies and we have to go across exchanges. Hence, Zimbabwe cannot pump up its domestic demand so high that it absorbs the globe’s resources. It can buy anything for sale in its own currency, but that does not mean it can buy anything for sale somewhere on earth for some currency or other because Zimbabwe’s access to other currencies is limited and there is not much around the world for sale for Zimbabwe’s currency directly.

Very large nations like the US and China can indeed run up global commodities prices and he is right to be concerned about equity issues. However, I am sure he will agree we are a very long way from global full employment of resources, and rising resource prices will increase flows, anyway.

So, Zimbabwe, or any nation, may create aggregate demand sufficient to fully employ its own population and facilitate its people maximizing their creation of their own real wealth, but generating demand that goes beyond a nation’s real wealth and potential to produce further wealth, will only result in higher domestic prices including higher prices in Zimbabwean currency for the resources it must import from others. So, there is a self-correcting factor in the system that would make it impossible for any nation to just create enough of its currency to corner all the globe’s resources.

Also, Randy’s reply about the legitimacy of equity issues and the ability of large nations to run up commodity prices, though qualified correctly by the point that we are very far way from global full employment, leaves open Nick, the Modern Mystic’s, question about whether MMT would be sustainable in the long run, if every nation did MMT successfully. So, I’ll address that now.

All of the world’s economies and humankind generally, faces the problem of scarce, non-renewable, natural resources “running out” in finite time. The problem is there for MMT, and it is there for any of the competing schools of economics. Joebhed, another blogger, who attended the recent Fiscal Sustainability Teach-In Counter-Conference, emphasizes the point that Nick, in raising the resource and social sustainability questions isn’t pointing to a problem that would be unique to MMT-based economies, if these existed. But rather is pointing to a problem that all schools of economics face.

Nick might reply to this point, by saying yes, but MMT-based economics makes this problem more acute, because its high aggregate demand approach, if followed all over the globe, would result in more and faster consumption of goods using scarce natural resources, than would a world where there were many more poor nations and people. This is a serious question, but I think MMT provides a ready answer to it. That answer goes back to one of its central ideas, which is that Government spending ought to be in the service of public purposes. Government spending, in other words, is for realizing certain valued outcomes, like full employment, truly universal health care, and public no-cost education for all. But that’s not all. In a world where natural resources are scarce, running out, and inequitably distributed, it can’t be part of the public purpose to get into increasingly serious conflicts with other nations over natural resources. Instead, the economy will have to be re-invented, so that its valued outcomes are socially sustainable, both domestically and internationally, and Government spending will have to be oriented as much toward realizing resource and social sustainability, as it is toward other outcomes.

And, if all the world’s economies implemented MMT principles, all of the world’s economies would also calculate the worth of the economy, it’s value for society, in terms of its success in achieving sustainability, as well its success in realizing other valued outcomes. Nick, the Modern Mystic, in his assumption, that competition among MMT-based economies would necessarily grow competition for scarce resources is making the assumption that MMT-based economies would necessarily involve the production of valued outcomes that used more and more of these scarce resources. However, if MMT-based economies are successful, part of the wealth they will produce will be the capability to produce energy from virtually limitless rather than scarce resources, the ability to clean the environment and limit any future environmental damage, the ability to produce goods from re-cycled materials, and most generally the ability to produce wealth using fewer and renewable natural resources.

Whether this will happen or not is problematic. But MMT-based economies can make the choice to use Government spending to facilitate a transformation to that kind of society, rather than to facilitate the kind of growth that is unsustainable. Just a little while ago, my friend and co-author, Henk Hadders, writes from a Conference in Paris he’s attending on sustainability and sustainable heath care systems, and he asks whether I or my MMT economist friends might react to the issue of the relationship between money and sustainability. I think I’ve already done a little bit of that here. But I’d like to do more by reacting to two questions of his, that perhaps Nick and Randy will be very interested in too. Henk asks (via e-mail):

1. Under which conditions can decreasing economic growth in the richer parts of the world be made acceptable? How can well-being still increase while economic growth decreases. How to manage the distribution of income and capital (in the broadest sense as man-made, built, human and social capital) in a society that moves from growth to a “Steady State”?

2. Under which conditions is a society under “Steady State” conditions able to “survive” without producing even more unemployment, economic crisis and poverty, than under the conditions of economic growth ?

I think the concern about limits expressed in these questions is very important. But I also think that the assumption that the need to achieve a “steady state” in the use, consumption, and renewal of natural resources doesn’t necessarily imply declining economic growth. Or to put this another way, economic growth does not equate to growth in the consumption of non-renewable natural resources, or in the too rapid consumption of natural resources. Since, I think both questions are ultimately based on that assumed equating, or at least on a close association between the two, they both beg the question of whether economic well-being and sustainability can increase together. I think that is the question we must answer, and also that the right answer is that it is possible for MMT-based economics to provide both of these valued outcomes.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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  • Nwalt2

    Professor Wray hits on an important point that Zimbabwe cannot just go into the worlds marketplace with their currency and buy oil or steel or any valuable commodity because the currency is too weak. Wealth must be created either by extraction of natural resources or value added manufacturing, in surplus as a prerequisite to gaining a strong currency. MMT FJG aside, the proper Governmental policies are needed to encourage job creation in manufacturing. This issue, in the last 30 years has hollowed out the US middle class and until now has been more important than resource constraints IMO. Going forward at some point our trading partners will require something other than paper in exchange for oil, steel, etc.
    Professor Wray of course like all Economists have a big blind spot where it comes to resource constraints. They are unable to recognize that there will be shortages of oil eventually, regardless of price and that there probably will be no good substitute.

    • http://overthepeak.com/wordpress/ Mystic

      I agree on the resources problem, but have trouble with the first paragraph.
      Not because I think it is wrong, but because I am at loss to understand how to work out the right balance of `productive` and `service` jobs~?
      I am thinking it is different for different countries, at different stages of development (but I don’t know why that should be so).

      How would a country know how many nurses it can have, for each welder~?
      (a silly simplification, but I hope you get the idea)

      • Nwalt2

        David stockman who worked on economic policy in the Reagan Administration recently commented on this issue. He made the statement that it may be difficult to see the harm to declining manufacturing employment, however picture the limit case of 0% manufacturing and imagine what kind of society you have. A Banana Republic that can only export raw materials.

        Given a level playing field, price and capital barriers to entry into manufacturing will regulate the number of manufacturing jobs.

  • Maxwell

    “I think that is the question we must answer, and also that the right answer is that it is possible for MMT-based economics to provide both of these valued outcomes.”

    I think the reality of MMT is somewhere in between the truth and perception of this [statement] right now. MMT, as I understand, is something like, “deficits don’t matter,” and some kind of abstract credit system. So, maybe I don’t fully get it, but nor do I care because this is too complex of a system in an infinitely variable reality. I understand there are many mathematical possibilities in this world… But reality, some where between possibility and perception, is why it is not so easy. You can’t precisely predict the timing of any possibility and truly understand all the long term effects. Reality is not efficient. However, there is a very basic concept we all question, “our natural resources.” MMT, understand it or not, already exists and has for some time. However, resources completely change the reality. Money without debt is the equivalent of living guilt free and we did it from 1980 until just recently and we had done this many other times in the past. People could go into massive debt and not go to jail for writing it off. The would continue on just fine and most people knew this. That was made illegal and then they allowed the banks to do it, because they had to and everyone knows it. But resources limit the exuberance and they always have. The great depression happened because the population out grew efficiency and the system became unstable. Then people figured out a way to catch it back up but this cannot be infinite. We break fix continually and faster and eventually we’re at zeno’s paradox. Half of a half of a half… is not infinitely sustainable and then again, on a long enough time line what is? Inflation is the reality of commodity prices regardless of quantity. Producer dependent commodities are all dependent on on naturally occurring commodities (that which we dig up) and these are limited without question. So the answer is that in order to live sustainably we have to face reality and not everyone can have everything they want because it does not exist infinity at the moment. If we can’t produce enough we can’t grow and we can either put limits on people forcefully or we can do it naturally. I prefer the later because its a lot more interesting than trying to calculate action. MMT is not the question or the answer and its absurd to believe anything is. Nothing can provide all. This is almost a “you aren’t God” injection but to be fair you know that. We know it. But that’s the mystery right? You know that you don’t know. I don’t know if I’ll live to see any great changes or if this will sustain beyond my lifetime but I do know that eventually things will drastically change and so too the money system.

    • http://overthepeak.com/wordpress/ Mystic

      Please accept a friendly tip – If you want people to appreciate your comments……chop them up into bite-sized chunks.

      • Maxwell

        noted.

  • Axionication1

    Mmt can possibly hoof the can a long way down the road. It is not a perpetual motion machine.

    • http://overthepeak.com/wordpress/ Mystic

      I don’t disagree, but would you like to say – why~?

      • Axionication1

        I read this article & finished with a very bad taste in my mouth. I am unable (& uninterested) in giving clever technical answers as to the why’s.

        MMT may be a powerful reality shifting tool & it may buy us time to do major work on alternative energy sources & renewables but it is surely not an engineering tool…

        I understand an itsy bitsy bit of qm, relativity & string theory- I have trust/faith that much more than what I understand on these subjects (& have the mental ability to understand) is indeed true. As an engineer I use the Newtonian tools in my toolbox to get my work done. To think that string theory would get me through my day would be idiotic.

        The Zimbabwe’s & Haiti’s of this world will not be saved by mmt or any other economic system. At their root they are corrupt shitholes. I cannot help but see much of the fervour behind mmt as nothing less than evangelism. A reality shifting time buying faith.

        I am sorry that that what I have just written is probably garbled. Mmt is surely not magic.

        • http://overthepeak.com/wordpress/ Mystic

          It will always appear like magic to you, until you understand it.

          • Axionication1

            I have an open mind towards mmt & will continue thinking on it. I have a feeling, that with time, you will do a 180…

            • Anonymous

              It’ll be interesting to see how that unfolds, ;-). I do know that Nick is not in the least adverse to going in a very different direction down the road, allowing things to naturally rearrange themselves in ‘is ‘ead if that is what seems appropriate at a later time… with further developments on various fronts. Now, I also won’t be too terribly surprised if the 180 is done by you, however, Axion, ;-).
              I guess my main question to you would be (and I’m not trying to be flippant here… I really would be interested…); what is the alternative you’d most like to see in place… I mean, if you really had your druthers regarding any possible kind of monetary system within the world as it is today?
              ~~~~
              As far as my own concerns…
              ** Things are happening so fast in the world on so many fronts… I just wonder… would anything like this (I mean really changing the perspective on this by enough people that it would make a difference) have a chance?
              ** The main proponents almost always couple the operational observances with the policy proposal they strongly advocate of — first and foremost — “full employment,” along with some other key policy proposals, such as a different stance on the shadow banking system, etc. – would others stay with those kinds of objectives, even if they did come to look at the operational side of things in the same way? how might it be used/abused otherwise (would it serve any real purpose to do otherwise… for one of the main considerations behind “full employment” is stabilizing the economy… are there other uses that would do that as effectively… if not, why go in a different direction than some of those key proposals… if it wouldn’t add stability?
              ** Getting back to the main proponents: How would the main proponents take on – I mean really take on – the fast approaching and multiple challenges of resource depletion that is at the heart of the reason this site, at least, was created (I see some things I respect along the lines of the challenges of climate change, there is more on that… but how would they converse with the likes of Richard Heinberg’s multiple concerns? with Chris Martenson’s? I personally think they’d have the shot at some really fruitful discussions… but I’d sure like to see them flesh those kinds of things out far more than is currently the case… although I appreciate the start I’ve seen here and there.
              Linda

              • Axionication1

                I wish I had more time to get to grips with things. Will try to answer your question/ pose some of my concerns, next Sunday. I enjoy reading your comments/articles.You are great value. thanks.

                A quick question of my own: how are you disposed towards Marxism?

                • Anonymous

                  Thanks for the kind words, Axion… (and yes, I imagine that’s the case with most folks – most barely have the time to take care of and appreciate the daily things of life… extra time to do much serious study/thinking/writing along these lines… quite a luxury…)

                  No, I don’t know much about Marxism. I’m trying to get better up to speed, however. Someone within one of the groups pointed out a great lecture series on economics… which led me to that person’s lecture series on the “history of economic thought,” which includes Marx. But due to the time needed to really listen to the lectures, I’ve been shying away from them… but if I really want to begin to get a better feel for the overall context of MMT (I don’t think the lectures specifically included MMT, but, still, they would help me with the context)… then, those would probably be a good place to start for me… at least to listen to a bit at a time.

                  I’m afraid to expound upon the little I do know (just taking a look at Mystic’s latest youtube exercise – asking a direct, straight-forward question about QE that basically NO ONE could answer, yet went on to reveal all that was in their heads about it… yikes! Although I didn’t partake in that directly, I could see myself in a lot of those commenters… if not on the subject of QE, on other ones… a good exercise… reminded me to get back to fundamentals regarding subjects I’m trying to better understand…)

                  For instance, I’ve finally decided to sit down to read MMT’s basic publically accessible paper on “full employment.” It’s not a long read, but I realized I hadn’t yet taken the time to “listen” directly from about their main policy proposal, at least in a basic form (they have gone on to write extensively about it elsewhere, but this is a key place to start). Their policy proposal regarding “full employment” is here: http://e1.newcastle.edu.au/coffee/pubs/wp/2006/06-15.pdf

                  Linda

                  • Axionication1

                    Hi Linda, you asked what monetary system I would like to introduce if I was god like.

                    I don’t believe that any monetary system will get us out of this mess. Some may buy time (your hospice analogy) & others appear more natural but none the less very brutal.

                    My question regarding Marxism- I increasingly see the final iteration of MMT to be a marxist pig with lipstick. Sorry.

                    I read a comment somewhere (it may have been Nick) where this person likened ‘something or another (?)’ as having your head in a lions mouth and complaining that the lion has bad breath. So too I think it is with our optioneering on monetary systems.

                    At root I believe our problems are a result of ( it is a list…): Greed. Lack of accountability (for some). A corrupt legal system. A debauched positive feedback loop between politicos, electorate & big business. Utter failure of leadership. And the massive hypocrisy that forms part of many of our day to day thoughts & actions. There are no doubt more…

                    I think that we are essentially self deluded. Perhaps this is the dream like state that jp refers to.
                    No system will improve our lot until we fix our moral fundamentals.

                    • Anonymous

                      I see your point… Even if MMT (including some of the main proponents’ policy proposals) were accepted by key people and a strong majority of the public… there are other important problems that have nothing to do with MMT or any other system that is/could be in place…

                      I know that some of MMT proposals (or with significant commonalities) are being tried in a few places around the world (they have also brought up some similarities with some things that happened in the past that got to near full employment)… It sure would be nice to see how those progress.

                      Again, with so many things, we also bump up against Hirsch’s concerns about the kind of time for any significant mitigation to be implemented – 20 years out, 10 years, etc…. Huge differences between 20 or even 10 than trying to take up such challenges as the challenges are upon us.

                      I think the folks I most admire right now along these lines (as I have probably said too many times elsewhere, ;-)) are folks like Richard Heinberg, Rob Hopkins, that woman who created that video (and is living it out) regarding “Farms of the Future…” They’re working on implementing at least what they can of “mitigation” here and now… When I think of “green shoots” in the world today, I first and foremost think of folks like them… What will come of their work (and their associates)… I don’t know… But I do admire it.

                      Thanks, Axion, for taking the time to write out the above…

                      Linda

                    • Axionication1

                      It’s hard.

                      You are correct, it is critical that we do find people/alternatives that we can admire & at the very least ‘give a go’. Something I am lacking in…

                      I have read John Michael Greer (of a non prothletising mystical bent) for quite a while now & have consistently found him to understand what is the what. He too offers (unguaranteed) actions that we can take.

                      Thanks.

                    • Axionication1

                      I have just returned from reading the latest archdruidreport: http://thearchdruidreport.blogspot.com/2010/11/no-time-for-lullabies.html

                      5 stars!

                    • Anonymous

                      I see your point… Even if MMT (including some of the main proponents’ policy proposals) were accepted by key people and a strong majority of the public… there are other important problems that have nothing to do with MMT or any other system that is/could be in place…

                      I know that some of MMT proposals (or with significant commonalities) are being tried in a few places around the world (they have also brought up some similarities with some things that happened in the past that got to near full employment)… It sure would be nice to see how those progress.

                      Again, with so many things, we also bump up against Hirsch’s concerns about the kind of time for any significant mitigation to be implemented – 20 years out, 10 years, etc…. Huge differences between 20 or even 10 than trying to take up such challenges as the challenges are upon us.

                      I think the folks I most admire right now along these lines (as I have probably said too many times elsewhere, ;-)) are folks like Richard Heinberg, Rob Hopkins, that woman who created that video (and is living it out) regarding “Farms of the Future…” They’re working on implementing at least what they can of “mitigation” here and now… When I think of “green shoots” in the world today, I first and foremost think of folks like them… What will come of their work (and their associates)… I don’t know… But I do admire it.

                      Thanks, Axion, for taking the time to write out the above…

                      Linda

  • James

    The more you dig into it, and compare it with reality progression, the more you’ll get to a global gov and trade international currency, with full citizen control. This is where we are heading.

    Bernanke Speech, November 19, 2010, Frankfurt Germany :

    Conclusion
    “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.

    Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy.”

  • Ferdinand

    The reason that MMT does not work for countries like Haiti or Zimbabwe is the lack of institutional quality of their governments. In order to prevent inflation and maintain the value of its fiat currency by removing it from circulation a government has to be able to implement taxation. Most third world economies are black market economies however and their governments are not able to maintain the oversight required to implement taxes.

    A country can conceivably print up money in order to buy up resources overseas but it would have to increase the taxation on its own population. This is necessary in order to maintain the aggregate demand for the extinguishment of tax liabilities in a given currency, because that’s where the currency’s value comes from. If a government doesn’t do this then the currency loses value proportionally to the amount that’s printed. An exception to this rule would be if there is a large demand from overseas to maintain reserves in the currency in question. This is essentially what the United States are able to do: Because countries like Haiti and Zimbabwe lack the institutional quality to implement taxation their own fiat currencies are perceived as worthless and their black market economies prefer to circulate US dollars. This creates a high demand for US dollars in Haiti and Zimbabwe. The United States can then print up dollars and trade them for Platinum from Zimbabwe and timber from Haiti.

  • Anonymous

    One of the things that I think the government should employ people to do is this. I think in every township in the nation there should be a small cadre of people who do nothing but help their neighbors get small gardening and winter storage programs going. People who would keep and maintain tools and become experts at things like composting and seed saving and drying vegetables. These people wouldn’t just teach and preach, they would go to peoples homes like missionaries and role up their sleeves and help pull weeds and everything. If we hired every unemployed person in the nation to do stuff like this it wouldn’t be to many!

    • Anonymous

      I rather like that idea, might even ask for such a job myself…

      Linda