Summarising, I suggest the two defining characteristics of MMT are: (1) a theory of public finance, which identifies inflation as the constraint on deficits, and advocates fiscal dominance; and a belief that (2) money is a liability of the state. The latter is false. One feature of a liability is that in order to transfer it voluntarily to another party you must pay them a positive sum. According to MMT, the supposed ‘liability’ money confers on the government is that it is accepted in payment for taxes and other government services. Funnily enough, everyone else accepts the same money as payment, without further inducement.
The reasoning used to argue that money is a liability is usually a variant of the “Randall Wray Fallacy” (RWF) I have discussed before: use the same word to describe distinct phenomena and conclude they are the same. (See my exchange with Randall Wray.)
Twitter can be very useful. The debate that followed this post provides lots of supporting evidence of the repeated use of RWF. Frequently, inverted commas are used to signal that the same word is being applied to identify something different. It also provides evidence of the ‘football team’ approach to thought. In a debate with thoughtful individuals on both sides, beware those that cede nothing, or ‘like’ only one side of the debate. Bias can be revealed by behaviour.
Twitter is also a rapid dialectical device. Where else can one discuss a school of thought, where the main protagonists are also pitching in? I have learnt a lot from these exchanges. And although certain entrenched extremes rarely budge, a majority of opinion tends to be in the centre and is open-minded. It’s not a waste of time.
From my perspective, the most flawed aspect of MMT is the dogma that money is a liability of the state at book value. Accounting as religion is something I have addressed before – and no one, other than Nick Rowe, Simon Wren Lewis and Brad DeLong [correction: and Stephen Kinsella] – have substantively considered the implications, to my knowledge. Think of it like this: what if the accounting standards for base money change? Would it stop being a liability of the state? The legal or accounting treatment of an economic phenomenon is neither the first nor the final word. In ethics and jurisprudence what is written in law is far from uniformly what is ethical or moral. That’s one reason why laws and accounting conventions change. That’s one reason why market values and book values differ. You dismiss Warren Buffett at your peril.
That said, many economists are very ignorant of much economic history (myself included). And reading economic history does change how one thinks economies work. However, history cannot alter a logical inconsistency. And historians are often profoundly biased – Niall Ferguson on bonds and fiscal policy springs to mind. He martialled lots of evidence from history on the probability of a bond collapse and runaway inflation post-GFC. Deductive reasoning and a smaller sample suggested the opposite, and was right.
Important questions emerge from the chartalist analysis of the history of monetary institutions.
But which of the following does historical evidence prove:
(1) That the state plays a central role in establishing a monetary monopoly;
(2) That once established, the survival of a monetary network depends on taxation (or some other compulsory government revenue);
(3) That the theoretical question – ‘is money a liability?’ – can be answered in the affirmative?
My synthesis proceeds like this: The historical evidence is very helpful at supporting (1), although there are exceptions. The three dominant networks identified by Hume – money, language and the law – are all frequently established with state intervention.
Regarding (2), I see no compelling evidence to support this. There is an obvious reductio ad absurdum problem: Let’s say the use of money in a society did depend on the government forcibly raising revenue, through taxes etc. What happens if the government starts cutting taxes? At which point do we suddenly stop and say ‘the government has stopped generating revenues from selling postage stamps – panic!’
That said, Warren Mosler has pointed out a very intriguing fact – super-low tax regimes seem to have (quasi-) fixed exchange rates. This is interesting. Obviously, super-low tax economies typically have other features. But at least Warren provides a testable hypothesis: if one of these currencies floats, taxation will matter less than he thought. I think it already proves that taxation matters not a lot once a network is established, and the idea that if Saudi floated its exchange rate there would be panic until they introduced income tax seems equivalently unlikely.
Finally, the latest tweet storm reveals that there is a legal equivalent to accounting as religion, it is law as religion. A liability in law, is precisely that. It can be an asset in reality.