Pragmatic Capitalism has the paper A Critique of Modern Monetary Theory (MMT). The introduction states the following:
Neochartalism, also known as Modern Monetary Theory (MMT) is an interesting and relatively new arm of Post+Keynesian Economics (PKE) that has developed in recent decades and has become quite popular in the last few years largely on the internet. As an arm of PKE there is much that is correct within MMT, but there are also some newer contributions made by the “neochartalists” that render the theory flawed and inapplicable to the modern monetary system. Although I find that MMT is incomplete, it is important to note that their description of the monetary system is, in my view, superior to the neoclassical models that tend to dominate modern economic discourse. I hope this critique will be viewed as a constructive criticism and not an attack on MMT.
A Google search will find you this definition of chartalism.
Chartalism is a term derived from the Latin word ‘charta’ meaning a ticket or token. Chartal money is the token for value, while metallist money is the thing of value itself. Precious Metal Viewed as Money.
I have only read 11 of the 73 pages of A Critique of Modern Monetary Theory (MMT). I am not sure of what I make of it yet, but other readers of this blog might want to have their own go at it.
I stumbled upon this paper as I contemplated the possible wealth effects mentioned in the article of my previous post Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies. I am nowhere near settling the issue, but I will try to describe what that issue is.
My epiphany on the wealth effect came about when considering how the Fed can get out of its low interest policy regime. If it raises interest rates, then the economy collapses. If it keeps interest rates low the economy is no longer being stimulated by a policy that has lost its effectiveness. My first thought is that a massive government stimulus spending plan will have to take place at the same time the Fed raises interest rates. Then I started to think about what is really being taken out of and put back into the private sector by the combination of these policies.
I got to thinking about the current state of inflated assets (stock market) and the impact of deflating that bubble. The bubble exists only because people value their stocks at mark-to-market prices. The wealth doesn’t really exist, but people think it does and they behave accordingly. If the stock market collapses and assumed wealth disappears, the government hasn’t actually taken anything out of the private sector pot and put it into its own pot. And yet, there are huge effects on the economy. So it is true that the accounting of “outside money” is not the whole story. “Inside money” is important, too.
The MMT assumes that “inside money” is less powerful than “outside money” because each creation of “inside money” creates a balancing debt on someone’s books. The trouble with mark-to-market accounting of the value of your stock holdings is the creation and destruction of notional money without any balancing debt creation or destruction. I am using notional money to mean money that you assume you have because of mark-to-market accounting, but this money only exists if you could sell all your stock instantly at the current market price. For small investors this might almost be true sometimes. If large investors or if many small investors make a similar buy or sell decision, then the mark-to-market price means nothing. The act of changing your stock into actual money changes the market price. You will only get the amount of money for your stock as you will find a willing buyer will give you.
What I am trying to research is what all this means in practical and in theoretical terms. This issue has been argued for thousands of years and is the subject of many PhD theses, books, articles, and Nobel Prizes. So it’s not that I expect to come up with a definitive answer. The point is to come to a better understanding from just looking into the question.
April 22, 2015
Now that I have read some more of the critique, I see a pattern developing. The author, Cullen Roche, seems to read into MMT extreme positions that I don’t think the proponents of MMT have ever taken, and then he criticizes those imaginary positions. There may be a few valid criticisms in what I have read so far, but most of it is knocking down a strawman that is the sole creation of Cullen Roche.
I think I will have to search elsewhere for what I am seeking. I am going to try to look at the composition of our money supply to see how much is outside money and how much is inside money.