Keen and Mosler on MMT

I enjoyed watching Steve Keen and Warren Mosler debating last night. They’re both engaging speakers, in very different ways. They both have a lot to offer. It’s unclear that they really disagree on anything fundamental.

I promised to write something quick on one of Keen’s criticisms of a view that Mosler holds:

Some MMT advocates interpret the implication of MMT, that all resources including labor can be fully-employed if the government runs a big enough excess of spending over taxation (I refuse to use the word deficit, given its false negative connotations here), to mean that the government “causes” unemployment.

To me, this is rather like blaming cold temperatures inside a house on the air-conditioning system rather than the weather outside. Yes, the house would be warmer if someone turned the temperature up, but fundamentally it’s cold inside because it’s cold outside.

It also implies that in the absence of government (or equally, if government always ran a balanced budget) there would be no unemployment: in other words, it’s Say’s Law in another guise.

I can’t address this directly yet, but I wanted to write about a related issue. I think it’s important to clarify this issue if we want to discuss Keen’s point here.

Mosler’s article on full employment and price stability makes one thing pretty clear, to me at least. His claim that the state is the cause of unemployment is philosophical rather than scientific. I’ll explain what I mean by this, but I think it explains why many economists (not necessarily Keen) find the claim to be simultaneously unintelligible and disagreeable. One economist I tried to explain it to told me it was ‘mere metaphysics’. As a matter of tone rather than sense ‘mere’ is the wrong word to use in referring to a nobler discipline. But I think it is true that the claim is metaphysical.

Begin with this question. What is the purpose of currency? What is it for? Right away this should strike you as a question that isn’t scientific. No amount of econometric research could settle it. Econometric data reveals trends and correlations but not purposes: think of the difference when the general tendency is for a thing to not be used for its proper purpose. Nor could psychological research on the issuers and users of the currency reveal its purpose. Mosler often suggests that many of the issuers and most of the users of currency don’t know what it’s really for; that was why he wrote his article.

But what does it mean to say that currency is for anything? If this isn’t a claim about a general tendency, and nor is it a claim about the intentions certain agents have, then what is it a claim about? It’s a claim, I say, about the institution’s purpose, as distinct from the purposes of the people participating in the institution. Maybe you don’t think institutions can’t have purposes of their own. But then I think you have no hope of understanding them. Anyway, I know that Mosler believes that institutions can have purposes of their own, because we discussed Robert Pirsig’s Lila, which contains that thesis.

Well here is one thing you might think currency is for. This is the story you find in economics textbooks. Currency is for reducing the transaction costs to private agents that pure barter would involve. It’s the private agents who want the currency for this purpose. Thus most neoclassical monetary models put money into the utility functions of households. A benevolent state creates and distributes this instrument as a charitable act towards its citizens. It taxes the currency in order to monetise it — that is, to guarantee demand for it. And then it puts it into the economy for private agents to use. The textbooks often add that the state must match its tax revenue to its spending over its entire lifetime to sustain the currency’s value. But that is an additional claim beyond the thesis about the purpose of currency.

On this view of the proper purpose of currency, it doesn’t matter how the state gets the currency into the economy. It could pay people a basic income; it could buy labour to provision the public sector; it could make regular payments to people with “von” or “Trumpington” in their names. As long as the currency circulates as a medium of exchange and acts as a store of value, it’s doing its job. If the state buys labour to provision the public sector, the citizens get a bonus: not only do they get a useful instrument for reducing transaction costs, they also get a well-appointed public sector. But it is only a bonus; if the state fails to appoint the public sector well, it is still using its currency properly, so long as the instrument is available for its medium-of-exchange/store-of-value purposes.

On Mosler’s view, by contrast, the purpose of the currency is to provision the public sector. Taxes are imposed to create demand for the currency, so that people need to sell their labour for it. In other words, taxes are there to create demand for paid work in the official currency, and not just demand for the currency as such. The state can then exploit this demand by issuing the currency needed to pay the taxes it has imposed and using it to buy labour to provision the public sector. A well-appointed public sector isn’t a bonus; it’s the whole point of the currency. Moreover if the currency doesn’t serve the textbook purposes — if it doesn’t get used as a medium of exchange and reduce transaction costs — that’s neither here nor there with regard to the purpose of state currency. If the private sector want a medium of exchange they can create their own.

(Nick Rowe wrote a post for me, criticising Mosler’s view of the purpose of currency and implicitly endorsing the textbook view — at least if I’m not reading too much into what he wrote.)

If we take the textbook view on the purpose of currency, we don’t have much scope for criticising the behaviour of current governments qua currency-issuers. They are issuing enough state-backed financial instruments to avoid the transaction costs associated with pure barter. The instruments are widely available, their value is not too volatile; they work at what they’re meant to work at. The fact that there is unused capacity doesn’t show the state to be mishandling its currency. If private citizens want to use up the spare capacity they can always borrow and invest in it.

If we take Mosler’s view, there is much room for criticism. The only point of having a state-issued currency is that the state can provision the public sector. Where there is spare capacity, labour and capital are being offered in exchange for the official currency, but nobody is taking the offer. The state should either reduce taxes, and thus the demand for currency, until there is no more spare capacity on offer, or it should expand the public sector to take up the offers. Since the only point of taxing is to create demand for the currency, and the only point in creating demand for the currency is to provision the public sector, it makes no sense at all for the state to leave the demand for currency unsatisfied by either taxing too much or spending too little for a public sector of a given size.

So a lot of the debate between MMT and the mainstream hangs on this question of purpose. How can we settle it? As I said, it’s not a scientific question. It is in fact partly normative. The question is what currency should be used for. And it seems to me that under the current system it’s important to have both a means of provisioning the public sector and a generally-accepted instrument of exchange/store of value for the private sector to use.

What I don’t see is why they should be the same instrument. Why not have one instrument that serves Mosler’s currency-purpose — used for payments to and from the state — and another instrument that serves the textbook currency-purpose — used for transactions among private agents?

The first instrument could be run on Mosler’s principles. It’s unlikely that people would save very much in a currency that was only to be used for payments to the state. But if they were e.g. uncertain about their future tax liabilities they might do so. The state would make sure to accommodate these savings desires by running a large enough deficit, so that no capacity for sale in the state currency went unsold for long.

The second instrument wouldn’t need to be state-issued. It could be created in a free banking system, with demand for it guaranteed through the liability-matching of the private issuers. They could choose whether to peg to the state currency by holding reserves of it, or peg to each other, or float. But their currency would not be acceptable for tax payments, since this would just get in the way of its usefulness as an instrument of exchange and store of value.

Would that make both Mosler and the textbook-writers happy? Maybe we’ll see. As for Keen’s complaint about the claim that the state creates unemployment, maybe he’d be satisfied if the claim were downgraded to this: the state is morally responsible for unemployment when it misuses its currency. But this claim rests upon the further claim that the purpose of the currency is what Mosler says it is. Since opinions on this are split, I say split the instrument. Then we can all be right.