Home > Main > Two Minutes Hate: Why not accept the Basic Accounting of MMT?

Two Minutes Hate: Why not accept the Basic Accounting of MMT?

February 22, 2011

From the Comments:

Given that, I still cannot understand why it is so hard for people to grok the sectoral balances accounting identity
G-T = S-I + M-X
which makes it clear that for a country with CAD (M-X>0) such as ours government deficit G-T is absolutely necessary for domestic private sector’s surplus S-I. I did not study economics but I had the impression that this equation is taught in every elementary economics course. What is then the objection people might have to this simple fact? What am I missing?

If you look to why people don’t like MMT, Austrians are the leaders of the two minutes hate.  People like Bob Murphy hate the fact that money is and always has been a construct of the state.

Murphy mistakes assets for savings, and he doesn’t understand the fundamental powers of government. I’ll give him a very, very slight break – Austrians confuse the real and monetary economy as a badge of honor.  See the discussion of 1 for more details.

Discussion of Murphy’s mistakes: Murphy makes two fundamental mistakes.  The first mistake results from his confusion of assets and savings. Murphy doesn’t understand the meaning of the word savings in an national accounting sense, or deliberately confuses real and monetary accountings.

Wynne Godley's Matrix of Accounts

The word savings in national income accounting has a very specific meaning, and stock ownership isn’t part of the definition. Stock ownership isn’t part of the definition because of a simple reason – any transaction involving stock simply transfers money from one person to another person, and doesn’t create any money at all.  The amount of money in the system remains the same.

The goal of monetary accounting is to identify where the money is.  It is not to value investments and assets.

Really, he makes two different errors related to this identity, but I’ll roll them up into misunderstanding of the word savings.   (Aside: Wynne Godley does a better job with the accounts in his work and is must read  to further your understanding money.)

Murphy’s confusion of savings and assets can be demonstrated easily.  To have savings in a monetary economy, you must have those savings in money.  Owning and asset worth money is not savings, even though it may be a valuable asset that you could exchange for money.  In national income accounting, we count the money, not the valuable assets.  The total net worth of the United States is roughly $55 Trillion, nobody in their right minds would say we have $55 Trillion of savings, simply because worth and savings are two very different ideas.

His example of a bus driver buying stock is a perfect example of this error.  The bus driver has decreased his savings of $1000 to purchase an asset for $1000.  Somebody else now has the $1000 cash money and the bus driver has some stock that someone else owned, so the savings across the economy are the same.

Nowhere in any national accounting does this transaction make any difference – because the amount of cash and stock in the economy does not change.  There is still $1000 in cash out in the real world.

For any given currency, savings only matters across the entire economy. Yes, my personal savings matters to me. But if I hold my savings, and somebody else has a deficit that exactly equals my savings, overall, there is no savings in the economy.

Re Murphy’s second mistake:  Governments are different than all other entites.  Here is a quote:

But perhaps a clearer way to pinpoint the fallacy in Nugent’s argument is to tweak it ever so slightly. Note that there is nothing special in choosing the US federal government as the financial entity in question. Nugent could just as easily have argued, “The Murphy household deficit = non-Murphy-household savings (of net financial assets).” Then, if the data indicate that right now the Murphy household spends $10,000 more annually than it earns in income, while my wife’s Colombian relatives lend us $10,000 net this year, then US (government and private) net savings (vis-à-vis my household, that is) must be zero. Clearly I need to go buy some more Big Macs and plasma screen TVs lest the nation’s children find it literally impossible to put money in their piggy banks.

He is right – on an accounting level, there is no difference between people and governments.  The accounts are treated the same – debits and credits are debits and credits.

On a practical level, there is a massive difference. Governments have a monopoly on the legitimate use of force within a geographical area.  Murphy understands this as he demonstrates in his next section.  What he fails to understand is that as far as I know, the advance of civilization has been always and everywhere accompanied by  government and government issued money.  There is one non-contacted tribe in the Amazon who doesn’t pay any taxes, and Mr. Murphy is free to live where he chooses – so he could go live with them and not pay taxes on his earnings. But everyplace else on the globe requires the payment of taxes.

It seems like a universal law of human behavior – Humans use speech, use tools, create government, collect taxes.  Didn’t Ben Franklin have something to say about Death and Taxes?

In many ways, the story of civilization is the story of advances in government.  For example, there is an entire sub-discipline of economic history devoted to the investigation of why former English colonies have performed so much better than French colonies.

It appears that when the hand of government is light, modern weaponry allows brutal monsters to take control of the population with ease. See Northern Mexico for what happens when government abdicates responsibility within a region.

Do Austrians like the idea of Freedom, but hate actual Freedom?

Murphy is disgusted by this idea that people like government and are willing to pay for it.  In fact, a leading light of the “libertarian” movement, Peter Thiel has come to a similar conclusion.  Thiel says: “I no longer believe that freedom and democracy are compatible.”  Wow.  He must want a dictatorship where his ideas of freedom are enforced at gunpoint.

One of the more odd things about the Austrian arguments is that in many ways, MMT provides them with a huge tool set to do real research, but because they hate empirical study so much, they won’t bother.  Check out this quote from Murphy:

The standard Misesian/Hayekian explanation of the business cycle is that the commercial banks arbitrarily increase the supply of loanable funds, even though the community hasn’t actually increased its real savings.

That isn’t far from the MMT/Minksy view in some ways.  MMTers also say that banks are not constrained by deposits, and Minsky’s instability hypothesis is that banks increase lending (and go through his 4 levels of financing) due to competitive pressures until small, unexpected shocks make formerly profitable loans massively unprofitable. We’ve just done the accounting to show this is the case, instead of stating it as a truism.

There is another class of 2 minutes haters, and these are people who understand the math and accounting, but wave their hands because they don’t like the conclusions.  This includes people like Jessie over at Cafe American, and a few other people. They either mock the math as being defined as true and therefore meaningless, when nothing can be farther from the truth. As .  or simply don’t like the fact that you can actually do hard work and figure out with math something they’ve spent a lifetime talking about with mushy words.  I’ll have more on Jessie Thursday.

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  1. Peter D
    February 24, 2011 at 11:02 pm

    This is great, thanks!
    I agree that people actually like the govt. The more I think about it, the more convinced I become that the following is going on in our national discourse:
    1) Our government spending is mostly what most of the people want: if you pick almost any government program, it will have support of majority of US public (see this, for example)
    2) As such, our spending is a reflection of a working, healthy (for most part) democratic process.
    3) Because of our misunderstanding of our monetary system (and because some powerful interests involved want a bigger share of the pie) the people get scared of the “unsustainable deficits”, when in fact, there is nothing inherently unsustainable about them (which is not to say that any deficit or spending is good or bad – but then we’re back to points 1 and 2 and the democratic process involved).
    4) Because of this fear people convince themselves that there is actually a lot of wasteful spending and, oh, if only we got serious about reducing our deficit we could do it, if it weren’t for the bad cowardly politicians in Washington.
    5) Conclusion: We’re deluding ourselves 🙂

    But I am still optimistic, especially since Austrians – should we call them Austerians? – are so inherently pessimistic. I don’t thnik their dour philosophy can find a lot of support in out naturally optimistic society.

  2. March 19, 2011 at 9:09 am

    Nice work you’re doing here. The route you went on your second point about how governments historically issued money and collected taxes was important, but perhaps not the route I would have taken. Instead I would have said that every other class of agent in the economy has limited ability to spend more than income except the federal government.

  1. February 22, 2011 at 9:56 am
  2. May 9, 2011 at 4:24 pm
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