Rebuttal to Bob Murphy’s Critique of Modern Money Theory

[Nima]

I just wrote a post with my thoughts on Bob Murphy's critique of Modern Monetary Theory.

 

Thoughts as always appreciated.

[Copper_Heart]

I think Bob is talking about Paul Krugman saying that USA govt can borrow more because credit is cheap. Now he reversed one.

I, however, want to make a question about one of your previous articles, noting first that my understanding of any economic school is limited:
 

The government doesn’t first raise taxes in order to obtain money to spend, it rather creates the money first by spending it into existence and then removes it from the economy via taxation.

 

So as far as I understand it,

1. currency/money is used because people see it as having value, basically, it is like any other good that we barter for.
2. MMT says that there is no need for government to put taxes in place(here is my weakest point, I am new here), just spending should be sufficient.
3. in this case, we talk about fiat, which by itself hold no value like an object.

So my reasoning goes as follows:

How to make fiat valuable? If a government just spend it fiat at first it will achieve nothing. It a fishy deal: people have work for this notes, but some entity can just issue them at will without any cost. Nobody would want that. So in order to put value into fiat government is taxing people. Then they start valuing money as their dear life. While necessity to repay adds makes it costly to create money, so that it does not seem unfair because at the end govt is promising to put some value behind it by repaying a debt.

If USA is not taxing but just printing, then somewhere some other forms of currency/money will completely substitute it. This will subtract from dollar's value even further because now it represents a lesser share of value in the market. The printing by a government, in this case, will create even great desire for people to hop off the dollar.

 

So as per argument that I have made 2nd point does not seem to hold. Have I missed something?

[Nima]

I think Bob is talking about Paul Krugman saying that USA govt can borrow more because credit is cheap. Now he reversed one.

 

I, however, want to make a question about one of your previous articles, noting first that my understanding of any economic school is limited:

 

 

So as far as I understand it,

1. currency/money is used because people see it as having value, basically, it is like any other good that we barter for.
2. MMT says that there is no need for government to put taxes in place(here is my weakest point, I am new here), just spending should be sufficient.
3. in this case, we talk about fiat, which by itself hold no value like an object.

So my reasoning goes as follows:

 

How to make fiat valuable? If a government just spend it fiat at first it will achieve nothing. It a fishy deal: people have work for this notes, but some entity can just issue them at will without any cost. Nobody would want that. So in order to put value into fiat government is taxing people. Then they start valuing money as their dear life. While necessity to repay adds makes it costly to create money, so that it does not seem unfair because at the end govt is promising to put some value behind it by repaying a debt.

 

If USA is not taxing but just printing, then somewhere some other forms of currency/money will completely substitute it. This will subtract from dollar's value even further because now it represents a lesser share of value in the market. The printing by a government, in this case, will create even great desire for people to hop off the dollar.

 

So as per argument that I have made 2nd point does not seem to hold. Have I missed something?

 

I think the key misunderstanding is this: "MMT says that there is no need for government to put taxes in place"

 

MMT says the exact opposite. It says that if a government wants to introduce a monetary token, it HAS to first declare a tax, payable in that token only, so that the governed subjects have demand for it.

 

Does that make sense?

[Copper_Heart]

I think the key misunderstanding is this: "MMT says that there is no need for government to put taxes in place"

 

MMT says the exact opposite. It says that if a government wants to introduce a monetary token, it HAS to first declare a tax, payable in that token only, so that the governed subjects have demand for it.

 

Does that make sense?

 

It does now, thanks. I am not sure in what state of mind I was reading, but I am glad I had quit early. XD

[Nima]

It does now, thanks. I am not sure in what state of mind I was reading, but I am glad I had quit early. XD

Haha, nice

 

I've also recorded a related clip: 

[Caley McKibbin]

Austrian economists by and large ignore this causality because they believe in the barter theory of money, where you can indeed hallucinate into existence an economy that functions without taxation and government spending, such as the one Murphy elaborates on in this article, where he neatly imagines how Robinson Crusoe could easily save up coconuts without any government deficit spending. This model is helpful if you’re ever stranded on a lonely island with coconut trees. It isn’t if you’re trying to understand the workings of a complex monetary production economy.

Is that an argument?  That paragraph basically reduces to "Some people say x and x is wrong."  Every economy involves one basic function regardless of anything being called "money".  The question of barter was asked a while ago in the offshoot Mises Community forum and I answered it:

 

I recently rewrote my financial analysis program to solve barter economization, including denomination of everything in terms of anything. Once you get at least one price of any sort for every class of item the rest is purely computational (and about as easy as problems get). The real calculation problem is not consulting people to get meaningful prices rather than not having prices specifically in money. I vaguely recall this being addressed by someone like maybe Hoppe in a response to the calculation debate.

It's trivial how many people or things are in the system.  The same elementary function is repeated some number of times.  What you linked to does not explain what barter is, so it only confuses the issue.  What was said a few posts down from mine is spot on:

The very definition of "barter" requires the assumption of the existence of "one money" in order to label as "barter" all exchanges not involving this "one money". I don't see any reason to make this assumption, which to me makes "barter" meaningless.

So it's not really an "empirical" discovery that there was no barter before money.  It's true by definition.  The ex post facto characterization of a system as barter stems from the retro application of a later identification of some type of good as money to that system.  E.g., any system prior to dollars or gold coins is "barter".  Which is not saying that a different kind of computation is involved.  So what is the "barter theory of money"?  Maybe it is the mere observation that some good became dominantly used in exchange sequences to obtain A starting with B.  I can't specifically recall any Austrian economist saying otherwise.  So referenced needed for that.

 

He also indirectly touches upon a common mistake made by orthodox economics and also Austrian economists: They think that banks need people to deposit savings before the bank makes loans allowing borrowers to invest.

Reference needed for Austrians that think that.

 

This topic is old hat by now.  So the conversation is not fresh in my mind.  But I watched the debate between Murphy and Mosler and recall Mosler did say something to effect of "deficits don't matter."  As a critique of the form of your article, you need to have a clear purpose.  As it is I don't see an argument.