Modern Monetary Theory | Lucas M. Engelhardt

all right so the top this afternoon out here but first owner thank you for coming like yeah I know you had the opportunity to hear a funny talk instead so you're here people really devoted to monetary theory I again I appreciate that so the talk this afternoon is about modern monetary theory although when I look at the title right of this theory that kind of makes me wonder what postmodern monetary theory would look like I don't know so but I think I told the story that the first night of how this talk came about was that I suggested the doctor Murphy would give a really good talk on modern monetary theory so here I am that's okay but so because I got assigned to me I had to actually find out what modern monetary theory is and the more that I read into it the more I realized that modern monetary theory isn't particularly modern it's not really much of a theory in many ways there are lots of things that go unexplained and it's not even clear II clearly about money so the the title I don't know how they got it but there it is but we know that nonetheless it is an important idea that we do have to deal with nowadays despite the fact that for a long time it's kind of existed on the fringes of economics it has been pushed into the limelight recently okay so I need to tell story about how I get my news because I don't like to like pay attention to the news I don't know I like to be disconnected from reality as much as possible that's why do economic theory so I get my news one of three ways right like either my wife tells me about it because she likes news better than I do right or it comes through on my Facebook feed right somebody shares a news story oh okay I found out about that happening or on my phone I can flip through swipe to the left and then Google will present things that it thinks I might find interesting all right so this morning I swipe to the left and there was a story from Bloomberg News were apparently stephanie kelton who's one of the big names in modern monetary theory declared that she believes that central banks are going to become more accommodative to fiscal policy which is exactly what modern monetary theorists want to have happen right so it's right there Google decided that it was important for me to know that it's a little bit creepy I wonder whether they know about this talk happening probably so because I put in my Google Calvin I obviously don't care much about privacy anyway so let's get into modern modern monetary theory first kind of outline what it is and then I want to respond to it now I'm going to try as far as possible to be fair in my presentation and not have modern monetary theory say things that the theorists don't actually say because they do suffer from this quite a bit and as an Austrian economist I can sympathize with that problem right so I want to be as fair as possible to them all right so when you look at modern monetary theorists they will say they're really two sides to what they do one side would be the theoretical side the other side would be the policy proposals that they would present so we want to focus at least I like the theory side if we get that right I think we can understand the proposals better so let's start by looking at the monetary theory now really I said before it's not that modern it's actually a combination of two previously existing theories that have been around for a good century right so first is the credit theory of money which comes from alpha demon Alfred Mitchell Ennis and roughly a hundred years old and the other is the state theory of money of Georg Friedrich nabbed so well the modern monetary theorist erty are doing or taking these two theories and combining them in a specific way if you want to do some reading from the more modern modern monetary theorists just a few names to look at Bill Mitchell Warren Miller Randall ray Randall ray actually played a big role in my formation of this particular talk he has a talk a modern monetary theory for beginners that's up on YouTube you can watch it's I think an hour 15 minutes something like that as I'm pulling a lot from him right in this summary Scott full Wyler has some work that you can very easily get to and then stephanie kelton who I just mentioned but so most of this talk really comes from the works of Randall ray Scott full Wyler and stephanie kelton being the big names that I've looked at okay all right so but I certainly would encourage you to make sure that I'm being fair I go out read them so how does it start that is in fact the question that we're going to start with how does money start according to modern monetary theory so go back what is the origin of money well they inherit this from the credit theory of money so the idea is the money is created right as effectively a debt instrument alright so I might for example write up an IOU or so I owe you five dollars right from Engel I hand that to you but then this can circulate or you can use this IOU to buy things from other people right and then eventually but if somebody owes me those five dollars they can come back to me and say ah but I have the IOU all right you actually owe me the five dollars that I owe you and then it cancels out we call that Redemption right so this credit is created the credit circulates right and then it ends up eventually back where it started and I have to accept right the debt that I owe myself then at that point is the idea and so historically they might point to several forms right this is taken it's so one right would be the form of tally sticks and so this is actually when I heard this described by Randall right it's a very interesting idea right so the way they would keep track of debts here you would have a literal stick right a wooden stick and then they would cut like different widths of cuts in it in the different widths were different amounts of money or grain or what-have-you right there was owed then they would take this tally stick and they'd cut it in half right lengthwise right so the creditor would keep right one half of the stick or the debtor would have the other half and then right when things are paid off right this all canceled out or you take the two halves you put them back together and that ensures that there's say no counterfeiting involved right nobody was adding hash marks to this at all you actually owe me more than we previously said no right the debtor still has right there stick to prove how much they would to start with which is kind of that's a clever way to go about this I think of accounting for debts or that's fairly easy to understand I Randall Ray mentions that these tally sticks actually hung around for a long time in history they're being used in some parts of rural Europe as late as the early 1900s right so we have a very very good evidence these things exist and we find them going way way back historically in the anthropological record and this idea that the debt played an important role modern monetary theorists would point out it's very consistent with the anthropological evidence we have right that is that we know that dead seems to be prehistoric because the earliest writings we can find right from the Sumerians our debt records from what we can tell which means since history started when writing came about right debt was apparently already existed right so debt is already as old as history meanwhile if we look at the record according to modern monetary theorists in here I'm basically quoting Randall ray when you look at the main gariands story I think you're in story's a little bit different how does money come about according to manga like well we have this barter economy but barbed economy runs into problems which dr. Klein described earlier it's double coincidence of wants is difficult right has to match up you have to have what I want I have to have what you want these divisibility problems as well right so it would be kind of nice if we had something that could both everybody would want it's solving the double coincidence of wants cuz we all want the thing and then also would be a divisible right now we don't immediately do this rather we figure out some things are more marketable than others right so i trade my less marketable good for a more marketable good even if i don't want it and then eventually this becomes extremely marketable is commonly accepted as a meaning of exchange and that's how we get money so that's the story that we would tell i'm following the main gear in line the response to that the rand or i gives is that frankly there is no anthropological evidence that there was a pre monetary barter economy we just don't see it on the other hand the earliest evidence we have historically is that debt did exist it's the holiest history we have is dead existing so this is clearly evidence that the credit theory of money is more credible because we know that credit existed from the beginning we don't necessarily know that barter ever happened this is Randall Ray's story right so now then where does the state come in so let's add an estate theory of money alright so another thing we know is that pretty much as far back as we have good records of monetary systems working the authorities have been involved here the authority is meaning the state the king whoever it happens to be and the suggestion here is that from a theoretical basis what the state does is unifies the monetary system right so when we think about the credit theory of money a consequence of that is that anybody can create money as soon as you're taking out a loan effectively or that creates this credit instrument that can circulate right as money so how is it that we all end up using dollars right rather a multitude of different currencies all of us in debt having our own currency being issued how does this happen well here the modern monetary theorists suggest that there is a hierarchy of money and at the top of this right is government debt so government debt is at the top of the hierarchy right it is then used as a money of account so why is government at the top well because everybody has to pay taxes in our society right right so we're all willing to accept right this government debt and then I can hand back to the government when I owe them money is IOU is canceled right right so we all need to have right some of this debt that was issued by the government to pay them back so that then that's a prominent place right on the government money there at the top of the monetary hierarchy whereas my Englehart dollars are not at the top of the monetary hierarchy so then how does this then float down well second in this hierarchy right would be bank issued money because we know that when I pay my taxes right I don't have to pay it in physical dollars I can pay say with it the check of course this checker it is a debt instrument that is on it's against a bank right not against the government so this bank money because it is also accepted in payment of taxes but it is also a very important right in the monetary system right just underneath right the state issued money according to the modern monetary theorists follow on down right then we have all the individual monies right right so for example when I went into debt to get a mortgage right that was a creation of money right right there but it is denominated in the state money of account right which makes it more acceptable makes it more likely that I'm actually going to be able to get the loan that I need in order to pay for my house say I put this creation of money they would say that still exists yes that was personally created it's just not as acceptable right so I can't just create money on my own as easily right as the state can okay and so that's the story of where money comes from and how the state gets involved the payment of taxes is important key so now come forward right - how does the modern monetary process work so we've got the origins we've got how the state got in what do things actually look like today so here you hear this phrase right from the modern monetary theorist they say we focus on the operational realities of the monetary system that's the phrase they like and here Rendel Dre and his talk it's really fascinating to watch he starts with a criticism because of kind of standard mainstream macro where do you start with me mainstream a croats the circular flow diagram so we have the households on the one hand we have firms on the other hand right and there's money circulating around here as households are buying goods and then as firms are buying the factors of production from households so money is flowing around and Randall races well the problem with this is it doesn't tell you where them I came from in the first place all right so credit three of money comes in here to explain that all right so how does this actually work in the modern system though here they say we need to get the government in there from the beginning after all our money of account right is government money right dollars so government creates this money through its spending process it's creating that money in spending that's how many gets created in the modern system right and then it redeems right some of this money or the old system of handing back the tally stick effectively but when things are being paid off it redeems some of this money through the taxation process spend money into existence they tax some of it back out right and some of this we can also take out of the system through the issuance of bonds right so so I issue these things that are more obviously credit instruments right and that also removes right some of what we would think of as money out of the system uses an example another historical example of the colonial Virginia apparently issue this is really interesting at the time he says colonial Virginia was running to a problem and were they they just didn't have enough right of the official money of the empire of the British Empire right so what they did to solve this problem was that the colonial government created a bunch of just paper money I think he said something ten thousand pounds or something along that although I think it was just a hypothetical number that he gave created this 10,000 pounds that then they could go out and spend right in order to pay for the various things that the government had to pay for and at the same time in that same legislation they introduced a Redemption tax was actually the name that they gave it of 10,000 pounds so the idea is we spend this money out eventually it's going to flow back to us and that is exactly the way that they suggest the system works now is that we spend this money out at least some of it is going to flow back to us us being the government here so this is kind of the heart of how the modern monetary Theory works as I understand it now where things get more interesting for me is the practical implications of this but if this is the way money works then practically what does that mean and here here the modern monetary theorists are extremely clear it's say because fiat money can be created just infinitely by government government spending has no financial constraints as long as you have a sovereign currency that is as long as it is your government creating the currency for your country so this would not work for say dollarized economies other than the United States or for say a lot of the say the eurozone that we're not producing your own national currency but if you are producing our national currency you don't actually face financial constraints effectively you can always print the money into existence and buy whatever you need to buy however and this is where they're often misrepresented the modern monetary theorists are very clear and they're not saying that deficits don't matter or the deficits never matter rather they recognize that deficits are funded through money creation and this can create inflation under the right circumstances it's so you might ask say Randall ray well what about the 1970s forgive all this high inflation right how did that happen he says well it depends how the money is targeted it's so if for example as he suggests happened during the 1970s but the government's spending a lot of money it's creating a lot of money to spend but where it's spending it is not on all these unemployed people where we have high unemployment rates it's rather trying to hire away engineers and alike right from say your tech companies as we're trying to do more space exploration or that kind of thing now that we've been to the moon we have to do something else right so we're trying to hire factors of production that are already being used when you start running up against good pass the only way to get those factors into the government is to bid higher than all the private actors meanwhile we can so we can have high inflation from that the government driving up prices from trying to buy away bid away are these various factors of production that are already being used by the private sector and yet this is perfectly consistent with also having high unemployment if the government's not bothering to hire those people that are unemployed so there's no inconsistency here as far as Randall ray is concerned and he would point to other cases you might challenge more well this hyperinflation things like biomart Germany okay well there the problem and according to Randall ray but is not that we're just creating too much money the problem was that Germany I had these enormous war reparations they had to pay back in in monies other than their own but and these claims are so large that effectively all of the production of Germany right was required to be sold internationally to raise that the foreign currency to pay these off which means effectively there weren't really resources there right for the government to buy with their money so if they create money at all right they're having to bid these resources away from having to pay off right all these foreign debts so this money creation is naturally going to be extremely inflationary in this kind of environment cuz the resources aren't available we're having to bid away from these other uses but that is the claim all right so naturally we get hyperinflation in this case and he would say those somewhat vaguely no this is the kind of thing that also happened in Zimbabwe more recently all right however at the same time if we spend money on things like say providing a job guarantee I have the government act as the employer of last resort for anybody so anybody who wants a job and can't find one right now we're not bidding resources away from the private sector okay so that's not going to be inflationary okay so that's the distinction if the government's trying to bid away from the private sector that will get inflation if we're just buying up unused resources this is not inflationary we can print as much as we like for that purpose now naturally there would be a limit with this eventually everybody's working for the government which when it would become inflationary to do more of this and I think it's fair to say the modern monetary theorist would not deny this once everybody's working for the government okay we shouldn't print money to hire people more or if we do it will be in Neri okay all right so this is as I understand it the positions of the modern of the modern monetary theorists on these points so I want to respond to the modern monetary theory first I think it's best to always recognize the good right before you start criticizing all right so what is good about the modern monetary theorists well first I want to agree but it is true that technically fiat money can be created without limit and in fact I think that Brandel ran his exposition modern monetary through for beginners it makes an important point in correction but actually something that I have gotten wrong here at Mises you say things like oh it only costs 5 cents right to print a 10 dollar bill that kind of thing well as Randall ray points out focus on the operational realities the reality is that when we create money we're very rarely printing bills instead it's basically free because it's not just happening in the computer right so you just press some numbers and we can create money right which means we can basically create money without limit ok yes nobody denies this in fact I've never heard anybody say well the problem right with modern monetary theories that you can't actually create that much if you got money no ill agreed grant that a second point and this is something where I do think the modern monetary theorists do actually better than the mainstream is that they understand the Munder stand the way that money works in the economy in a disaggregated fashion right so the way that we can get things like the stagflation that all relied on disaggregating the economy and say well we have this sector that's kind of underutilized this sector that's already utilized this disaggregation and understanding that money will have different effects depending on where it ends up right I have to give them some credit for that or that is something that's difficult to see if you look at the standard Keynesian or freed Manion framework I think it would typically get from macro economists so so good job on that also I'm not even going to deny right that credit can actually serve as a basis for money Mises talks about credit money in the theory of money and credit this is something that you recognize his first can't happen in second actually had happen that is that you can have something some kind of debt instruments that are you used as a medium of exchange this is perfectly possible and we know that it has happened so I'm not going to deny that either okay but let's dig into this a little bit then like some Mises talks about right this credit theory this is not the credit theory of money but the idea of credit money and he says what distinguishes credit money right from from just a standard money substitute right so I have this gold-backed currency say well what what is it the distinguishes the two he says first it's not immediately payable in full on demand or less that's one possibility right or its repayment is not absolutely certain that's what makes it credit money rather than just a money substitute or I can hand this in and get the gold in exchange but it's in at the time I thought this is really interesting too as I was reviewing through of money and credit and this distinction because I knew he talked about credit money I want to see exactly what he said at the time that Mises was writing he suggested that a lot of alleged fiat money was actually just credit money up to that point in history he said it's theoretically possible for a true fiat money to exist but at the point that he was writing he wasn't sure that it had happened its credit money as far as he was concerned was something that had happened though don't you think it's interesting but now let's get more into kind of what I consider be the problems with modern monetary theory the first isn't the definition of money and I didn't he may notice I didn't really define money in modern monetary theory terms quite yet and the reason is that they're kind of vague about it at times right so Randall ray I found within that talk was particularly bad as he offered actually two different definitions of money all right so the first of them is that money is an IOU right so money is credit of the second though which is the one I want to deal with first is that money is a social unit of the measurement of value right it's a social unit of the measurement of value okay so let's start with that one first that's the easier one I have to deal with so the social unit for the measurement of value okay so so here's the problem in brief right value is not measured because value is not something that exists inherently and a good so you can't really measure it per se look the way you can length or mass or weight right these kinds of things right value we know instead exists right in the eye of the beholder it values subjective right so the value of that I place on something may be different than the value you place on it now if we're talking about exchange value that's a little bit different in that that is an objective thing well that's not inside the good rather in that case I would say the if we say to swap out value for price being the exchange value though that doesn't really help us idea of a measurement of value again because prices are not measuring the objective exchange value of money right the price is the objective exchange value right for a particular good right you might put in another way prices are stated in money you're not measuring alright something in this case so still no measurement here I put it but I think it's probably not fair to hold Randall right too much to that particular definition because he does offer us another one right and the other one seems to be the more acceptable one to most of the modern monetary theorist Stephanie at the time of Stephanie bell she's now stephanie kelton wrote a very interesting paper regarding this this money as an IOU concept alright so what this suggests right logically and we stayed this before is that any IOU right it's effectively money then if money is credit any time credit is created money is created and that's where she introduces this idea of a hierarchy of money now here's what stephanie kelton says affirming this definition right ok oh here's the paper right the role of the state and the hierarchy of money that's the title in this she says right money is credit it represents a debt relation a promise or obligation which exists between human beings and cannot be identified independently of its institutional usage so money is dead this is this debt relation right that exists and then she goes on to quote hyman minsky so who said that everyone can create money right the problem is to get it accepted randall ray also suggested this which i think is kind of a clever steam and anyone can create money the trick is to get it accepted but stephanie kelton made in a great point here and she said no that's actually not true right debt is a two-sided transaction right if I'm actually creating money but I need to find somebody that's doing the lending side of that transaction right so if I'm creating money it's already accepted means we're entering into debt so she actually corrects the logic of one of the predecessors of her theory which I can appreciate that as well you can have a debtor unless you also have a creditor so let's deal then with this one this is a little bit more complicated now I would suggest that the very idea of a hierarchy of money suggests an additional standard for what we might call moneyness right his Kelton suggests right that the money that I create right through so credit transactions like taking out a mortgage it's not quite as money there's actually in the slang since that's probably true all right but it's not quite as money as the money that is created by the government it's further down on the hierarchy well how do we decide what's on the hierarchy that's the question but well that's obvious and she answers this very honestly it's the acceptability as a medium of exchange so and what is it that makes it money well it's more money the more acceptable it as a medium of exchange it's less money the less acceptable it is so we're kind of playing around with definitions but ultimately all right having to go back right to the trait that we as Austrians would use to define money in the first place or the acceptability of as a medium of exchange it's generally accepted as mean exchange that's what money is all right they ultimately have to appeal to this whereas we when we define money in this way you can have an economy entirely without dead and still have it be monetary as far as we're concerned and that's going to be part of the criticism going further down now here at Mises also takes over a little bit talking about this ideas well when he talks about credit money he establishes again yes across credit instruments can be money but the fact that they're acceptable at all as credit money is the fact that they are redeemable at some point in the future at some ratio in true money so the credit money is not fundamental it's not where the money started is that as a claim to something else right that is already acceptable all right so the idea that money came just from credit being created right some kind of non-monetary system is very questionable right unless the thing that we're having claimed to is a commodity so there's either fundamentally a commodity underlying this or some other form of money that is acceptable to people now when we get to this historical issue Michael Watson has a very good paper about this the title of it is did debt proceed money or did debt proceed medium of exchange maybe I forget the exact title but something like that and he says it doesn't matter it's actually in the title the second part the debt proceed to debt proceed money it doesn't matter right cuz he says even if debt proceeds having a medium of exchange this isn't really a problem right for us as Austrian economist it just means we have intertemporal barter happening it's perfectly fine we can give a name to this right it doesn't require having money in there I would also add to that even if it is true right that early money took the form of trading these credit instruments if that is the way that money was created in some sense this is the first thing being used as a medium of exchange that we have credit before we start trading these --is as the money that's also not a problem right after all all we really need from the regression theorem is that the thing that has originally used as money has some value that is pre-existing that we know well if it's a claim to a certain amount of wheat or what-have-you and that wheat has value so the claim to it would have value so it's not any problem at all right for our story in terms of the regression theorem or even the origin of money okay so rather than trading the wheat itself we're trading claims to the wheat it doesn't really make much difference so this is not a problem for us now another issue and here I think starts to get a little bit more fundamental is the exclusion of the possibility of pure commodity monies I think this is especially a problem right and Ray is very clear about some about just one example of this he says for example that bitcoin is not money it's kind of funny says this was in the Q&A I think and he just in terms of his attitude it seemed to become very cranky this is brought up bitcoins not money it can never be money well of course if you're defining money as credit Bitcoin can never be money sure it's it's not based in credit right but what we do know right is that bitcoin has served as a medium of exchange so even if I might not call it money but certainly I'm not going to deny that it's use it as a medium of exchange right it has the potential possibly to be money we also know and I think this is interesting given the tax basis of that that they rely on so much we know that some governments I mentioned I think before right the state of Ohio has declared its accepting Bitcoin payment of taxes right still not money can never be money that's a strong statement yet somehow does pay if it's acceptable payment of taxes doesn't that make it on the second tier right below so make it with bank money accept it all wait we've defined it away from being money because it's not credit okay another problem we have is we have we know that there are numerous other cases of actual commodity monies that have existed in historical time right for example preserve war camps and we have things like a cigarette based economy all right so err we're using cigarettes as a medium of exchange right so if they want to define money as credit fine they can do that I think it's a bad use of the term people who cause misunderstanding but fine let's let them do that in that case that's leaving these commodity based transactions outside of the analysis right you cannot simultaneously claim as they do that there is no evidence of a barter economy and at the same time claim that money is credit because we know that these prisoner of war camps are using this medium of exchange right right so either like if we're using this say cigarette as a medium of exchange either we're doing barter right because this cigarette is not money right in which case your claim that there's no evidence of a barter economy is wrong right or what they're doing is actually trading right in money we have just local money in the prisoner of war camp that takes the form of cigarettes that is not credit based so either way we're gonna get something wrong either we accept this is money in this context in which case money as debt is wrong right or we accept that a barter economy can in fact exists and has existed historically right we have to choose we cannot simultaneously say money is debt by definition in that there is no or it never has many part economy okay all right so that's another issue but now let's get finally I mean not finally but now to what I really think is the fundamental theoretical problem with their issue with this theory and it's not a new problem like here I'm just citing Mises okay the problem is how do we establish the purchasing power of money under this theory okay and this has been a problem ever since right Knapp created right this state theory of money at the beginning and missus pointed out the problem 100 years ago roughly but there's no understanding here for where the purchasing power of money comes from how we can explain our that purchasing power of money so let's talk about how this works under the Miss Sen system this is not new or you've heard this before all right so we know the purchasing power of money today where it comes from the supply and the demand for money today money is not radically different from any other good in that fashion so where does the demand for money come from and this is had a very important insight and this is something we need to explain as economists well the demand for money comes from the fact that I have expectations about what I can get for that money in the future where do those expectations come from well the fact that I've observed in the past right money being acceptable in exchange right so the fact that I've observed this array of prices yesterday means that yes I'm willing to be paid in money today because I expect that I can spend that money in the future to get the things that I need that establishes exactly what my demand for money is going to look like it tells me how much I should be willing to work for because I have some sense of what I can buy right with that income for example alright so I have to have in my mind heard some sense of the value of money before I find it acceptable and this is where the regression theorem ISM is it is extremely important right so where did that purchasing power come yesterday like well came from demand and supply of money yesterday right where did that come from well the demand was because people expected to be able to spend money in the future based on their experiences in the past right and this is why we have to trace it back to something that ultimately did have some kind of value in exchange to start with right even without any kind of monetary use that's why we suggest a commodity basis makes the most sense it is actually logically consistent with how we know people actually work in terms of their demand for money yeah all right so then getting into modern monetary theory where is the purchasing power of money come from now they don't seem to deny that the supply of and demand for money is going to have some kind of impact so I'm just going to assume that they do believe there's a demand for money right so where does the demand for the medium of exchange come from so it comes from these tax liabilities right tax liabilities everybody has to pay that so we all have a demand for money but that doesn't really work for what a good economist would mean by demand right demand doesn't mean that I want something right demand is is related to what I'm willing to give up to get that thing right so the way that we would often define the same principles of microeconomics is our demand is this relationship right between the various prices that I might be asked to pay for the good amount of the good that I want to buy right so is this connection right it's not just all be kind of nice to have this thing my demand for money is not infinite just because I'm willing to accept lots of money my demand for money is based on what I'm willing to do to get that money right so that's where it comes from I so demand is not just a desire or even a need right for a good in money is case specifically right demand is it would be the relationship between the purchasing power of money and the various qualities of money that people desire to hold at those various purchasing powers so if I have a liability of 100 of some arbitrary unit right it's just totally fiha and I have no sense right what this how this would relate to anything else right so the state says all you owe us a hundred units of tax payment what am I willing to do to acquire those right it's not so obvious right so that's where there's a lack of clarity all right where does this where's my demand for money going to come from if I don't have any sense right of what this hundred units would be worth this is very unclear now it seems reasonable to me that I might want to say do just enough work for the state themselves right to get a hundred units have just have them pay me that right then I keep those hundred units till it's tax time and pay them back in it this seems like a reasonable thing that I would do but in that case I'm never using this as money as a meeting with exchange right just basically enslaved to the state till they give me enough money to pay them back at which point I leave that and I go do something else there's no point where they can explain how this enters into exchange and that is why Mises when he when he talks about the state theory of money he puts it into a broader category what he calls a Cadillac t'k theories of money Cadillacs as being the analysis of exchange I said as far as he's concerned this theory it's just it's totally separated from and it's impossible to get into an analysis of exchange okay so and so the question is is there any evidence of any fiat money coming into existence that wasn't tied historically to some commodity as far as I know there is not right we can always trace back ultimately right to some kind of commodity in that it's the regression theorem at work now I want to take a minute just talk about Bitcoin because sometimes people challenge us on Bitcoin all right bitcoin is a fiat it doesn't have any any pure use value I disagree important thing in my mind to remember about get Bitcoin is that when it started it was extremely cheap which means it didn't have to have much use value to anybody so you might think this is just kind of an interesting curiosity and so you start mining Bitcoin or you buy some all right so it can have this direct use value even if you don't expect that people are going to actually accept it an exchange later it later then does actually get some demand for peasant meaning of exchange so I can't think of any example maybe you can so then they actually have an answer so that I think it's really the fundamental theoretical problem how do we actually get the purchasing power of money out of this system now that I would want to finally then turn to the practical issue so what would happen right if people actually accept right modern monetary theory and it's practical implications of the very least right that is that we don't have any financial constraints in the words of Randall ray the only thing that's constraining the government right now is this totally artificial debt ceiling or the United States is the only country he claims it has a debt ceiling just repeal the thing and then we can spend as we like so the only only constraint are those we put on ourselves and then actual physical resources so what's going to happen right if we accepted this is true I suggest that the government feel less constrained in its spending right so we'd probably see a increase in government spending shockingly people that want significant increases in government spending often point to modern monetary theory is justifying it okay NPR actually just recently ran an extremely poorly titled article saying you know this economic theory this economic theory could pay for the green New Deal I'm not sure that any economic theory has like assets it can sell or a source of income that it could use but I might be able to explain how we pay for it ah there we go that's what theories do three should explain things alright anyway right so the government feels less constrained it decides yeah let's go ahead with the green New Deal or the debt ceiling is just nonsense anyway we can always print the money to do this it's not a problem right and it might be a problem if we're having to bid away I previously employed resources that's or might run into issues but as long as they're unemployed resources we can buy those up without any problem at all right now surely this is a good thing we can all agree that having unemployed people is bad and if we can hire them without it being inflationary then this should be something we should do except I don't think we can't agree with that so as I was thinking about this job guarantee idea employing these unemployed resources a title popped into my mind and I thought I should read that book it sounds important that's Hutt's theory of idle resources and as I've been reading it I admit I'm not all the way through it yet but I'm through enough chapters to say things that I hope are potentially important here or at least relevant if not important but what I think really got at the heart of the Keynesian program is early theory as much right but the program of what the goal was in the first place so in the theory of idle resources and theory of idle resources what hutt says is that Keynes was assuming was simply assuming that full employment is a desirable thing and that this full employment is something that we can see something that is visibly possible to identify and that is something that is actually inherently desirable but and oh a lot of what Hut's work was doing was saying well the problem is we don't actually have a good theory of why our resources would be idle in the first place there might be good reasons and the first several chapters right in that book are actually going through good reasons that we might have idle resources who might be the resources are actually valueless that is we don't have a good use for them we don't have a good use for them we should not be trying to use them as the idea or it might be that they are in a state of what he calls pseudo idleness a pseudo idleness is say typically what my car is in most of the day if you look at my car I'm driving it very very little the average day I'm driving it maybe 40 minutes maybe slightly more if I hit the stoplights wrong on my commute but something like 40 minutes out of 24 hours I'm using my car so the rest of the time is just an idle resource so we need to find some way to employ that no we don't because I want to have access to my car right what it's providing for me the rest of those 23 hours and 20 minutes of the day is availability it has this possibility that I could if I needed to use it actively I can right so if I need to run my my kid to the hospital or something like that I can run down throw them in the van and drive off to the hospital that's something that I can do and I would not be able to do that if I didn't have possession of this car and what looks like an idle state so this availability is actually a service that a lot of apparently idle resources are providing but he also mentions he just calls preferred idleness right it might be that my grandma doesn't have a job be she's 90 years old and doesn't want a job this is something that happens right it might be that I don't I simply don't want right to use the resources that I could potentially be using okay all right so preferred idleness all of these are perfectly good reasons that we would not have every single resource employed all the time okay so what happens then if we decide no we do need to employ these and the government can't employ these without any kind of inflationary effects let's go ahead and say it suppose we can do this without an immediate inflationary effects for those resources one of the problems is that employing resources typically requires the cooperation of complementary resources all right so just because you have lots of employed people does not mean that you can get them jobs because the job usually requires working with something else right it's not just people standing on street corners singing or something like that I guess that could be a potential job and it's actually one hit randall ray list is a possibility right so he has in mind these kinds of jobs he actually lists these in a paper called employer as a government as the employer of last resort he says here are some examples of the kinds of jobs we could provide to employ people people could be a companion right so so we know that say you left but we know people are actually employed is this right say elderly people get lonely that kind of thing employ people to go talk to them how are they going to get there we need additional resources to get them right to actually be a companion to somebody but or could be a public school classroom assistant now these also already exist so I don't know these would be new jobs necessarily but we have to have classrooms there I teachers that are being assisted as well a safety monitor at schools is another thing we could do well we need to make sure we have schools there right we could do cleanup and things like parks okay of course again we need to get people there and give you the equipment to actually do the cleanup are there these complementary resources that are necessary right we could do low-income housing restoration the kind of thing that Habitat for Humanity does but but people to do pay people to do this isn't it a guaranteed job and so on and so there are all kinds of possibilities out here but they all require using these other resources as well complementary resources so what's going to happen right if we want to employ people these ways we have to drain these resources out of the private economy where they're already being employed now as we drain these resources out of the private sector what happens well there's going to be a drop in productivity interestingly rental rate does not suggest as a problem though he admits that it's something that will happen oh yeah we can have a drop in productivity but we're rich it's basically what he says in this paper I'm not kidding he says a country wealthy as ours should be willing to put up with someone productivity I'm not joking what happens with lower productivity right we're going to get higher prices right even by mmt our standards if we have less goods being produced right that's less stuff that we're spending money on so what are we going to do then well it's part of the system we can increase taxes that will increase the demand for money soak up some of the money that's out there according to Ray increasing taxes again this is a quote decreases the ability of the private sector to compete with the government for resources hmm no I'm not gonna say it's wrong but it's it's interesting the program that underlies the way that's stated okay all right so then it turns out in my mind there are two possibilities but when we have these types of programs expending programs either the government isn't going to raise taxes in which case even under the modern monetary standards we're gonna have an increase in inflation unless we do as Randall ray also suggested this is a possibility we could have price controls and just ration right he states this is something all we've done it before and acts like this was not a problem or alternatively the government does raise taxes in which case right the government is slowly replacing the private sector as the economic driver all right so what is the path right then that we're put on if we accept this theory that's a practical matter okay all I'm there [Applause]

Channel: misesmedia

Views: 14,337

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Keywords: Economics, Austrian School, Money, MMT, Modern Monetary Theory, Engelhardt, Mises, lecture, Auburn

Id: KBGo2nojiek

Length: 45min 25sec (2725 seconds)

Published: Fri Aug 09 2019