Modern Monetary Theory is really Magical Monetary Theory

In my quest to understand things economic, I have run into Modern Money Theory (MMT) a number of times, and have adopted the habit of calling it "Magic Money Theory" because it seems to bestow magic properties upon money issued by governments. Feeling that I, perhaps, just didn't understand what MMT theorists were talking about, I searched for their responses to Weimar inflation--something that would seem hard for MMTers to explain. As a result, I stumbled upon L. Randal Wray's series of articles at EconoMonitor, entitled Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 1), Not Worth a Continental! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 2), and http://www.economonitor.com/lrwray/2011/09/07/helicopter-ben-how-modern-money-theory-responds-to-hyperinflation-hyperventilators-part-3-2/. These articles did nothing to change my views of MMT, and actually makes me wonder if "Maniacal Money Theory" might be more appropriate.

Wray starts his defense of MMT by stipulating 'that government spends by “keystrokes”, this is a description'--no argument there. But then he goes on to state, 'If critics were correct that government spending by “printing money” necessarily leads to hyperinflation, then most developed nations would have hyperinflation all the time.' As far as I know, no critic says printing money "necessarily leads to hyperinflation," but they generally would say that it risks hyperinflation. The claim is hyperbolic as governments can and do reverse inflationary policies. The concerted actions of Reagan and Volker in the early 1980s illustrate the point.

The claim is made that "gold and silver coins were the Sovereign’s IOUs that happened to be recorded on metal (rather than on paper or electronic balance sheets)," but sovereign IOUs on paper, such as Tsarist bonds, are now generally worthless, while a Tsarist rouble will, even if melted down, its sovereign connection (and collectibility) broken, purchase a nice dinner for two. A gold coin is no one's debt--it's an asset.

A clear indicator of the falsity of what the MMTers call "nominalism" is that sovereigns began coinage with precious metals and then debased the coinage, producing greater numbers of coins and inducing inflation. Without this credible beginning, coinage would have had virtually no value. The MMT narrative also fails to explain the use of cigarettes as currency in POW camps, although this article attempts to discredit the idea as irrelevant. Note that Menger only argued that money was derived from the most liquid commodity, with reference to why that commodity was the most liquid (see Carl Menger, Principles of Economics, p 257-262). After all, he was one of the founders of the marginal revolution and the concept of subjective value. MMT also fails on the private coinage front, described in George Selgin's Good Money.

It is correct that governments who claim to be on a gold standard go off it in crises. However, this reaction is generally to a specific class of crisis--war. Wray implies that money-printing constraints are removed to cope with financial crises, but this phenomenon is more closely related to interventionist and, later, Keynesian policies that came into vogue in the 20th century.

What I admit that I do not understand, is why currency boards or a gold standard would present a problem. The country that creates its own money through keystrokes should be able to buy the foreign currency it needs on the deep foreign exchange markets or, likewise, acquire gold. Perhaps, gold markets are not deep enough, but surely the forex markets are. How could there be "imprudent expansion of these IOUs relative to ability to actually deliver the foreign currency or gold," when currency may be created without limit to acquire these assets?*

Near the end of the second "reply" we find the following aside: "(If you think about it, calling in all the coins to melt them for re-coinage would be a very strange and pointless activity if coins were already valued by embodied metal!)." But this recoinage makes perfect sense, as it is the method by which the sovereign may default on its debts. Reducing the amount of gold or other valued commodities and replacing them with base metal, while declaring the coins "legal tender" enabled the sovereign to pay of debts and purchase more commodities. This circumstance takes advantage of the non-neutrality of money as the sovereign was the first to use the debased money at current prices--prices that would increase as the new money flowed into circulation.

In the last segment there seems to be a slight-of-hand--the fact that reserves are not lent is paraded as a reason inflation cannot occur; but the reality, which is glossed over when the deposit multiplier is mentioned, is that 10 times reserves (as much as 30 times by investment banks before the financial crisis) may be lent. The fact that the Fed pays interest on excess reserves (reserves that reduce the ratio of lending to reserves) reduces the incentive to make loans, reducing inflation.

Finally, Wray suggests that unemployment will keep inflation down, ignoring the data from 1961 to 1984, along with "rational" increased net savings by firms and households. The latter, of course, increases reserves and, without the demand or the incentive (due to interest being paid on excess reserves) reduces the deposit multiplier and, hence, inflation.

MMT seems to rest on assumptions that are easy to criticize, and it seems to have a very limited following (Bernie Sanders seems to be their political champion). It contradicts our view of the state as incompetent at best and evil at worst. Did some bureaucrat invent money, or was it that a monarch saw the possibilities of wealth extraction that coinage provided? Was it Menger's evolution or political fiat?

So, what do we have here? Primarily, I would say that it is an argument that creation of money by the state does not necessarily lead to hyperinflation. On this point we can agree, as that is rarely the argument. But is money the creation of the state, or simply the commanding of an instrument created by individuals in order to enslave them? The latter is the view of economists in the Mengerian tradition.

* It has come to mind that the MMT people must think that the population of a country, no matter how little confidence they have in the money still must use it to pay debts and taxes, while people of other countries do not need to purchase, causing a collapse in the foreign exchange markets. However, in Zimbabwe, my understanding is that the US$ was being used in private commerce as the currency collapsed. In When Money Dies, Adam Ferguson documents the fact that farmers in Saxony would not accept German paper currency for produce (p 151). The fact is that unlimited production of fiat money can and will produce hyperinflation, even without the mistakes MMTers claim are required.

Evolutionary Liberalism

Although this blog is named "The Radical Liberal," my thinking has taken a decidedly evolutionary turn. In a sense that turn is even more radical, but I think that it is time for me to attach a more descriptive term than "radical" to this liberalism—"evolutionary."

The characteristics of evolutionary liberalism are that it embraces universal Darwinism and takes trial-and-error, evolutionary learning as the only way forward for humanity. It argues that the pursuit of such learning is inhibited by what people call "government" or "the state"—that the state is itself a failed experiment.

The social embodiment of this learning process is what is generally called "the market," discussed previously in my paper "Let Go and Let the Market," referenced in another post on this blog. The ideas in that paper have been developed further, and money profit identified as the selection mechanism for societal evolution.

The philosophy of evolutionary liberalism is heavily influenced by the scientific philosophy of Karl R. Popper (not his generally-flawed political and economic thinking) and the economics of the Austrian school, as elucidated by Ludwig von Mises and Friedrich Hayek. These thinkers are influences and there is no argument that they would agree with or support evolutionary liberalism. This is not a project to argue about what they thought, but to use their work as inspiration for ever bolder conjectures.

I am quite sure that many people are circling around these ideas, including Matt Ridley and Daniel Dennett. Although they are far more well known and knowledgeable than I, they seem to have missed the basic problem of the state and its "solution." When it comes to them, or other widely-read thinkers, we might have a renaissance of true liberalism.

Contra Hayek, Cultural Evolution IS Darwinian

In Hayek's The Fatal Conceit (1988) there is a section titled "The Mechanism of Cultural Evolution Is Not
Darwinian." Within the section Hayek takes the position that Darwinian theory applies only to biological and not cultural evolution. He writes that "cultural evolution simulates Lamarkism" (25).

However, when we take an abstract view of Darwinism—variation, selection, and retention—we see that Hayek is mistaken. The problem of Lamarkism is not that characteristics are acquired, as characteristics resulting from mutations are also acquired; but that there is no mechanism of retention. Rather than DNA, it is the institutions of society that pass on the mutations of society—the new ideas, technologies, and customs. The mechanism of cultural retention is what Karl Popper called World 3 (1972).

The mention of World 3 prompts the suggestion that DNA is also a World 3 phenomenon created by processes in the cell for purposes of retention. Where this suggestion leads is anybody's guess.

Bibliography

Hayek, F.A., 1988, The Fatal Conceit, Chicago, University of Chicago Press.
Popper, K.R., 1972, "On the Theory of the Objective Mind" in Objective Knowledge, London, Oxford University Press, 153-190.

David Sloan Wilson on Evonomics: An Agenda Cloaked in Science

After David Sloan Wilson wrote the article, The Road to Ideology: How Friedrich Hayek Became a Monster, Peter Boettke invited him to give a seminar at the F.A. Hayek Center for Advanced Study in Philosophy, Politics, and Economics. On February 11, 2016, Wilson presented the seminar, which is summarized here with a link to a video that incorporates a recording of the seminar and the slide presentation. I suggest that those interested in Austrian economics or coming from a non-leftist position watch the presentation as it will give you a clear idea of what we are up against. Make no mistake, Wilson and his comrades at Evonomics are heavy hitters and have an agenda that you won't like. Having listened to the presentation once, I have a few thoughts.

First, Wilson alleges that laissez-faire has its roots in the Christian worldview of universal harmony. Doing so is an attempt to discredit it as mystical and unscientific, and rob it of its roots in the Enlightenment. The reality is that Christianity was the home of top-down, unrelenting authoritarianism until it was tamed by the realization that markets tended to reduce or eliminate the antagonisms between religious groups. The resulting intellectual movement, in which those such as Voltaire argued that religion and aristocracy should be de-emphasized and commerce elevated, was probably more of an influence on Christianity than the other way around (see Jerry Z. Muller, The Mind and the Market, p 23).

Wilson goes on to state that progress came from the societal suppression of "disruptive, self-serving behaviors," rather than the realization on the part of individuals that cooperation was to their advantage in achieving goals that would have been difficult or impossible for them on their own (see Ludwig von Mises, Human Action, p 143). This view results in a bias toward top-down (coercive) rather than bottom-up (evolutionary) thinking. Wilson is definitely pushing methodological collectivism. He believes societies were successful because they dragooned their members into following the rules, not because they had rules that helped individuals flourish, thereby attracting and keeping members. Group selection is a reality, but only in the context of the feedback of individual selection that makes one group prosper over another.

While wanting to speed up group selection, Wilson fails to realize that the state suppresses selection by bypassing the feedback mechanism of profit and loss, and even imprisons its victims within its boarders, preventing the possibility of "voting with your feet." Failing the latter, there may be an effort for governments to form cartels or impose rules through a world-wide body, eliminating the possibility of selection still further. After all, if there is only one body, we are done with selection. The feedback of money profit and loss in an environment of open competition is superior, and the only objective method I can see that can facilitate group selection.

When watching Wilson's slides you will see that he believes the Earth is being destroyed by human activity. The Evonomics agenda is to reverse that perceived destruction by imposing an "intelligent design," cloaked in science, that has no possibility of effective criticism or reversal--of negative selection. Only by critically developing our own arguments and pointing out that their approach is actually anti-evolution can we succeed in defeating their effort.