by I don't link to the NYT since it stopped being a newspaper. Alex Douglas explains Paul Krugman's criticism there of MMT based on r > g.This is not a new criticism. It is a neoclassically based argument. It was raised when Thomas Piketty's Capital in the 21st Century made r > g famous.The expression r > g itself was criticized at the time, and I won't repeat it. Suffice it to say that that is a monetarist view that suffers from the insufficiency of neoclassical assumptions about monetarism, in particular the assumption that interest rates are determinative economically, upon which monetarism is based. Brad DeLong raise this issue, too, if I recall correctly. It also prioritizes interest rates as an economic factor (cause) and policy instrument much higher than the data justifies, and it
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I don't link to the NYT since it stopped being a newspaper. Alex Douglas explains Paul Krugman's criticism there of MMT based on r > g.
This is not a new criticism. It is a neoclassically based argument. It was raised when Thomas Piketty's Capital in the 21st Century made r > g famous.
The expression r > g itself was criticized at the time, and I won't repeat it. Suffice it to say that that is a monetarist view that suffers from the insufficiency of neoclassical assumptions about monetarism, in particular the assumption that interest rates are determinative economically, upon which monetarism is based. Brad DeLong raise this issue, too, if I recall correctly. It also prioritizes interest rates as an economic factor (cause) and policy instrument much higher than the data justifies, and it ignores the difference between currency users that must obtain the currency and the currency issuer, especially when the issuer is sovereign in its currency.
While the model is perfectly logical based on the assumptions, that it is wrong as shown by its being useless other than perhaps in special cases. Of course, it could matter in the special case that Paul Krugman and other conventional economists are chiefly concerned with, inflation. But the monetarist solution involving interest rate setting (NAIRU) works through economic contraction that idles workers to reduce wage pressure. This results in a buffer stock of unemployed.
The idling of real resources amounts to waste that cannot be recaptured, and economic inefficiency is the big sin in neoclassical economics, which leaves economic effectiveness to "market forces" and spontaneous natural order. MMT proposes a solution for that in terms of the MMT JG that maintains full employment (less transitional) while providing a price anchor in the guaranteed wage.
Abba Lerner proposed functional finance in contrast to so-called sound finance, which manifests as fiscal conserativism, for example. It is grounded monetarist thinking, the idea being that fiscal imprudence will generate inflation that will result in the bond vigilantes driving up the interest rate they demand to lend money, assuming loanable funds and crowding out. Government, having lost control of the interest on its debt will be driven to insolvency if it doesn't adopt draconian measures that "restore confidence" to financial markets. "Sound finance" is has therefore been a cornerstone of finance capitalism in addition to neoclassical economics, which serves as its academic justification.
One of the foundations of functional finance in its rejection of "sound finance" is that monetarism upon which sound finance is based is not only ineffective but also based on false assumption (which is a reason it doesn't work). This is revealed by a correct operational understanding of government finance built on a correct theory of money. Neoclassical (conventional) economics miss the target here. Even the Fed recently admitted that it has no good theory of inflation. This implies that monetary policy is discretionary rather than rule-based, since a rule-based policy requires a good theory articulated in a model.
Hint: Mono-causal theories are generally insufficient at explanation in complicated simple systems and a fortiori in complex adaptive systems. The reliance on "expectations" shows that the Fed understand that the finance and the economy are aspects of a complex adaptive system. Any mono-causal explanation is likely to be inadequate to the task of predicting, and monetary policy is based on the ability to forecast. Barking up the wrong tree.
The good news though is that Paul Krugman continues to move toward the MMT position. Progress!
Alexander Douglas at Medium
Paul Krugman on Functional Finance
Alexander Douglas | Lecturer in Philosophy, University of St. Andrews
UPDATE
Paul Krugman is out with a follow-up piece at the NYT, to which I don't link, calling for "spend and tax" rather than interest rate setting.
Identical with the MMT position, if Krugman understood it, or was even aware of the exchanges on Twitter these days.
The MMT position as Stephanie Kelton stated in succinctly on Twitter is that spending must be offset as the economy reached optimal capacity as indicated by approaching full employment. Taxation is one offset. Others are available.