“What I am asking you is whether you believe MMT’s order of the trifecta would be FE>PS>production?”

“What I am asking you is whether you believe MMT’s order of the trifecta would be FE>PS>production?”

The MMR crew had a conversation about the order of importance of these three policy goals:

  1. Full Employment
  2. Price Stability
  3. Production
The MMR view of this would be: Production > FE > PS.   (Feel free to chime in, C&C!)
The mainstream operates under: PS > FE > Production. We can be sure Price Stability is in the #1 position; this is expressed by Michael Woodford in his monumental work.

“The present study argues instead for a different view of the proper goals of monetary policy. Its use to stabilize an appropriately defined price index is in fact an important end toward which efforts should be directed—at least to a first approximation, it should be the primary aim of monetary policy”

It seems to us MMT thinks FE>PS>production. Here is Tom Hickey on this same topic:

“I have never heard the MMT economists address this, and I am not well versed enough in macro and the MMT professional lit to give any sort of definitive answer. Basically, the PK-MMT approach is demand-driven and NAD drives production and investment. This is the basis of the sectoral balance approach and FF to adjust NAD to the ability of the economy to expand to meet it at FE while also maintaining PS. Based on this I would say, maintaining NAD at the appropriate level optimizes production (uses of available resources including human resources (FE). Then the issue become maintaining PS as well. But as I say, that is my take, which may not adequately summarize theirs.”

Tom’s always gracious and smart.  The title of this piece is meant to be an attention-grabber rather than a slam on you, Tom. I thought it was a good, provocative quote to get a debate going.

What do you think?

(Update: I’d like to apologize to Tom Hickey. I did not mean to offend him and I did. The short warning at the end was not enough. Tom, I am sorry. )

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Tom Hickey
4 years 1 month ago

Mike, if that is what you took away from what I said, then either you misunerstood me or I did not make myself clear. First, let me reiterate, I am not an economist or financial type, let alone an expert in MMT. Secondly, let me make clear what I intended to say.

MMT builds on top of the PK analysis of production, as Scott has said. This is demand-driven rather than supply-driven. MMT uses the sectoral balance approach and functional finance to plug demand leakage and maintain production at a level at which there is no output gap in that available resources are employed, including human resources. That means close to FE.

However, the private sector virtually never employs everyone that is willing and able to work. The MMT JG mops that up. So maintaining optimal effective demand through sufficient purchasing power to consume all production at an optimal output level is the goal. That goal means that the private sector is ideally always employing to the max that is its able to make a profit from. Production is first!

Some people seem to think — erroneously — that the primary solution that MMT offers for FE is government hiring. That is a total misrepresentation of MMT macro, which is a demand/income-driven approach to production, not some socialist theory based on government intervention in employment, as some people seem to think.

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FDO15
4 years 1 month ago

I gather that MMT would argue FE and optimizing production are interconnected. I don’t think that’s right though. A government could employ all of its citizens picking up trash, but that doesn’t mean that nation would necessarily produce anything that actually improved living standards.

MMR seems to be concerned with the 96-99% while MMT is worried about the 1-4% who are unemployed and they’re willing to sacrifice lower potential living standards for the 99% in order to make sure that 1% has a job.

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Dan Kervick
4 years 1 month ago

That’s incorrect. MMT argues that there is no reason to neglect the task of employing the unemployed when doing so will not harm, and will in fact even improve, the lives of those who are already employed.

Remember that MMTs critique of the current way of doing things is based on the idea that those current ways of doing things are based on faulty macroeconomic theories, and that those theories lead us to make unnecessary and sub-optimal social policy choices, in effect choosing economic underperformance over high economic performance. MMT sees the decision to leave large masses of our people unemployed as a massive economic waste that is hurting us all, not just the unemployed themselves.

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Dan M.
4 years 1 month ago

Head of nail, meet hammer.

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Dan Kervick
4 years 1 month ago
It’s seems to me that these kinds of ordinal rankings of policy goals are unnecessary since they don’t correspond to genuine policy alternatives. Everyone should support the ideal of an economically thriving society that provides the ability of all of its citizens to share in the society’s economic success as both participants and beneficiaries. And I think everyone accepts some some measure of price level stability and predictability is needed to prevent distortions and disruptions in the everyday processes of making contracts for future delivery of money, since such contracts are inherent in the financing process that makes a thriving modern economy hum. MMT argues that we can achieve the goal of full employment without sacrificing the goal of price stability, and so takes issue with a long mainstream tradition that argues there is an inherent tradeoff between the two. MMT also argues that the ability of the government to produce its own financing instruments from scratch, rather than borrow them, means that government can directly hire willing workers whom the private sector is not employing, and put them to work doing something productive and socially beneficial. This process does not involve any crowding out, because it does not take financial assets away from others who might use them differently or more productively. It does not take labor resources away from others because it hires only those people that the private sector has not employed and who are looking for work. It does not generate price instability, because the hired workers are doing something productive, and therefore the newly created monetary assets are only monetizing additional output, rather than chasing after existing output. So I think the theme of MMT is that we don’t have to prioritize these goals due to built in trade-offs among them. We can have them… Read more »
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paul (formerly paulie46)
4 years 1 month ago

Michael

I’m voting for:

1. Full Employment
2. Price Stability
3. Production

Guest
Dan Kervick
4 years 1 month ago

No need to rank them. It’s macroeconomics, not a horse race.

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paul (formerly paulie46)
4 years 1 month ago

Agreed

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PeterP
4 years 1 month ago

+1.

MMT can do both FE=PS (this is JG), and minimizing the JG buffer leads to maximizing production. So MMT is FE=PS=Production.

Admin
4 years 1 month ago

Nonsense. Their own research shows that the JG doesn’t optimize production. So you’re misrepresenting MMT and the research they’ve already done.

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PeterP
4 years 1 month ago

“optimization” is a meaningless concept, because the result depends on the utility function you are maximizing and everyone has its own. I therefore said nothing about optimization and neither says JG.

Admin
4 years 1 month ago

You said “maximizing production” so it’s semantics. Regardless, the Fullwiler simulation proves that you’re wrong.

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Tom Hickey
4 years 1 month ago

IIRC, “maximizing” is the Fed’s policy mandate from Congress.

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Tom Hickey
4 years 1 month ago
Michael, beowulf makes a good point regarding metrics. Policy decisions are based on metrics applied to models. MMT emphasizes employment as a key metric, for example, because there is abundant data available. Inflation indexing is a lot more speculative, selective, and difficult to verify. There is no single metric for production per se. Production is an economic concept that involves many factors and measures. As I understand it (admittedly cursorily) the Cambridge capital controversy pretty will undercut the notion of a macro production function similar to the micro. “Production” is rather controversial among economic theories. But the general idea is understood and the controversy is essentially about supply side approaches that address production directly and demand side approaches that address production in terms of the circular flow. There are two separate issues here. The first is the macro theory. It deals with production, distribution and consumption in aggregate in a time series, monthly, quarterly, yearly, etc. The priority of macro is maintaining circular flow at as optimal a level as possible. This trifecta operates together and macro is about removing the friction that inhibits flow. Thus macro necessarily begins with > production > distribution > consumption > as fluid system functioning in terms of fluid dynamics. It is an open system. What MMT macro deals with is the flow of the domestic private economy in terms of production, distribution, and consumption in an open system with input and outflow to and from government and the external sector. FE and PS must be ancillary to this. MMT as a PK theory focuses on maintaining effective demand in the face of demand leakage both in the domestic private sector but also govt. and the ROW. So in this sense, production comes first, before FE and PS, which are effects of the flow.… Read more »
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Dan M.
4 years 1 month ago

ME>FE>ES>Production>PS

ME = My Employment 🙂
ES = Environmental Sustainability

Savers have lots of flexibility to protect themselves from inflation. The unemployed in a bad economy do not have nearly the flexibility to protect themselves from misery.

I’ll go ahead and post an Austrian’s priority to save them the trouble:

“Society does not exist. We are only individuals interacting freely. We are always at full employment because if people wanted to work they would bargain to get a fair price for their time. Production as a result of bartering or exchange for gold is simply a debt-fuelled bubble driven by the fed. Further, to put “importance” on one of these things implies that we have a government managing them in the first place, and since government is just a protection racket, not a legitimate entity (other than to deed the land I live on), the question is invalid on its face.”

I kid…. kind of.

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KainIIIC
4 years 1 month ago

That sounds just like ’em! You forgot a few things though, like how the Fed printing all this money will lead to hyperinflation! And the usual ones like taxation = theft, praxeology > evidence, etc.

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Dan M.
4 years 1 month ago

Correction:

Production as a result of ANYTHING BUT bartering or exchange for gold.

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