Sunday, May 23, 2021

A fatal flaw?

Ekosj writes a surprisingly less-bad article at the conservative site Richochet, "Modern Monetary Theory: Wishful Thinking or Exposing a Fatal Flaw at the Heart of Neoclassical Economics?" The author includes the obligatory ideological swipes at MMT, but points out an interesting feature of contemporary macroeconomics.

The supposed "fatal flaw" is that with superficially reasonable assumptions (notably the natural rate of unemployment and rational expectations), the quantity of money drops out of our macroeconomic models.

Well, yes. This feature is more-or-less by design. Economics is usually concerned with the real economy, the goods and services that provide actual utility to consumers. Economists usually view money as a "neutral veil" over what is essentially a barter economy. And, of course, a barter economy needs no money.

Economists do look at money too, but the constrained choices about money are almost, but not quite, completely unlike the constrained choices of an abstract real (barter) economy: a theory of the real economy works doesn't tell us much about how to set up a money system. Very different social systems could, in theory, coordinate a complicated real economy, and the simplifying assumptions are equally weird in every system.

We have to understand money on its own terms, not as something that emerges from real economic analysis. Ironically, when you study money on its own terms in a capitalist, fiat currency context, you get MMT.

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