Saturday, June 1, 2019

NOT GOOD: A 600-Page Textbook About Modern Monetary Theory Has Sold Out

If book sales are any guide, then Modern Monetary Theory is gaining traction, comments Bloomberg.

The first MMT textbook, a 600-page volume titled “Macroeconomics," by William Mitchell, L. Randall Wray, and Martin Watts, and aimed at college students, has sold out of its initial print run.

This is not a good sign.

I have a copy of the book, it is nothing but a mad justification for government money printing and deficit spending.

As far as Austrian school economics, the book lumps the Austrian school with  Léon Walras and makes the absurd claim that the Austrian school is almost exclusively about equilibrium economics.

The book, further, does not link Austrianism to subjective value theory or deductive methodology, and makes a complete mess of Austrian business cycle theory by stating that it is a theory that holds that general entrepreneurial mistakes cause the business cycle.

Of course, modern Austrians do not hold that the business cycle is the result of entreprenerurial error in the everyday work of entrepreneurs. Their view is that the entire boom-bust cycle is caused by central bank manipulations of the money supply (SEE: Austrian School Business Cycle Theory by Murray Rothbard)---manipulations that are justified in full in the MMT textbook. The textbook fails to address the ABCT critique by distorting ABCT.

The textbook seems to stop its understanding of the Austrian school with the very limited Austrian Joseph Schumpeter. But the modern Austrian, Murray Rothbard, slammed the Schumpeter door shut decades ago:
It is surely no accident that the rise to dominance of Walrasian economics has coincided with the virtual mathematization of the social sciences. Mathematics enjoys the prestige of being truly “scientific,” but it is difficult to mathematize the messy and fuzzy uncertainties and inevitable errors of real world entrepreneurship and human actions. Once one expunges such actions and uncertainties, however, it is easy to employ algebra and the tangencies of geometry in analyzing this unrealistic but readily mathematical equilibrium state.

 Most mainstream economic theorists are content to spend their time elaborating on the general equilibrium state, and simply to assume that this state is an accurate presentation of real world activity. But some economists have not been content with contemplating general equilibrium; they have been eager to apply this theory to the real world of dynamic change. For change clearly exists, and for some Walrasians it has not sufficed to simply translate general equilibrium analysis to the real world and to let the chips fall where they may.

As someone who has proclaimed that Leon Walras was the greatest economist who ever lived, Joseph A. Schumpeter (1883-1950) faced this very problem. As a Walrasian, Schumpeter believed that general equilibrium is an overriding reality; and yet, since change, entrepreneurship, profits, and losses clearly exist in the real world, Schumpeter set himself the problem of integrating a theoretical explanation of such change into the Walrasian system. It was a formidable problem indeed, since Schumpeter, unlike the Austrians, could not dismiss general equilibrium as a long-run tendency that is never reached in the real world. For Schumpeter, general equilibrium had to be the overriding reality: the realistic starting point as well as the end point of his attempt to explain economic change...

 To return to Schumpeter’s main problem, if the economy begins in a Walrasian general equilibrium modified by a zero rate of interest, how can any economic change, and specifically how can economic development, take place? 

With tastes and resources disposed of, there is only one logically possible instrument of change or development left in Schumpeter’s equilibrium system: technique. “Innovation” (a change in embodied technical knowledge or production functions) is for Schumpeter the only logically possible avenue of economic development. To admire Schumpeter, as many economists have done, for his alleged realistic insight into economic history in seeing technological innovation as the source of development and the business cycle, is to miss the point entirely. For this conclusion is not an empirical insight on Schumpeter’s part; it is logically the only way that he can escape from the Walrasian (or neoWalrasian) box of his own making; it is the only way for any economic change to take place in his system.

But if innovation is the only way out of the Schumpeterian box, how is this innovation to be financed? For there are no savings, no profits, and no interest returns in Schumpeterian equilibrium. Schumpeter is stuck: for there is no way within his own system for innovation to be financed, and therefore for the economy to get out of his own particularly restrictive variant of the Walrasian box. Hence, Schumpeter has to invent a deus ex machina, an exogenous variable from outside his system that will lift the economy out of the box and serve as the only possible engine of economic change. And that deus ex machina is inflationary bank credit. Banks must be postulated that expand the money supply through fractional reserve credit, and furthermore, that lend that new money exclusively to innovators—to new entrepreneurs who are willing and able to invest in new techniques, new processes, new industries. But they cannot do so because, by definition, there are no savings available for them to invest or borrow...

In conclusion, Schumpeter’s theory of development and of business cycles has impressed many economists with his suggestive and seemingly meaningful discussions of innovation, bank credit, and the entrepreneur. He has seemed to offer far more than static Walrasian equilibrium analysis and to provide an economic dynamic, a theoretical explanation of cycles and of economic growth. In fact, however, Schumpeter’s seemingly impressive system has no relation to the real world at all. He has not provided an economic dynamic; he has only found an ingenious but fallacious way of trying to break out of the static Walrasian box. His theory is a mere exercise in equilibrium logic leading nowhere.

 Hence, the conclusion that innovation is the instrument of economic change and development, and that the innovations are financed by inflationary bank credit, is not a perceptive empirical generalization discovered by Joseph Schumpeter. It is not an empirical generalization at all; indeed it has no genuine referent to reality. Suggestive though his conclusion may seem, it is solely the logical result of Schumpeter’s fallacious assumptions and his closed system, and the only logical way of breaking out of his Walrasian box.


  1. The MMT crowd's favorite response: just print more.

  2. ...and bypass the middlemen (the big, investment bankers) by getting the freshly-printed money directly into the hands of the U.S. Treasury...
    Such madness.