"Since government spending isn’t producing or consuming anything, the One Lesson (see below) tells us that there’s no free lunch here."
I hope you are not saying governments don't produce anything. When the government spends, it may not make apples appear by magic, but it does produce MONEY. It also causes a whole chain of real production to take place. As the currency sovereign, the government's financial net worth is effectively infinity - so infinity minus something equals infinity. However the economy it owns and manages does have a limited productive capacity to make apples appear.
If apples can appear from nowhere and we call that "production" then it is even easier for something notional, such as money, to pop into existence.
You do not mention how money gets a value. It is in demand to pay taxes. Taxation makes fiat money valuable.
On judgement day, when nobody needs any money to make an economy work, the government can tax all its money back and pay out all its liabilities. What's the problem?
Thanks for the comment! I'll try to clarify what I mean.
First, I'd say that I only call economic activity "production" when someone gains a tangible asset on their balance sheet, and nobody else's assets (or liabilities) change. It increases the products available for their consumption. So, for example, harvesting an apple is a form of production. (We can discuss how to think about where the apple comes from originally if you like).
The creation of money is different. Watch carefully any time Steve Keen fills in Godley tables where there's money creation, and you'll see that the recipient gains an asset (RNW↑), but the bank which issues the money gains a liability (RNW↓). So production is net positive for the world's RNW, but creation of money is zero-sum, even though it's effortless.
Here's an illustration of the government buying a photocopier.
Notice how every arrow which points towards someone (RNW↑) also points away from someone else (RNW↓). This diagram doesn't show the production itself, which is where the increase in the world's RNW comes from. But we could show it as being produced by the seller (or by someone else who sold it to them), not by the government. You can argue that the government adds to the demand for it, but that's not the same as producing it, just like you aren't producing apples when you buy them from the supermarket. The producer produces, and you eventually buy the product by swapping something for it.
Before I discuss your phrase "the government's financial net worth is effectively infinity", I need to ask you if you're familiar with the concepts of solvency and liquidity. Does it make sense to you if I say the government has infinite *liquidity*, but like anyone else, its (Raw) Net Worth is just its assets minus its liabilities?
I actually rarely, if ever, discuss the concept of value. I simply look at what each person(/entity) owns, is owed and owes; how those change over time; and what "invariants" exist i.e. what remains true no matter what events occur. Taxation reduces private sector assets and public sector liabilities, and is therefore also zero-sum.
I think it's undeniable that the existence of government-issued money circulating in the economy has a significant role in adjusting people's behaviour. But the RNW model shows up the fundamental constraints and compromises, which simply can't be broken, any more than Newton's laws of motion can be (leaving aside QM and relativity). I wrote about that here:
On financial assets first. I agree that the grand sum of all financial assets and liabilities is zero, but do not see a problem with one entity maintaining a permanent (or even expanding) negative balance in order to facilitate the illusion of savings. Anytime a monetary sovereign really wants to kill the economy, it has the power to reduce its negative balance to zero, by taxing away the entire amount of fiat money that it spent into the economy and use it to pay out bonds and bank reserves - just before taxing back that cash. Because it has the power to do this, it remains "solvent". If this ever did hypothetically occur, only credit money would remain in circulation and the economy would soon collapse as the businesses and people of that nation quickly became insolvent.
Now, when you talk about (Raw) Net Worth, you are suddenly including all other kinds of assets, some of which do indeed have infinite value. Since you wish to avoid assigning monetary values to these, then, from my perspective, your notion of Raw Net Worth must be a multidimensional sum of non-interchangeable (orthogonal) entities. Because you (probably wisely) try not to equate money with these other assets, then it is not actually possible to sell things for money, so privatisation is not possible - and a definition of "solvency" which includes real assets is somewhat problematic.
An economics without a theory of value is not economics at all - at best, it is merely accounting. What is the value of natural resources? What is the value of the air you breath if you allow anyone to "own" it (to restrict your access to it)?
"Belongs to nobody" reminds me of "terra-nullius". Apologies for getting confusing at the end, but I am being called away. Cheers.
Thanks for the reply. There's quite a lot to respond to there, so I'll just try to address the main points.
1. It's certainly possible for a government to run a permanent debt, which it has no intention of ever settling. But it's often useful to consider separately the real economy of goods and services, and the financial economy of debts. The real economy is what's truly important. The financial economy is there as a record of promises to resolve imbalances in (ultimately) the real economy in the future - it saves having to use a commodity as money. I talk about debts as temporary compensation for real economy imbalances in this article from the Macroeconomics series:
If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated.
2. Yes, with RNW, I'm certainly talking about a vector with an enormous (but still finite) number of dimensions for the different types of thing. Given how I think about value (how much of something else a person would be prepared to trade for it), I'm not sure what you mean by some things having infinite value, since nobody has an infinite amount of anything to trade. What do you mean when you talk of infinite value?
Just because I don't have an objective theory of value doesn't mean that people can't buy things. It's just that I don't claim to predict when they will. If Bob decides to buy 10 apples from Alice for $2, she transfers 10 apples to him (purple arrow), and he transfers $2 to her (green arrow). Each of those transfers is a zero-sum action. If Alice insists on $3, and Bob agrees, then 10 apples are swapped for $3, again in two zero-sum actions.
3. I don't see the RNW model as being all there is to economics. But I do think it makes a powerful foundation, which explains a lot by itself, and other ideas can be built on top of it. What it offers are (a) its axioms are so self-evident that they should be uncontroversial, i.e. there are entities which can own, be owed and owe things, (b) it is linear: there's no fallacy of composition, (c) it's easy to represent in arrow diagrams, (d) it's quite intuitive, and (e) it's universal: it doesn't assume a particular type of economy. I really think that there's a very close analogy between this and Newton's laws of motion.
1. I quite like your point one. But there is an unnecessary twist or distorted value judgement colouring the proposition at the end. I cannot go along with this bit:- "If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated."
The imbalance is a dynamic one. Nobody loses out because everybody can cash in their assets at the appointed time or before. However, it just so happens that their assets, their savings, (aka government debt) are very likely to be replaced almost immediately by somebody else's voluntary savings - thereby maintaining a fluctuating dynamic balance of government debt.
Here's another analogy. Do bank depositors "lose out" from the permanent (dynamic) pool of bank debt? When you decide not to spend all your money today, and put (or leave) your money in your bank account, are you really "losing out"? Nobody loses out from these permanent voluntary dynamic balances - until the music stops with the collapse of civilisation. Then everyone loses out.
What you call government DEBT (because it IS a liability) is not at all like personal debt. The government is satisfying the savings desires of the non-bank private sector. It is providing a service at extremely minimum risk to investors. It is not impoverishing the country or heading towards insolvency.
2. Infinite value. Think about the replacement value of the irreplaceable. Does life on Earth have a value beyond money?
If you want to get mathematically pedantic, you might prefer "undefined", but that is "infinity's" twin sister. (And they are both the children of zero.)
"...nobody has an infinite amount of anything to trade." It is interesting that you limit value to what somebody can afford to pay, rather than consider what cannot be afforded. Most humans are capable of valuing something more highly than their own lives. So here I must open the Pandora's Box of subjectivity. If someone is willing to give everything they have, then that, too has infinite value - for some at least.
In your foundational model, you are sticking with "exchange values" as determined by subjective individuals at a moment in time. In the real world, of course, these momentarily factual exchange values change dynamically, so the subjective "zero sum" exchange applies only for a moment, for a specific transaction. Apples are growing and rotting all the time - and they are seasonal. Value is not conserved, and that fact really messes up your ledgers because they change even when no transactions occur.
Now all this is getting terribly close to value theory, so I will mention some thoughts about that. Subjectively, there are needs and wants and an ability to pay. There is a time varying hierarchy of preferences which can be swamped by the overriding need for the necessities of life. Objectively, there are statistical phenomena such as "scarcity" and "market prices".
How much are you willing to pay Elon for breathable air when you work for him on Mars? I am very interested in the power relationships which enable extortionate market pricing through to economic slavery. And I tend to attribute "infinite" value to the irreplaceable - especially the free gifts of nature. There is a practical reason for this. In my view, these things should not become part of financial calculations - and nothing stuffs up a calculation like an infinity.
I'm not saying these "resources" cannot be used, but they do need to be maintained. I'm saying that the realm of money and economic calculation must remain subservient to more fundamental values.
By way of analogy, "Thou Shalt Not Kill" does not discuss the economics nor the exchange value of a person's life, but we don't complain about the consequence that it increases the market price of a "hit"- because such laws serve a higher value. I do hope you are OK with that.
BTW. One thing I would require of your foundational model, before I took it seriously - more than a primitive model - is a ledger for "the world" - the source of all production. Since you seem to assume there is a pre-existing private ownership of the free gifts of Nature, then I suppose only "The Commons" remains as a label for the non-private, or collective, universe. Yes, of course it is difficult.
"I cannot go along with this bit:- "If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated.""
I think we might be using the word "imbalance" in different ways. This is quite a tricky subject, and I need to write an article or 2 on it, at least in part to help me to clarify my thinking on it, but I'd definitely argue that each debt should be considered temporary. Imagine I write you an IOU in exchange for some goods/services. You're happy for now, because you can redeem that promise later on, when you actually want something I have. But if you *never* redeem that debt (maybe if you drop the IOU in the fire, or I scarper to another continent and you can't find me), our supposed exchange was essentially just a transfer from you to me. That's the problem. (If you use the IOU as a means of buying something, it just means that someone else is now in the position that you were).
It seems to me that the dynamic imbalance you're referring to is in the aggregate. I agree that that's not (necessarily) a problem. For example, if the government launches a new infrastructure project every year to be paid off over 20 years (because that's the period when people will benefit from it), the level of debt will rise for the first 20 years, and then plateau essentially forever.
What I think needs to be understood is the implications. When the government spends beyond its income, it's implicitly (or even sometimes explicitly - see the balancing item for the UK's whole of government accounts) committing to taxing enough in the future to clear the debt, even if it hasn't assigned those taxes to specific individuals yet. This is the only honest way of accounting.
It's quite common for economists (not just MMTers) to treat the government's *power to tax* as an asset in its own right, suggesting that no level of debt makes it insolvent. But this is effectively claiming to be able to create wealth by fiat: adding to one entity's assets without taking away another's assets or increasing another's liabilities. There's actually a sleight of hand going on here. The government's power to tax isn't just the ability to increase its assets; it's the ability to increase its assets *by increasing the liabilities of the private sector*. As with any action other than production and consumption, it's zero-sum for RNW.
"What you call government DEBT (because it IS a liability) is not at all like personal debt. The government is satisfying the savings desires of the non-bank private sector. It is providing a service at extremely minimum risk to investors. It is not impoverishing the country or heading towards insolvency."
It's always interesting to look at RNW. It's absolutely rigorous in terms of what the effects of each economic action (represented by a coloured arrow) are, and specifically that there are some profound invariants (statements which remain true no matter what anyone does). In terms of what people own, are owed and owe (i.e. assets and liabilities), I've not found any way in which government debts act differently from personal debt. The only qualitative difference is that the government can defer settling forever, but as I tried to show above, that's not really that different from a private sector debtor going into hiding.
"Does life on Earth have a value beyond money?"
"I'm saying that the realm of money and economic calculation must remain subservient to more fundamental values."
I completely agree. Economic theory shouldn't determine what we value. It should just help us to understand the nature of limited resources and tradeoffs. I think that a major major reason for the failure of economics is that it makes incredibly naive assumptions about people's motivations. What I concentrate on is what we can know for sure *irrespective of what people perceive, value and do*.
"If someone is willing to give everything they have, then that, too has infinite value - for some at least."
I wouldn't say infinite. The value for them is greater than all they currently have, which isn't infinite.
"In your foundational model, you are sticking with "exchange values" as determined by subjective individuals at a moment in time"
The model essentially doesn't deal with values at all. Value is a layer of interpretation applied to goods, services and debts: specifically what benefits (of any sort) can be gained from them. But in the RNW model, an apple isn't represented by what can be gained from it (e.g. nourishment for 1 day, or something which can be exchanged for for 4 plums or 20p). It's just an apple.
"Apples are growing and rotting all the time - and they are seasonal. Value is not conserved, and that fact really messes up your ledgers because they change even when no transactions occur."
I certainly never claim that value is conserved. You're certainly right that if you have an apple, and leave it in a fruit bowl for weeks, it will rot. That doesn't mess up the analysis at all: it's just consumption (it decreases the owner's RNW without increasing anyone else's).
"And I tend to attribute "infinite" value to the irreplaceable - especially the free gifts of nature."
I'm going to challenge you on this. If you want to go and visit a friend or family member, you will almost certainly consume more natural resources (raw or processed) than you would have otherwise. You have to decide whether that's something you're prepared to sacrifice. This is what economics is about.
"By way of analogy, "Thou Shalt Not Kill" does not discuss the economics nor the exchange value of a person's life, but we don't complain about the consequence that it increases the market price of a "hit"- because such laws serve a higher value. I do hope you are OK with that."
Yes, I completely agree.
"BTW. One thing I would require of your foundational model, before I took it seriously - more than a primitive model - is a ledger for "the world" - the source of all production. Since you seem to assume there is a pre-existing private ownership of the free gifts of Nature, then I suppose only "The Commons" remains as a label for the non-private, or collective, universe. Yes, of course it is difficult."
One thing I'd say first is that Steve Keen is happy to have models which don't have a ledger (or balance sheet) for the natural world (things outside human possession). So any criticism of this model applies equally to his sectoral model of government, central bank, banking sector, and non-bank private sector. I agree with his implicit claim that that's a valid thing to do - you can learn useful things from it.
As to a balance sheet for the natural world, I've got a basic idea of how that could be done. For example, when new life comes into being, that's a new "asset" for the natural world, and when something dies, that's removed from its balance sheet. When a person takes possession of a natural resource, that's a transfer from the natural world's balance sheet to the person's balance sheet (purple arrow). When a person dumps something into the environment, or loses their keys on a country walk (don't ask!), that's a transfer from the person's balance sheet to the natural world's. Transformation of something in the environment (e.g. a tree turning CO2 and water into O2 and glucose) is consumption of the former and production of the latter.
A natural world balance sheet is something we should keep in the back of our minds, but it's not needed for understanding some key ideas in economics. I'd be interested to know your thoughts on Bastiat's broken window parable, which I discuss here:
I've read some more and I am enjoying your calm, clear persistence very much. You might be making progress, because I read a recent piece by J.D. Alt where he was singing the praises of creating new fiat money without raising taxes.
The following passages did not win my whole hearted endorsement. Could this be because I could not get away with saying such things here?
"But the truth is, if the Sovereign Fiat Money System we’ve been using now for over half a century is properly understood, our national government could write those paid leave paychecks—could do so without either raising taxes or borrowing dollars that must be repaid with future taxes—and arguably ought to do so as a matter of “fiscal responsibility” in pursuit of our collective well-being."
And..
"If we truly understood that taxes do not pay for federal spending—and Treasury bond operations do not “borrow” dollars that must be repaid with future taxes—we could be having an entirely different conversation."
If claims such as these are what you want to challenge, then I already agree with you. These statements CAN be effectively true IF there are appropriate idle resources available in the economy. But they may not even be true most of the time.
For example, in a well managed, fully employed economy, additional government spending is quite likely to be inflationary, so taxes should be increased or the rate of bank lending reduced to calm total demand. Of course, if everyone is doing well, increased taxes should not be an imposition, especially if the alternative is inflation which acts like an untargeted tax anyway. Am I now playing both sides against the middle and inviting attacks from both sides?
Back to our discussion and something you said above.
"The model essentially doesn't deal with values at all. Value is a layer of interpretation applied to goods, services and debts: specifically what benefits (of any sort) can be gained from them."
You described transactions which you said were zero sum - because the sum of existing possessed items did not change - but did you not also describe examples of barter somewhere? Something like, 2 bags of wheat could be swapped for one book or a dozen apples? Perhaps I dreamed it, because I cannot find it now (while keeping this tab open).
It seems that I missed this critical absence. Because I really thought you had exchanges or purchases going on where one type of asset was exchanged for a different type of asset. That sort of subjective assessment of value versus ability to pay is so important to economic behaviour that I am surprised you managed to avoid it. I am just perplexed.
At this point, I agree that the mathematical, long term liability for government spending rests on the nation's economy, that is, on future taxpayers. However, I do not agree that it is a problem, essentially because there is no requirement to ever pay it back. Building a society with material and social infrastructure also greatly facilitates production.
Government money creation is not a problem, but I think there is potentially a problem with paying interest on the accumulated government liability associated with fiat money creation. The potential interest problem goes away if the government pays that interest to itself via the reserve bank. But that is a different discussion.
Finally an acknowledgement of the challenge relating to infinite value. I braced myself, but then nothing much happened. I suspect we need to build some overlapping common ground before we can properly discuss this issue. I admit that I have been somewhat enigmatic on this topic.
Starting at the end - the only stuff we are compelled to "consume" is available energy (exergy) - and heaps of new energy arrives on the planet every day. As in Nature, the recycling of all material resources can be driven by renewable energy which would otherwise go straight to low grade heat. There are two levels of "consumption": there is macro scale of resource consumption and there is personal consumption. In a linear (extract and pollute) economy there is a one to one (per capita) correspondence between the two. In a mostly circular economy, there is a one to many relationship because the same extracted resources are remade and "consumed" many times over. The result is that the main input to enable personal consumption is energy. It's a dream right now, but it is scientifically sound. Our physical economy can copy nature's evolved economy after we work out how to make money serve this goal instead of the goal of maximising extraction and waste.
I have not finished reading yet, but you have beautifully expressed things so far. This is where I am up to.
"But this is effectively claiming to be able to create wealth by fiat: adding to one entity's assets without taking away another's assets or increasing another's liabilities. There's actually a sleight of hand going on here."
Is this so different to the "sleight of hand going on" when banks create money? The expansion of the aggregate of outstanding bank loans is quite similar to the expansion of untaxed government spending. Let's look at the similarities and differences.
Banks create credit money on the basis that the money can be recovered (with interest) from the future, so banks require a repayment schedule. Banks also require collateral - some asset they can sell in the case of a default. In the normal case, the productive power of the borrower is supposed to repay the loan with money (an arbitrary combination of yet-to-be-taxed government spending and other people's debt) which has been exchanged for newly created value (the borrower's labour). This picture needs to be expanded to include the transfers of wealth the borrower can accumulate by legal or nefarious means, which do not contribute to the total sum of value.
Governments also create new money on the basis that money can be recovered from the future - so I think you are correct to say that there is an implied liability that future taxation CAN repay all government money creation. Unlike bank credit, however, government created money does not have a repayment schedule, instead, money is reclaimed on an "as needed" basis via taxation. It is functionally very important that govt spending and taxation do not have to balance, but can respond to the needs of managing the dynamics of the chaotic beast that is the economy.
Now, on the subject of collateral. The bank's asset is your debt, not your house, so they are not selling it to you on "lay-buy". The bank's lien is a guarantee which affects the limit, but does not partake in the creation of credit money. The new credit money is the result of a balanced expansion of the assets and liabilities of both parties. This credit money circulates in the economy but is slowly removed as the loan is paid off. In the meantime, banks have (usually more than) replaced the depleted circulation of credit money with new loans.
When the government spends into the economy, it is effectively lending to the "Economy" without a specified repayment schedule. The collective "Economy" has a liability, just as the collective economy has a permanent (usually growing), dynamic liability to repay bank loans. Both these collective liabilities are not a problem, so long as the borrowers of bank loans and the subjects of taxation are producing value and maintain future productive capacity. If the rate of production of real value declines relative to the money supply (i.e. the sum of government plus private debt), then you DO start to get problems - one of which is called inflation.
I am very appreciative of the stimulation, but I will read some more later. Be patient. Expect another comment or two rather than tempting me to ignore your excellent work, by spiralling into another discussion.
On a second reading, I now think we do have some things in common. I do not like the government paying interest on reserves or on bonds. This is because it is a subsidy for the wealthy. The problem discussed above is less concerned about the monetary sovereign's ability to create money and has much more to do with the issuing of debt - converting reserves into bonds - accepting liability for private sector savings - and worse, paying the private sector interest on the money which the government created.
Issuing bonds is something which governments do "voluntarily", by which I mean I am not at all convinced that "issuing government debt" or "accepting deposits", is a necessary function of a monetary sovereign unless the banking system is entirely public. A continuously accumulating liability that enriches the private sector according to how much money the have already, means that taxation has to be higher in order to control inflation.
In favour of issuing bonds:-
providing the safest investment vehicle for savings has a stabilising effect on the financial sector. Not only does it provide control of interest rates, but it also reduces the amount of savings that would otherwise be forced into asset bubble speculation. By encouraging long term savings, cash is temporarily removed from circulation, so part of today's inflation problems can be shifted to the future. I am sure there are more effective ways to adjust the money supply, but they tend not to make people feel good about voluntarily limiting their consumption spending. I am not so confident about the benefits of time shifting spending because it is possible that bonds are readily convertible into cash at any time. I'm no expert here.
"Since government spending isn’t producing or consuming anything, the One Lesson (see below) tells us that there’s no free lunch here."
I hope you are not saying governments don't produce anything. When the government spends, it may not make apples appear by magic, but it does produce MONEY. It also causes a whole chain of real production to take place. As the currency sovereign, the government's financial net worth is effectively infinity - so infinity minus something equals infinity. However the economy it owns and manages does have a limited productive capacity to make apples appear.
If apples can appear from nowhere and we call that "production" then it is even easier for something notional, such as money, to pop into existence.
You do not mention how money gets a value. It is in demand to pay taxes. Taxation makes fiat money valuable.
On judgement day, when nobody needs any money to make an economy work, the government can tax all its money back and pay out all its liabilities. What's the problem?
Thanks for the comment! I'll try to clarify what I mean.
First, I'd say that I only call economic activity "production" when someone gains a tangible asset on their balance sheet, and nobody else's assets (or liabilities) change. It increases the products available for their consumption. So, for example, harvesting an apple is a form of production. (We can discuss how to think about where the apple comes from originally if you like).
The creation of money is different. Watch carefully any time Steve Keen fills in Godley tables where there's money creation, and you'll see that the recipient gains an asset (RNW↑), but the bank which issues the money gains a liability (RNW↓). So production is net positive for the world's RNW, but creation of money is zero-sum, even though it's effortless.
Here's an illustration of the government buying a photocopier.
https://www.economics21st.com/i/143676573/buying-goods-and-services
Notice how every arrow which points towards someone (RNW↑) also points away from someone else (RNW↓). This diagram doesn't show the production itself, which is where the increase in the world's RNW comes from. But we could show it as being produced by the seller (or by someone else who sold it to them), not by the government. You can argue that the government adds to the demand for it, but that's not the same as producing it, just like you aren't producing apples when you buy them from the supermarket. The producer produces, and you eventually buy the product by swapping something for it.
Before I discuss your phrase "the government's financial net worth is effectively infinity", I need to ask you if you're familiar with the concepts of solvency and liquidity. Does it make sense to you if I say the government has infinite *liquidity*, but like anyone else, its (Raw) Net Worth is just its assets minus its liabilities?
I actually rarely, if ever, discuss the concept of value. I simply look at what each person(/entity) owns, is owed and owes; how those change over time; and what "invariants" exist i.e. what remains true no matter what events occur. Taxation reduces private sector assets and public sector liabilities, and is therefore also zero-sum.
I think it's undeniable that the existence of government-issued money circulating in the economy has a significant role in adjusting people's behaviour. But the RNW model shows up the fundamental constraints and compromises, which simply can't be broken, any more than Newton's laws of motion can be (leaving aside QM and relativity). I wrote about that here:
https://www.economics21st.com/p/newtonian-laws-for-economics
Thanks again for your comment. I'm interested in challenges to my analysis, and I hope we can both benefit from discussing it.
On financial assets first. I agree that the grand sum of all financial assets and liabilities is zero, but do not see a problem with one entity maintaining a permanent (or even expanding) negative balance in order to facilitate the illusion of savings. Anytime a monetary sovereign really wants to kill the economy, it has the power to reduce its negative balance to zero, by taxing away the entire amount of fiat money that it spent into the economy and use it to pay out bonds and bank reserves - just before taxing back that cash. Because it has the power to do this, it remains "solvent". If this ever did hypothetically occur, only credit money would remain in circulation and the economy would soon collapse as the businesses and people of that nation quickly became insolvent.
Now, when you talk about (Raw) Net Worth, you are suddenly including all other kinds of assets, some of which do indeed have infinite value. Since you wish to avoid assigning monetary values to these, then, from my perspective, your notion of Raw Net Worth must be a multidimensional sum of non-interchangeable (orthogonal) entities. Because you (probably wisely) try not to equate money with these other assets, then it is not actually possible to sell things for money, so privatisation is not possible - and a definition of "solvency" which includes real assets is somewhat problematic.
An economics without a theory of value is not economics at all - at best, it is merely accounting. What is the value of natural resources? What is the value of the air you breath if you allow anyone to "own" it (to restrict your access to it)?
"Belongs to nobody" reminds me of "terra-nullius". Apologies for getting confusing at the end, but I am being called away. Cheers.
Thanks for the reply. There's quite a lot to respond to there, so I'll just try to address the main points.
1. It's certainly possible for a government to run a permanent debt, which it has no intention of ever settling. But it's often useful to consider separately the real economy of goods and services, and the financial economy of debts. The real economy is what's truly important. The financial economy is there as a record of promises to resolve imbalances in (ultimately) the real economy in the future - it saves having to use a commodity as money. I talk about debts as temporary compensation for real economy imbalances in this article from the Macroeconomics series:
https://www.economics21st.com/p/the-financial-economy-1
If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated.
2. Yes, with RNW, I'm certainly talking about a vector with an enormous (but still finite) number of dimensions for the different types of thing. Given how I think about value (how much of something else a person would be prepared to trade for it), I'm not sure what you mean by some things having infinite value, since nobody has an infinite amount of anything to trade. What do you mean when you talk of infinite value?
Just because I don't have an objective theory of value doesn't mean that people can't buy things. It's just that I don't claim to predict when they will. If Bob decides to buy 10 apples from Alice for $2, she transfers 10 apples to him (purple arrow), and he transfers $2 to her (green arrow). Each of those transfers is a zero-sum action. If Alice insists on $3, and Bob agrees, then 10 apples are swapped for $3, again in two zero-sum actions.
3. I don't see the RNW model as being all there is to economics. But I do think it makes a powerful foundation, which explains a lot by itself, and other ideas can be built on top of it. What it offers are (a) its axioms are so self-evident that they should be uncontroversial, i.e. there are entities which can own, be owed and owe things, (b) it is linear: there's no fallacy of composition, (c) it's easy to represent in arrow diagrams, (d) it's quite intuitive, and (e) it's universal: it doesn't assume a particular type of economy. I really think that there's a very close analogy between this and Newton's laws of motion.
1. I quite like your point one. But there is an unnecessary twist or distorted value judgement colouring the proposition at the end. I cannot go along with this bit:- "If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated."
The imbalance is a dynamic one. Nobody loses out because everybody can cash in their assets at the appointed time or before. However, it just so happens that their assets, their savings, (aka government debt) are very likely to be replaced almost immediately by somebody else's voluntary savings - thereby maintaining a fluctuating dynamic balance of government debt.
Here's another analogy. Do bank depositors "lose out" from the permanent (dynamic) pool of bank debt? When you decide not to spend all your money today, and put (or leave) your money in your bank account, are you really "losing out"? Nobody loses out from these permanent voluntary dynamic balances - until the music stops with the collapse of civilisation. Then everyone loses out.
What you call government DEBT (because it IS a liability) is not at all like personal debt. The government is satisfying the savings desires of the non-bank private sector. It is providing a service at extremely minimum risk to investors. It is not impoverishing the country or heading towards insolvency.
2. Infinite value. Think about the replacement value of the irreplaceable. Does life on Earth have a value beyond money?
If you want to get mathematically pedantic, you might prefer "undefined", but that is "infinity's" twin sister. (And they are both the children of zero.)
"...nobody has an infinite amount of anything to trade." It is interesting that you limit value to what somebody can afford to pay, rather than consider what cannot be afforded. Most humans are capable of valuing something more highly than their own lives. So here I must open the Pandora's Box of subjectivity. If someone is willing to give everything they have, then that, too has infinite value - for some at least.
In your foundational model, you are sticking with "exchange values" as determined by subjective individuals at a moment in time. In the real world, of course, these momentarily factual exchange values change dynamically, so the subjective "zero sum" exchange applies only for a moment, for a specific transaction. Apples are growing and rotting all the time - and they are seasonal. Value is not conserved, and that fact really messes up your ledgers because they change even when no transactions occur.
Now all this is getting terribly close to value theory, so I will mention some thoughts about that. Subjectively, there are needs and wants and an ability to pay. There is a time varying hierarchy of preferences which can be swamped by the overriding need for the necessities of life. Objectively, there are statistical phenomena such as "scarcity" and "market prices".
How much are you willing to pay Elon for breathable air when you work for him on Mars? I am very interested in the power relationships which enable extortionate market pricing through to economic slavery. And I tend to attribute "infinite" value to the irreplaceable - especially the free gifts of nature. There is a practical reason for this. In my view, these things should not become part of financial calculations - and nothing stuffs up a calculation like an infinity.
I'm not saying these "resources" cannot be used, but they do need to be maintained. I'm saying that the realm of money and economic calculation must remain subservient to more fundamental values.
By way of analogy, "Thou Shalt Not Kill" does not discuss the economics nor the exchange value of a person's life, but we don't complain about the consequence that it increases the market price of a "hit"- because such laws serve a higher value. I do hope you are OK with that.
BTW. One thing I would require of your foundational model, before I took it seriously - more than a primitive model - is a ledger for "the world" - the source of all production. Since you seem to assume there is a pre-existing private ownership of the free gifts of Nature, then I suppose only "The Commons" remains as a label for the non-private, or collective, universe. Yes, of course it is difficult.
Sorry - these are getting quite long!
"I cannot go along with this bit:- "If the imbalance in the financial economy is permanent, then those who lost out in the real economy imbalance are *never* compensated.""
I think we might be using the word "imbalance" in different ways. This is quite a tricky subject, and I need to write an article or 2 on it, at least in part to help me to clarify my thinking on it, but I'd definitely argue that each debt should be considered temporary. Imagine I write you an IOU in exchange for some goods/services. You're happy for now, because you can redeem that promise later on, when you actually want something I have. But if you *never* redeem that debt (maybe if you drop the IOU in the fire, or I scarper to another continent and you can't find me), our supposed exchange was essentially just a transfer from you to me. That's the problem. (If you use the IOU as a means of buying something, it just means that someone else is now in the position that you were).
It seems to me that the dynamic imbalance you're referring to is in the aggregate. I agree that that's not (necessarily) a problem. For example, if the government launches a new infrastructure project every year to be paid off over 20 years (because that's the period when people will benefit from it), the level of debt will rise for the first 20 years, and then plateau essentially forever.
What I think needs to be understood is the implications. When the government spends beyond its income, it's implicitly (or even sometimes explicitly - see the balancing item for the UK's whole of government accounts) committing to taxing enough in the future to clear the debt, even if it hasn't assigned those taxes to specific individuals yet. This is the only honest way of accounting.
It's quite common for economists (not just MMTers) to treat the government's *power to tax* as an asset in its own right, suggesting that no level of debt makes it insolvent. But this is effectively claiming to be able to create wealth by fiat: adding to one entity's assets without taking away another's assets or increasing another's liabilities. There's actually a sleight of hand going on here. The government's power to tax isn't just the ability to increase its assets; it's the ability to increase its assets *by increasing the liabilities of the private sector*. As with any action other than production and consumption, it's zero-sum for RNW.
"What you call government DEBT (because it IS a liability) is not at all like personal debt. The government is satisfying the savings desires of the non-bank private sector. It is providing a service at extremely minimum risk to investors. It is not impoverishing the country or heading towards insolvency."
It's always interesting to look at RNW. It's absolutely rigorous in terms of what the effects of each economic action (represented by a coloured arrow) are, and specifically that there are some profound invariants (statements which remain true no matter what anyone does). In terms of what people own, are owed and owe (i.e. assets and liabilities), I've not found any way in which government debts act differently from personal debt. The only qualitative difference is that the government can defer settling forever, but as I tried to show above, that's not really that different from a private sector debtor going into hiding.
"Does life on Earth have a value beyond money?"
"I'm saying that the realm of money and economic calculation must remain subservient to more fundamental values."
I completely agree. Economic theory shouldn't determine what we value. It should just help us to understand the nature of limited resources and tradeoffs. I think that a major major reason for the failure of economics is that it makes incredibly naive assumptions about people's motivations. What I concentrate on is what we can know for sure *irrespective of what people perceive, value and do*.
"If someone is willing to give everything they have, then that, too has infinite value - for some at least."
I wouldn't say infinite. The value for them is greater than all they currently have, which isn't infinite.
"In your foundational model, you are sticking with "exchange values" as determined by subjective individuals at a moment in time"
The model essentially doesn't deal with values at all. Value is a layer of interpretation applied to goods, services and debts: specifically what benefits (of any sort) can be gained from them. But in the RNW model, an apple isn't represented by what can be gained from it (e.g. nourishment for 1 day, or something which can be exchanged for for 4 plums or 20p). It's just an apple.
"Apples are growing and rotting all the time - and they are seasonal. Value is not conserved, and that fact really messes up your ledgers because they change even when no transactions occur."
I certainly never claim that value is conserved. You're certainly right that if you have an apple, and leave it in a fruit bowl for weeks, it will rot. That doesn't mess up the analysis at all: it's just consumption (it decreases the owner's RNW without increasing anyone else's).
"And I tend to attribute "infinite" value to the irreplaceable - especially the free gifts of nature."
I'm going to challenge you on this. If you want to go and visit a friend or family member, you will almost certainly consume more natural resources (raw or processed) than you would have otherwise. You have to decide whether that's something you're prepared to sacrifice. This is what economics is about.
"By way of analogy, "Thou Shalt Not Kill" does not discuss the economics nor the exchange value of a person's life, but we don't complain about the consequence that it increases the market price of a "hit"- because such laws serve a higher value. I do hope you are OK with that."
Yes, I completely agree.
"BTW. One thing I would require of your foundational model, before I took it seriously - more than a primitive model - is a ledger for "the world" - the source of all production. Since you seem to assume there is a pre-existing private ownership of the free gifts of Nature, then I suppose only "The Commons" remains as a label for the non-private, or collective, universe. Yes, of course it is difficult."
One thing I'd say first is that Steve Keen is happy to have models which don't have a ledger (or balance sheet) for the natural world (things outside human possession). So any criticism of this model applies equally to his sectoral model of government, central bank, banking sector, and non-bank private sector. I agree with his implicit claim that that's a valid thing to do - you can learn useful things from it.
As to a balance sheet for the natural world, I've got a basic idea of how that could be done. For example, when new life comes into being, that's a new "asset" for the natural world, and when something dies, that's removed from its balance sheet. When a person takes possession of a natural resource, that's a transfer from the natural world's balance sheet to the person's balance sheet (purple arrow). When a person dumps something into the environment, or loses their keys on a country walk (don't ask!), that's a transfer from the person's balance sheet to the natural world's. Transformation of something in the environment (e.g. a tree turning CO2 and water into O2 and glucose) is consumption of the former and production of the latter.
A natural world balance sheet is something we should keep in the back of our minds, but it's not needed for understanding some key ideas in economics. I'd be interested to know your thoughts on Bastiat's broken window parable, which I discuss here:
https://www.economics21st.com/p/the-broken-window
Part 2
I've read some more and I am enjoying your calm, clear persistence very much. You might be making progress, because I read a recent piece by J.D. Alt where he was singing the praises of creating new fiat money without raising taxes.
https://johnalt.substack.com/p/the-popular-misunderstanding-of-money
The following passages did not win my whole hearted endorsement. Could this be because I could not get away with saying such things here?
"But the truth is, if the Sovereign Fiat Money System we’ve been using now for over half a century is properly understood, our national government could write those paid leave paychecks—could do so without either raising taxes or borrowing dollars that must be repaid with future taxes—and arguably ought to do so as a matter of “fiscal responsibility” in pursuit of our collective well-being."
And..
"If we truly understood that taxes do not pay for federal spending—and Treasury bond operations do not “borrow” dollars that must be repaid with future taxes—we could be having an entirely different conversation."
If claims such as these are what you want to challenge, then I already agree with you. These statements CAN be effectively true IF there are appropriate idle resources available in the economy. But they may not even be true most of the time.
For example, in a well managed, fully employed economy, additional government spending is quite likely to be inflationary, so taxes should be increased or the rate of bank lending reduced to calm total demand. Of course, if everyone is doing well, increased taxes should not be an imposition, especially if the alternative is inflation which acts like an untargeted tax anyway. Am I now playing both sides against the middle and inviting attacks from both sides?
Back to our discussion and something you said above.
"The model essentially doesn't deal with values at all. Value is a layer of interpretation applied to goods, services and debts: specifically what benefits (of any sort) can be gained from them."
You described transactions which you said were zero sum - because the sum of existing possessed items did not change - but did you not also describe examples of barter somewhere? Something like, 2 bags of wheat could be swapped for one book or a dozen apples? Perhaps I dreamed it, because I cannot find it now (while keeping this tab open).
It seems that I missed this critical absence. Because I really thought you had exchanges or purchases going on where one type of asset was exchanged for a different type of asset. That sort of subjective assessment of value versus ability to pay is so important to economic behaviour that I am surprised you managed to avoid it. I am just perplexed.
At this point, I agree that the mathematical, long term liability for government spending rests on the nation's economy, that is, on future taxpayers. However, I do not agree that it is a problem, essentially because there is no requirement to ever pay it back. Building a society with material and social infrastructure also greatly facilitates production.
Government money creation is not a problem, but I think there is potentially a problem with paying interest on the accumulated government liability associated with fiat money creation. The potential interest problem goes away if the government pays that interest to itself via the reserve bank. But that is a different discussion.
Finally an acknowledgement of the challenge relating to infinite value. I braced myself, but then nothing much happened. I suspect we need to build some overlapping common ground before we can properly discuss this issue. I admit that I have been somewhat enigmatic on this topic.
Starting at the end - the only stuff we are compelled to "consume" is available energy (exergy) - and heaps of new energy arrives on the planet every day. As in Nature, the recycling of all material resources can be driven by renewable energy which would otherwise go straight to low grade heat. There are two levels of "consumption": there is macro scale of resource consumption and there is personal consumption. In a linear (extract and pollute) economy there is a one to one (per capita) correspondence between the two. In a mostly circular economy, there is a one to many relationship because the same extracted resources are remade and "consumed" many times over. The result is that the main input to enable personal consumption is energy. It's a dream right now, but it is scientifically sound. Our physical economy can copy nature's evolved economy after we work out how to make money serve this goal instead of the goal of maximising extraction and waste.
I have not finished reading yet, but you have beautifully expressed things so far. This is where I am up to.
"But this is effectively claiming to be able to create wealth by fiat: adding to one entity's assets without taking away another's assets or increasing another's liabilities. There's actually a sleight of hand going on here."
Is this so different to the "sleight of hand going on" when banks create money? The expansion of the aggregate of outstanding bank loans is quite similar to the expansion of untaxed government spending. Let's look at the similarities and differences.
Banks create credit money on the basis that the money can be recovered (with interest) from the future, so banks require a repayment schedule. Banks also require collateral - some asset they can sell in the case of a default. In the normal case, the productive power of the borrower is supposed to repay the loan with money (an arbitrary combination of yet-to-be-taxed government spending and other people's debt) which has been exchanged for newly created value (the borrower's labour). This picture needs to be expanded to include the transfers of wealth the borrower can accumulate by legal or nefarious means, which do not contribute to the total sum of value.
Governments also create new money on the basis that money can be recovered from the future - so I think you are correct to say that there is an implied liability that future taxation CAN repay all government money creation. Unlike bank credit, however, government created money does not have a repayment schedule, instead, money is reclaimed on an "as needed" basis via taxation. It is functionally very important that govt spending and taxation do not have to balance, but can respond to the needs of managing the dynamics of the chaotic beast that is the economy.
Now, on the subject of collateral. The bank's asset is your debt, not your house, so they are not selling it to you on "lay-buy". The bank's lien is a guarantee which affects the limit, but does not partake in the creation of credit money. The new credit money is the result of a balanced expansion of the assets and liabilities of both parties. This credit money circulates in the economy but is slowly removed as the loan is paid off. In the meantime, banks have (usually more than) replaced the depleted circulation of credit money with new loans.
When the government spends into the economy, it is effectively lending to the "Economy" without a specified repayment schedule. The collective "Economy" has a liability, just as the collective economy has a permanent (usually growing), dynamic liability to repay bank loans. Both these collective liabilities are not a problem, so long as the borrowers of bank loans and the subjects of taxation are producing value and maintain future productive capacity. If the rate of production of real value declines relative to the money supply (i.e. the sum of government plus private debt), then you DO start to get problems - one of which is called inflation.
I am very appreciative of the stimulation, but I will read some more later. Be patient. Expect another comment or two rather than tempting me to ignore your excellent work, by spiralling into another discussion.
On a second reading, I now think we do have some things in common. I do not like the government paying interest on reserves or on bonds. This is because it is a subsidy for the wealthy. The problem discussed above is less concerned about the monetary sovereign's ability to create money and has much more to do with the issuing of debt - converting reserves into bonds - accepting liability for private sector savings - and worse, paying the private sector interest on the money which the government created.
Issuing bonds is something which governments do "voluntarily", by which I mean I am not at all convinced that "issuing government debt" or "accepting deposits", is a necessary function of a monetary sovereign unless the banking system is entirely public. A continuously accumulating liability that enriches the private sector according to how much money the have already, means that taxation has to be higher in order to control inflation.
In favour of issuing bonds:-
providing the safest investment vehicle for savings has a stabilising effect on the financial sector. Not only does it provide control of interest rates, but it also reduces the amount of savings that would otherwise be forced into asset bubble speculation. By encouraging long term savings, cash is temporarily removed from circulation, so part of today's inflation problems can be shifted to the future. I am sure there are more effective ways to adjust the money supply, but they tend not to make people feel good about voluntarily limiting their consumption spending. I am not so confident about the benefits of time shifting spending because it is possible that bonds are readily convertible into cash at any time. I'm no expert here.