Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Tuesday, 8 December 2015
A slight mistake by David Graeber and others.
Graeber should be congratulated for helping explain how the bank and monetary system really works, which is significantly different from how the proverbial man in the street understands it, and indeed how some economics text books explain it. However the following sentence of his in The Guardian is not correct. (The same error is made incidentally by others)
“What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.”
The flaw in that argument is that the total amount of debt VASTLY exceeds the amount of money needed to make the economy work.
To illustrate, in the UK, SME trade debts alone amount to three times GDP, never mind mortgages and debts between large firms, etc. (That probably doubles the "three times" figure).
In contrast, the amount of money needed by the average household is little more than what's needed to tide them over from one monthly pay day to the next. That's roughly one twelfth GDP. But trebble that if you like and make it a quarter of GDP. That quarter of GDP figure is a minute fraction of the above three or six times GDP figure.
That point can be illustrated by reference to King Henry I and tally sticks, which are a form of money. Henry (who came to the throne in 1100) introduced tally sticks to England in a big way (though tally sticks were being used in some sort of fashion throughout Europe long before that).
You could argue that the amount of tally stick money was limited during Henry’s reign by the amount of wood available from which to make those tally sticks. However, that’s not a brilliant argument given that the amount of wood available for tally stick production was probably a good million times the amount actually needed.
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Ralph> The flaw in that argument is that the total amount of debt VASTLY exceeds the amount of money needed to make the economy work.
ReplyDeleteCouldn't it be that Graeber (in his article) and you (in your comment) are using a notoriously ambiguous word ("money") with very different meanings? It's often difficult to follow an author's logic if one doesn't step into the author's shoes by understanding the words as the author intended.
In the context of Graeber's article, money is IOU is debt and all debt is money, roughly equivalent to what is shown as "broad money" in the BoE text that he discusses, while you refer in your comment to money as "the stuff in circulation" in its strict technical meaning of M1 or M2?
I agree that “money” is very ambiguous word, but I don’t think Graeber and me are using the word in a different sense. On reflection, I think the weaknesses in my above article are as follows.
DeleteFirst, the whole idea that it’s necessary for anyone to go into debt in order for the private bank system to create money is nonsense, and for reasons I set out here:
http://ralphanomics.blogspot.co.uk/2015/02/without-debt-thered-be-no-money.html
I should have mentioned that flaw in the whole “debt is needed for there to be money” idea. And that’s the basic flaw in Graeber’s article I think.
Second, my inclusion of SME trade debts was a bit of a cheat.
Reason is that one definition of money is “a debt which is easily transferable” and there’s no way trade debts can be made so easily transferable that they constitute money. Trade debts are easy to transfer in the sense of selling them (at a discount), but those debts THEMSELVES are hard to use in lieu of more conventional forms of money.
All in all, the fact that total debts vastly exceed the amount of money needed makes Graeber’s argument look a bit silly, but that’s not as important as the above first point. I.e. my “total debts including SME trade debts” point is a bit of a red herring I reckon.