Dev.SN

Adapting Monopoly to Understand Modern Money

posted by Dopefish on Saturday March 01 2014, @10:30AM   
from the pass-go-and-collect-$200 dept.

buswolley writes:

"Is the United States or the EU really too poor to afford to build the things each needs to maintain prosperous nations? Modern Monetary Theory (MMT) posits that America is not too poor in real resources to do the things it needs to do, and now proponents of the theory have adapted the rules of the classic board game Monopoly to demonstrate their case. For those that do not know what modern monetary theory is about, a suitable primer on the topic might be Warren Mosler's Seven Deadly Innocent Frauds of Economy Policy or Diagrams and Dollars, either as a book on Amazon or on-line for free at NewEconomicsPerspectives.org.

While the Modern Monetary Theory perspective tends to elicit disbelief and even rage, I think it is important for any scientist and geek to weigh the evidence carefully, and by doing so understand better about how and why money is created and destroyed."

• Re:I wasn't going to respond to all this, but ... (Score: 0) by Anonymous Coward on Saturday March 01 2014, @08:10PM

  by Anonymous Coward on Saturday March 01 2014, @08:10PM (#9285)

  Thanks for your thoughtful post AC. I will first note that this is not a conversation of the usual type: oh no China is going to own us! :)

  No problem. And it's worth noting that while China was never going to own the US, it's also true that China decided that owning the US is a bad deal. (I'm summarising their decisions with respect to US debt in the light of instability prospects, imbalancing effects on current account deficits, prospects of currency revaluations (theirs) and diversification.)

  I summarized your AC original post as inflation because uncontrolled inflation undermines many functional aspects of currency; for example the balance between maintaining value over time vs maintaining growth. Inflation devalues savings, and it devalues the debts that have been issued. This can be a boon for the debtor but can severely disrupt the system.

  But all of that matters precisely because of the unchanged function of money regardless of its value: that of a unit of account. In fact, it's because it's a unit of account that savings and financial assets are vulnerable to inflation.
  This next segment I will go through in small parts, because it's messy to untangle.

  I agree that unrestrained government spending can cause inflation, and I further agree that an unrestrained government spending can incur a large opportunity cost in the private sector if those spending priorities are allocated poorly.

  So far, so good.

  I also fear a government that could crowd out all private enterprise. However this latter is mostly a danger (maybe) when there are both a very high tax rate and very high fiat spending.

  Pragmatically, it really can't, except by regulation. Why? Because people will continue to serve each other's needs regardless of what the government wants as long as there's a return. The higher the burden, the larger the black market and the more destructive of government control the situation is. Prohibition and the War on Drugs are microeconomic examples, and the old USSR is a macroeconomic example. If you try to tax what people want out of existence, they smuggle it. If you ban it, they make it in the black market. If you ban private commerce entirely, you probably fail and you certainly foment vast human misery. The answer to that is to guard civil liberties, of which private enterprise should be regarded as one.

  In this case, since money is destroyed by taxes so quickly all economic activity chases Federal spending directly.

  The problem in this scenario is one of relevance. If the only buyer for what I do is the government, and the only purpose for the sale is to gather money which is paid to the government, where's my motivation to participate? I'd rather deal in barter, or a potlatch style economy and have no usefully measurable taxable income which does me no good anyway. And if that is banned or choked by regulation, I'll sit in a corner and compose poetry because what motivates me to do anything else? This is the dilemma, or something very close to it, which is created for many third world farmers who flooded out by well-meaning food donations. They know they'll be fed, so subsistence isn't much of a driver. Working the land is punishingly hard work, so if they don't have to farm they won't - so they stop farming. This is a real example, and so destructive that the very concept of food aid is under heavy fire.

  Low taxes and low spending leaves little growth and little government power.

  It's not at all clear that the low growth is a certain thing - in fact, provided a reasonably free field and a chance to accumulate meaningful capital, people will generally work like dogs to better their own lot. There's a fair amount of evidence to suggest that private expenditure is in fact more efficient than government expenditure at wealth creation.

  With low taxes and high levels of spending targeted as near zero unemployment via a job guarantee buffer stock, I do not yet see how government is crowding out the private sector from achieving non-government priorities because the low tax rate keep the money in the private sector.

  Again, you're looking at the money to the exclusion of other elements in the economy, which is probably why you don't see the distortionary effects. First, if there is large government expenditure but low taxes, you're either extracting capital via a bond structure, thus reducing your short term money supply and choking the supply of capital to enterprise, or you're printing money and essentially reducing the reward for financial success by guaranteeing inflation down the line. But even assuming neither of those is true because you're spending an accumulated rainy day fund of some sort, you're raising the cost of labour in the market and introducing inelasticity. Slice it how you like it, but some element of this pattern is affecting one or more of access to labour, capital and given the twisted priorities behind government employment of last resort as a universal, you're probably not getting value for money in terms of what the government employees are giving you anyway, thereby reducing net productivity even though you have nominal full employment. The mere fact that there are low taxes in the abstract doesn't mean much if the capital held is withdrawn via bonds or devalued by inflation.

  After the initial spending into the economy, that money will continue to flow through the economy, and businesses will chase that money.

  It's not clear that the spending continues infinitely (in fact in reality it's crystal clear that it doesn't) and businesses will only chase money which is worth their time and effort. There are actually businesses which use durable commodities as hedges against inflation and currency fluctuations and this is standard practice.

  Now I admit, I am not a trained economist, so perhaps I am fooled by things simple for others to see. But the logic of fiat currency, at the minimum, destroys the usual rhetoric about debts and deficits. Ultimately that cannot be a bad thing.

  It turns out that debt does matter, interest payments do matter, and deficits (current account as well as budget) do matter. While I agree that the rhetoric is often a little hysterical, it's not entirely divorced from reality. Moreover, the logic of fiat currency actually supports concerns about debts and deficits when you look at longer term consequences and the degree to which these systems are interconnected. Sorry, Modern Monetary Theory doesn't rescue the theory of consequence-free government spending.

  I am curious. What do you think of the Modern Monetary Realism perspective?

  It strikes me, frankly, as people who realised that MMT doesn't get it all right, but don't really want to give up their vague optimism that somewhere, somehow, if they look long enough, they will find a free lunch. I have yet to see a cogent explanation of what MMR actually is, because it's largely defined as all the parts of MMT they don't adhere to. This is not helpful.

  Also let us be clear. If I understand correctly, congress has authorized banks to create money via loans to the private sector.

  This is more or less correct. A more accurate statement might be to the effect that congress permits it up to a point, but has banned reserveless banking. It's actually even more complicated than that, but you're not really wrong.

  This is happening now. The government has ultimate monopoly on fiat currency creation has the power to create money directly if it so wished.

  This is not as true as a lot of people would love to think. The government would love to have total control over fiat currency supply manipulation, but those darned general public people keep misbehaving themselves in complex ways. The government is constantly chasing a mirage, in terms of money supply control, and its actual powers are very blunt, heavy instruments. Also, the less convenient money is, the more people turn to alternative means. For example, in much of the rural regions of the USA, guns and ammunition are as good as money.

  Thus the whole debate aught to shift to a debate about whether money creation should be wholly private, wholly Federal, or a mix of private and Federal. I think that it should be the latter as each are better equipped to respond to different threats to a healthy economy and nation.

  It already is. Most people just don't understand that.

  Parent