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Thursday, July 8, 2010

Re-reviewing Chartalism / Neo-Chartalism

At request, I am re-reviewing this hot-button post-Keynesian topic. There seems to still be a debate within the post-Keynesian world about whether chartalism (of which I am still very skeptical) is in competition with or in conjuction with circuitism (of which I believe).

I am therefore revisiting chartalism - re-reading things I've read, and reading new stuff. I have to say I still have concerns about chartalism - about it's seeming tendency to ignore inflation, about the seeming assumption of a foreign exchange market in equilibrium, about its assumption that the demand for money is a function of the need to pay taxes as opposed to cancel bank obligations, etc. Basically, I have concerns like this and of those as outlined by Febrero here.

I note that Bill Mitchell, a current proponent and leader in the chartalism area, seems to answer the 'inflation' critique I mention above by pointing out that apparently with chartalism the fiscal authority (government) would need to create a base wage / full employment mechanism in order to control inflation - this as opposed to the current classical thinking of having monetary authority controlling inflation. I have to say that that this is a novel idea to me, and I'm considering buying his book to read up on his thoughts. And who knows, maybe it will help alay some of my concerns about chartalism. I have to say, so far, I'm less than impressed with the movements seeming inability to adequately and coherently answer these critiques. ...I'm continually pointed to this person's blog, or this person's unpublished (or sometimes published) paper. But none of it seems very cohesive.

24 comments:

Ken Houghton said...

Febrero link should be here.

Full employment would contain inflation, in theory, but I suspect it would slow economic growth, depending on the mechanism. (At the moment, I would take the trade. At full employment, it becomes problematic in an open economy.)

STF said...

Hi Garth

If I may, a few comments on your concerns:

"I have to say I still have concerns about chartalism - about it's seeming tendency to ignore inflation,"

As you noted, Bill is covering this now. He does spend a good deal of time on it in his book, too.

"about the seeming assumption of a foreign exchange market in equilibrium,"

I don't know where you got that. Can you elaborate?

"about its assumption that the demand for money is a function of the need to pay taxes as opposed to cancel bank obligations,"

You're misinterpreting here. Bank money or govt money can cancel bank obligations. And the govt does accept checks written on bank accounts to settle tax liabilities. But your bank ultimately settles your tax obligation in reserve balances. See my paper, "Setting Interest Rates in the Modern Money Era" at cfeps.org (WP34, I think) for more on this point.

"Basically, I have concerns like this and of those as outlined by Febrero here."

The Febrero paper is absolutely horrible. No chartalist takes it seriously because it is such a complete misinterpretation of chartalism. I provided a brief, incomplete (due to time constraints) critique of the paper on Keen's site last fall when he was discussing it:

Here's what I wrote in comment 381 at http://www.debtdeflation.com/blogs/2009/09/19/it%e2%80%99s-hard-being-a-bear-part-five-rescued/?cp=all

Eladio’s paper is a complete misinterpretation of chartalism. Anybody using that paper to discredit chartalism doesn’t understand chartalism. At least none of the “card carrying members” will pay any attention to any critique founded on that paper or others like it. I don’t want to use too much space or precious time discussing that paper, but let’s just consider quickly the three points of criticism made in that paper:

1. He uses the EMU as a counter to the chartalist argument that money has value b/c it is used to settle taxes. Apparently he hasn’t read much of anything Randy has written, b/c Randy’s noted numerous times that EMU is NOT an example of a sovereign currency-issuer for precisely the reasons Eladio mentions. If he’d read the chartalism literature instead of the literature critquing chartalism, he might have noticed that.

2. His critique of the chartalist point that the state controls the value of money misinterprets the chartalist argument. There’s a lot here I could say, but I’ll just make one point (it’s not a complete refutation, granted): Mosler’s 1998 JPKE paper explained rather clearly that the position was that government deficits RELATIVE to private sector desires to spend is what sets aggregate demand. Thus (a) it’s too simplistic to state the point as Eladio does, (b) the chartalist view here is a theory of aggregate demand, and should not be considered inconsistent with approaches such as the PK wage-conflict view.

3. Eladio misinterprets chartalist use of the term “leverage” and their suggestion that “state money precedes private money” to mean something like the money multiplier. It’s beyond me how anyone could ever read Wray, Mosler, myself, etc., and come to this conclusion, but several have. In short, it’s simply wrong . . . we are in complete agreement with the endogenous money view of banking and there’s nothing inconsistent with it and chartalism. See Wray’s edited volume “credit and state theories of money,” Mosler’s paper “soft currency economics,” or Mosler/Forstater’s paper on a “general framework for the analysis of money and other commodities” or something like that (both on Mosler’s site). Here again, Eladio relies on critics of chartalism that had also misinterpreted the chartalist view.

Best to you--and thank you for the honest hearing on chartalism. Let me know if I can be of assistance as you are working through any of this.

Scott Fullwiler

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STF said...

Sorry about all the deletions. I was getting "too many characters" messages, so kept shortening and trying to post, then saw that all of them got posted. So, I deleted all but the original.

STF said...

Forgot to comment on this:

"There seems to still be a debate within the post-Keynesian world about whether chartalism (of which I am still very skeptical) is in competition with or in conjuction with circuitism (of which I believe)."

Where? There is no debate, at least among actual chartalists and actual circuitistes, that I can see, on whether bank money is endogenous/horizontal. We all agree on the monetary circuit or endogenous money. In fact, there's very little difference between the entire paradigm put forth by chartalists and circuitistes/horizontalists like Marc Lavoie and Mario Seccareccia.

Best,
Scott

Garth said...

Thanks for all the good comments Scott. I'll keep them in mind as I read up more. I think I have a couple pk bloggers and economists in mind regarding skepticism to chartalism - I know Steve Keen for example has expressed some skepticism in the past for example, though I admittedly don't know his current position.

I do have one question for you though - would you say there is any conflict with chartalism's pro-government spending view versus the potential instability/bubbles that such spending could create when one looks dynamically over time?

STF said...

Hi Garth--good questions.

Yes, a number of people, Keen included used to think there was some inconsistency between MMT/Chartalism and endogenous money. I think I've explained it enough to Keen that he gets that there is no inconsistency, but I'm not sure, since many on his site still say that sort of thing. As I said, though, horizontalists like Marc Lavoie will tell you we are using basically the same model as he is for both government money and bank money.

Regarding 'pro-govt spending' and asset price bubbles, there are two points to make. First, MMT/Chartalists wouldn't call their view "pro govt spending" or even "pro deficit," necessarily. The issue is full employment with no additional AD pressure on inflation, and that whether or not these are achieved is the appropriate way to judge the size of the deficit (i.e., it's the macro effects of the deficit that matter, not the size of the deficit per se in its own right).

Second, MMT/Chartalists are Minskyans (Randy Wray is probably the best known student of Minsky, for instance), so there is a great deal of attention paid to financial instability and asset price bubbles. Again, some, like Keen even lately, continue to argue erroneously that MMT is about govt spending/deficits only and doesn't concern itself with financial instability and so forth (even though I've pointed out otherwise on his blog several times--I know Steve and like him a lot personally, so it's baffling to me that this doesn't get through). Just go look at the presenters at the Minsky conferences at Levy over the years--MMT is very strongly represented there. Further, since the crisis started in Summer 2007, there are literally dozens of working papers (at Levy, mostly) and blog posts on MMT views on diagnosing current problems in the financial system and and proposals for re-regulating the financial system.

A final point to add would be that Bill Black at UMKC, not originally a chartalist but perhaps is now (and if not, is certainly very sympathetic) has had a big influence on MMT views of the financial system.

So, overall, in order to really understand MMT/Chartalism, one needs to understand the influence Minsky and Bill Black have had. And anyone who thinks that true adherence to the views of Minsky and Black would mean ignoring the potential for asset price bubbles and financial instability simply doesn't have a clue what MMT/Chartalism actually is.

Best,
Scott

nisha said...

Great content. keep it up
mba

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