30 May 2011

More Mises Mastery

Economics, Inflation 37 Comments

On Sundays I quote Holy Scripture, on Mondays I quote from The Theory of Money and Credit:

The national capital is composed of the capital of the individual members of the State, and when the latter is consumed nothing remains of the former either. The individual who takes steps to invest his property in such a way that it cannot be eaten up by the depreciation of money does not injure the community; on the contrary, in taking steps to preserve his private property from destruction he also preserves some of the property of the community from destruction. If he surrendered it without opposition to the effects of the inflation all he would do would be to further the destruction of part of the national wealth and enrich those to whom the inflationary policy brings profit.

It is true that not inconsiderable sections of the best classes of the German people have given credit to the asseverations of the inflationists and their press. Many thought that they were doing a patriotic act when they did not get rid of their marks or kronen and mark or kronen securities, but retained them. By so doing, they did not serve the Fatherland. That they and their families have as a consequence sunk into poverty only means that some of the members of those classes of the German people from which the cultural reconstruction of the nation was to be expected are reduced to a condition in which they are able to help neither the community nor themselves.(pp. 256-257)

37 Responses to “More Mises Mastery”

  1. Bob Roddis says:

    In the appendix to TMC, Mises smacked down the MMTers a century ago:

    Another acatallactic doctrine seeks to explain the value of money by the command of the State. According to this theory, the value of money rests on the authority of the highest civil power, not on the estimation of commerce. The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the State fixed the actual level of the money prices of all economic goods and services as by means of general price-regulation. @ p. 464


    APLerner has announced that since we have been on a fiat system since 1971, catallactics is now irrelevant.
    Say what?

    • Jonathan M. F. Catalán says:

      You can tell from their comments to these blog posts that MMTers don’t really deal with economic theory. They deal strictly with monetary accounting. They just don’t make the synthesis when they try to comment on economics with what is a theory of accounting.

    • MamMoTh says:

      The State does not fix the actual level of the money prices of all economic goods and services as by means of general price-regulation.

      However, as the monopoly supplier of the currency, the government sets the price level of the economy by setting the price of what it gets in exchange of its currency and the interest rate. But relative prices are set by the market.

      So Mises and yourself are wrong (again).

      This is a must-read to understand how state money works


      • Joseph Fetz says:

        What is the net benefit of this arrangement to the players within the market (the people), might I ask? Further, who are the general beneficiaries of such agreement?

        • Joseph Fetz says:

          That last word in my query should be “arrangement” rather than “agreement” (there has not been anything close to agreement on this issue).

      • Bob Roddis says:

        Of course, Abba Lerner concocted his MAP because he was so convinced that the state can “set the price level of the economy be setting the price of what it gets in exchange of its currency and the interest rate”.


        Even if this were true, artificially setting the interest rate causes malinvestments and the boom/bust cycle and leads to poverty-inducing unemployment. Why do such a monstrous act?

        How exactly does the government set the “price level” of the economy by setting the price of what it gets in exchange of its currency? When does it do that? Why is the “price level” the government’s business? Why is the “price level” of concern to anyone absent funny money dilution? How can any of this even be conceptualized without a concern for Cantillon Effects? How can anyone know what the real value of anything might be under such a monstrous regime? How can anyone conduct reasonable economic calculation for long term investing under such a monstrous regime?

        • MamMoTh says:

          All entrepreneurs could. If you couldn’t, don’t blame the regime for your own incompetence. You are just an attorney after all…

          • Bob Roddis says:

            MamMoTh is always ready to supply a new link for presenting evidence that he does not understand the concepts of economic calculation or the pricing process. I’ve yet to see an MMTer who could “issue spot” the topic at all. It flies right over their little heads. Like the law of scarcity.

            I’m not sure why we bother with these “debates”.

            • MamMoTh says:

              I’m not sure why YOU bother. Nor why YOU always prefer to use WE when speaking about yourself, like mafiosi do.

      • Joseph Fetz says:

        Just out of curiosity, is there a single treatise so that I can read and better understand the MMT position? I have seen many articles, which often cater to specific circumstance, but many do not entirely lay out the MMT argument in its entirety.

        Essentially, what is the single prominent that lays out the entire MMT position and does so in an exhaustive effort to coordinate and explain it within the realm of economic science? I have seen a few self-published books that go for $20 for less than 200 pages, but I am not sure if these are the books to purchase (quite expensive).

        I am not looking for articles or websites. Please list for me a book or books that lay out the entire MMT position.

        Thank you.

        • MamMoTh says:

          I guess Randall Wray’s Understanding Modern Money: The Key to Full Employment and Price Stability is the only book I know of that could be considered a treatise on MMT, but it costs more than 20$.

          Mosler’s 7 Deadly Innocent Frauds, which is a good introduction for the layman, can be downloaded for free.

          • Bob Roddis says:

            I think one can get a good read on L. Randall Wray from this article, “Money and Taxes: the Chartalist Approach” and save $27.


            As all good Austrians know, money is the creature of the state and neither money nor we mere peons can exist without the state.

            • MamMoTh says:

              nor we mere peons can exist without the state.

              clearly you can’t. you waste your life complaining within the state. haven’t you noticed?

        • Bob Roddis says:

          Resident MMT expert AP Lerner told me to read something by the authentic original Abba Lerner if I wanted to understand MMT, so I bought his medium-sized little red book, “THE ECONOMICS OF CONTROL” with a bright RED COVER (which should raise some eyebrows – there is no sarcasm or irony involved in the title, he really really means it). The Table of Contents to “The Economics of Control” expresses Lerner’s goal as an attempt to save SOCIALISM:


          The fundamental aim of socialism is not the abolition of private property but the extension of democracy. This is obscured by dogmas of the right and of the left. The benefits of both the capitalist economy and the collectivist economy can be reaped in the controlled economy. The three principal problems to be faced in a controlled economy are employment, monopoly, and the distribution of income. Control must be distinguished from regulation. Liberalism and socialism can be reconciled in welfare economics.


          Lerner had been a full fledged commie who reluctantly decided that totalist Stalinism did not work but needed to be repaired with a bit of freedom. Income is to be distributed by the state. Mises eviscerated these guys 100 years ago. While Mosler claims to have reinvented MMT all by himself, the near-totalitarian nightmare stuff is always lurking below the surface. There’s a reason that the Constitution was intended in part to CONSTRAIN the government. Why should we take seriously people who openly celebrate that the government is unconstrained and who have no clue regarding “the problems of knowledge in society“ or the problems of economic calculation?

      • Major_Freedom says:

        However, as the monopoly supplier of the currency, the government sets the price level of the economy by setting the price of what it gets in exchange of its currency and the interest rate. But relative prices are set by the market.

        Only if the individuals value the additional money created for use in exchanges. If new money is created, but individuals valued it as a store of value (cash), then the price level won’t change.

        So you’re wrong, again.

    • von Pepe says:

      Thanks for this quote Bob.

  2. Bob Roddis says:

    “But hold on one minute,” the Modern Monetary Theorists say. “There will ALWAYS be demand for U.S. currency – because we need it for transactions and payroll and taxes!”

    This idea extends from the Chartalism school of thought. As a U.S. citizen, you get paid in dollars and have to pay your taxes in dollars. Also, if you want to go down to the store and buy milk or gasoline or shotgun shells, you have to conduct your transactions in dollars. Therefore, hey presto, permanent currency demand. But consider this:

    Americans can travel Europe while holding no euros.
    Brazilians can travel the United States while holding no dollars.
    Australians can travel Japan while holding no yen… and so on.

    How is this is so? Through the power of instant conversion transactions. When you use your major credit card to buy something for sale in a currency other than your own base currency, the bank makes the conversion for you on the spot. This reality makes it possible to limit one’s currency exposure to point of sale only!

    The same applies with tax and payroll considerations. What is to prevent a U.S. based business from holding its cash reserves in, say, a mix of Canadian dollars and Swiss francs, then converting the necessary funds to $USD only at the instant point of transaction, i.e. when they pay the tax?
    And as for payroll, why couldn’t a company wait until the last second to convert its payroll accounts from, say, Swiss francs to dollars… with employees again making the switch from $USD to something else as soon as the paycheck hits their accounts?

    Heck, let’s take this further. Thanks to the modern miracle of ETFs, you could keep 99% of your net worth in copper, crude oil and cotton if you really wanted to. Whenever you needed $USD for a transaction of some kind, you could convert instantly – “point of sale” – and hold no dollars otherwise.

    The argument that “there will always be demand” for a currency because of tax, payment and transaction requirements thus seems dubious at best. There is nothing (at least for now) to prevent even U.S.-based investors from

    1) shifting their preferences away from $USD liabilities, and

    2) minimizing their exposure to $USD to as small a footprint as possible (and hedging even that!).


    • MamMoTh says:

      That’s another straw-man that has already been knocked down.
      You can exchange US$ for Yen whenever you want. However, the amount of US$ and Yen remains unchanged. The desire to net save in one currency or in another can affect the exchange rate and the trade balance as MMT recognizes.

      • Major_Freedom says:

        However, the amount of US$ and Yen remains unchanged.

        Yeah, because the Fed and the Bank of Japan never inflate these currencies. Laugh.

        The desire to net save in one currency or in another can affect the exchange rate and the trade balance as MMT recognizes.

        The desire to gross save in one currency or in another can also affect the exchange rate, which MMT doesn’t seem to recognize.

        • MamMoTh says:

          The exchange rate of floating currencies is determined by the market at indifference levels.

  3. Bob Roddis says:

    The table of contents to Chapter Two of Lerner’s book starts with:

    The quantitative problem in distribution is how much shall go to each individual. The qualitative problem is how the different kinds of goods shall be allocated among each individual.

    Really? These are “problems?” Says who?

    Note that the book by L. Randall Wray is called “Understanding Modern Money: The Key to Full Employment and Price Stability”. Doesn’t sound so innocently descriptive to me.

    In addition to all of the other various economic and poli sci concepts that escape them, the MMTers have never met public choice theory.


    • MamMoTh says:

      Full employment and price stability are two of the goals of the Fed.

      However since the 70s unemployment has been used as a tool to achieve price stability because of the lack of understanding of how modern monetary economics work because they still operate as under a gold standard.

      MMT shows how a proper understanding of a sovereign free floating currency helps achieve both targets by implementing a Job Guarantee program that anchors the currency to a buffer of minimum wage workers instead of anchoring it to a buffer of gold.

  4. Bob Roddis says:

    From the Mosler article cited by MamMoTh:

    The State is effectively the sole issuer of its currency. As Lerner and Colander put it, “if anything is a natural monopoly, the money supply is” (1980, p. 84). This means that the State is also the price setter for its currency when it issues and exchanges it for goods and services.

    In the bibliography for the article, Mosler cites “Lerner, Abba P., and David C. Colander, 1980, MAP: a market anti-inflation plan, New York: Harcourt Brace Jovanovich.”

    David C. Colander is the author of the much-cited (by me) article explaining Lerner’s love of the MAP in 1980 (Lerner died in 1982) @ p. 12:


    Collander explains:

    I will first specify what functional finance is. ‘Functional finance’ is the name given by Lerner to the theory of financing government according to the following three rules: (1941)

    1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

    2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.

    3. If either of the first two rules conflicts with the principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

    In proposing these rules of functional finance Lerner’s purpose was to shift thinking about government finance from principles of sound finance that make sense for individuals—such as a balanced budget—to sound finance principles (now designated as functional finance) that make sense for the aggregate economy in which government spending and taxing decisions affect levels of economic activity. These two differed because the secondary effects of spending decisions and savings decisions—what Lerner and I called macro externalities—had to be taken into account in the aggregate economy. By introducing functional finance Lerner’s goal was to get economists to focus on the consequences of government financing, not on the then generally accepted, but little considered, rules of sound finance and the quantity theory of money.

    That’s the alleged foundation for the Keynesian alternative universe of macro logic.

  5. bobmurphy says:

    Just to explain what I think Mises is saying in that quote about general price fixing: Let’s say we’re initially in a situation of direct exchange. Then the king slaps his head one day and says, “Whoa! Instead of everyone trading goods for what he or she directly wants, instead we should all first sell things against these shells, and then use the shells in turn to buy what we want. Voila! The division of labor will be extended and productivity will soar!”

    But the problem is, even if the king uses the hangman to force everybody to do this, nobody knows the purchasing power of the shells. The first people who are supposed to sell their cows and apples for shells, don’t know what to charge for them (in terms of shells), and so it can’t get off the ground.

    Thus, it’s not enough for the king to use force to get people to start using something as money. He has to tell them how many units of the new money commodity exchange for various real goods and services, in order to get the thing going.

    So MamMoTh, even though what you are saying about the State currently just setting one price and then letting everything else adjust may be true, that doesn’t address Mises’ point. He’s talking about the origin of money there, and saying it couldn’t have come from a ruler’s command. (I’m 99% sure that’s what he means; I haven’t looked up the context of the quote Roddis gave.)

    • Bob Roddis says:

      Back in August, 2010, our pal AP Lerner explained the significance of the Mises TMC appendix on Knapp and the state theory of money as follows:

      That essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.


      I guess he told us.

  6. MamMoTh says:

    Thus, it’s not enough for the king to use force to get people to start using something as money. He has to tell them how many units of the new money commodity exchange for various real goods and services, in order to get the thing going.

    That is what MMT people call setting the price level. If the king pays 100 shells for a cow, and a cow exchanges for 2 horses, then horses will eventually trade for 50 shells. A gold standard sets the price of gold so that gold is fully employed, whilst a Job Guarantee sets the price of unskilled labour so that labour is fully employed.

    As with every chicken and egg story, there is always the problem of bootstrapping. The MMT people favour the theory of the origin of money as credit.


  7. Bob Roddis says:

    I think Bob Murphy’s example is the aspen stake we needed to drive through the heart of MMT. The approximate exchange rate for state money in the market must be pre-existing for a successful purchase by the state. Otherwise, if the state theory of money were true, the state could simply initially announce that it was going to buy a 2011 Maserati Quattroporte Sport GT S for 6 forty pound sacks of belly button lint which were needed to pay one’s taxes in belly button lint. Clearly the state did not invent money. People simply got use to using paper money as warehouse receipts and failed to see the fraud involved with the gradual creation of a pure fiat system. There was never a possibility of the state successfully inflicting its fiat system upon the populace if there had not first been an earlier era of a more-or-less free market in sound money represented by paper.

    The Mises appendix does not go as far as Bob Murphy and is really limited to explaining generally that the state theory of money is acatallactic. Bob’s explanation fleshes out that argument. The MMTers have been routed.

    • MamMoTh says:

      As far as I am concerned, the origin of money could be whatever, and it’s totally irrelevant to understanding modern money. The state theory of money is not acatallactic at all. You just don’t get it, live with that. You are an attorney after all.

      And no Roddis, MMTers have not been routed, eviscerated, shredded, etc as much as you like to think. Poor old sod, all your life wasted living within a state and complaining about it like a rebel teenager but using the public infrastructure to squander stolen gas in order to give meaning to your life. The good news is you are already 60, so your ordeal might be over soon.

      • Bob Roddis says:

        I guess you told me.

      • bobmurphy says:

        Mammoth, I’m not sure where the line is on this wacky blog, but I think you crossed it. Let’s calm down kids.

        • MamMoTh says:

          Sorry, I was trying to be kind.

        • Bob Roddis says:

          As a rule of thumb, when one of my debating opponents calls for my imminent death, I figure that I’ve won the debate.

          • MamMoTh says:

            As a rule of thumb, you never debate, but you always figure you’ve won the debate.

            • Joseph Fetz says:

              In all fairness, mammoth, you do often resort to personal attacks when you cannot prove your side of the debate. Not to take sides, but you often show deep-seaded malice toward those whom you disagree with, which is quite troubling considering that you have indicated that you’re of a dictatorial mindset. I can only imagine the world that your ideas would/could design, and I am pleased that I have a minimal probability of finding out. I don’t mean to be disrespectful-but, man… Get your head checked.

              • MamMoTh says:

                Not really, only to those who build strawmen arguments to prove that some idea has already been eviscerated, trashed, routed or shredded.

                I might be wrong but I think I tried my best to explain my understanding of MMT to those who were genuinely curious about it.

                That excludes Roddis. of course.

  8. Joseph Fetz says:

    Yes, you have been helpful in this forum for those curious as to the nature of MMT, and I have downloaded the material that you offered, as well as purchased the book that you recommended. But, that is not what I am driving at- what I want to know is what is your core motivation in supporting this theory? What is the end goal that you’re attempting to realize? It does not appear that it is to improve the plight of man on Earth, or to increase cooperation of the same. Rather, it appears that you have a nefarious motive that is deep-seaded in power and control of others. I don’t mean to psycho-analyse you, but then again you haven’t been all that shy about revealing this aspect of your aims and core principles.

    • MamMoTh says:

      I hope Wray’s book is good, I’ve heard good things about it but have not read it myself. I prefer Warren Mosler’s articles in the mandatory reading sections on his website. Wray tends to focus too much on the state theory of money. As I said before I find the origin of money a fascinating subject but quite irrelevant to understanding modern money economics, like arguing about who invented differential calculus is irrelevant to putting a satellite in orbit

      I have no nefarious motives whatsoever other than wanting people to live happily under whatever system they prefer. Unlike some (or most) Austrians and MMTers I don’t think any system is better than another in absolute terms.

      What draws me to MMT is their interesting analysis of the operational realities under a free floating fiat currency, and how they subvert some basic tenants of mainstream economics. I’m not knowledgeable enough to support it, but I understand enough of it to spot strawman arguments against it.

      I think the most nefarious thing about MMT for many people is the Job Guarantee they support as a means to achieve price stability with a buffer of employed people at the minimum wage, instead of a buffer of unemployed people. Although I am critical about some aspects of it I think it is a very interesting concept that deserves to be taken seriously.