For some reason, was selling the “Selected Essays in Economics” of Knut Wicksell and edited by Bo Sandelin (two volumes) for €7.51 per volume, so I had them shipped over to Germany. They arrived this morning and I went to read the book review of “The State Theory of Money” in volume II on pages 210-219 (Some pages are readable at Google Books, btw). It was originally published in Ekonomisk Tidskrift in 1907, two years after Knapp’s book.

Wicksell, very much concerned with the connection between the state of credit and the interest rate and, very importantly, the changes in the level of (consumer goods) prices, does not like that Knapp aims to have a fixed exchange rate as the ultimate goal. This is one of the instances of the debate of what anchors a currency: a fixed exchange rate or a stable domestic price level.

Nevertheless, Wicksell agrees with Knapp and ends with this: “it can probably be said that in terms both of its content and its form – though most of all its form, its refined dialectical style, the elegance which the brief account given above has only been able to hint at dimly – it is to be counted among the pearls of economics literature.

There is more on Wicksell and MMT in my working paper – written with Nicolas Barbaroux – published here.

Posted by: Dirk | January 3, 2019

Minsky in 1993 on the Non-Neutrality of Money

I have read an article from Hyman Minsky which is only 6 pages long but contains some major arguments of his thought. There are also some very nice quotes to take out of the text. The article was published in the FRBNY Quarterly Review issue of spring 1992 on pages 77-82. Minsky attacks equilibrium economics:

The essential problem is whether any macroeconomic theory that is constructed upon a set of assumptions from which the proposition that money and finance are neutral is derived can be a serious guide to understanding our economy and to the development of policies for our economy.

This, by now, is common knowledge. Macroeconomics has failed, and only entrenched interests and the unwillingness to change when confronted with new empirical evidence that should lead to paradigm change is what is blocking the path of Minskian economics. Minsky writes:

The conventional economic paradigm is not the only way economics interrelations can be modeled. Every capitalist economy can be described in terms of sets of interrelated balance sheets. Except for two sets of entries – those that allocate the real capital assets of the economy to particular balance sheets (of firms) and those that allocate the net worth of the economy to other particular balance sheets (of households) – every asset is a liability in another balance sheet and every liability is an asset in other balance sheets. Balance sheets balance.

This is essential Minsky. For me, this approach is the only way to go forward. Either you are dealing with with assets and liabilities and trying to make sense of the macroeconomy or you are abstract and non-realistic, prone to repeat the mistakes of the past. As Minsky writes:

Balance sheet relations link yesterdays, todays, and tomorrows;

Again, this is fundamental. The economy is structured by legal constructs that potentially trigger cash flows, and these contracts were made mostly in the past, some in the present, and extend into the future. Minsky is lead to a very important question:

For economics the appropriate questions is, How do rational individuals behave in an irrational world, that is, a world they do not fully understand?

The center of analysis is the money-making process:

The fundamental borrowing and lending act in this system is an exchange of “money” now for “money” in the future.

He then foresees what Richard Koo has called the yin and yang phases of the economy:

We also need to be able to swing from periods in which the private economy dominates in the determination of gross profits and periods in which public debt-financed spending takes over the burden of sustaining gross profits.

This is brilliant. There is more in this short article, so I urge readers interested in a short introduction to Hyman Minsky to read this six-page article.

Posted by: Dirk | December 4, 2018

Progress in economics?

This is a quote from John Maynard Keynes from the General Theory, Chapter 22, Section 3, p. 322:

“We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.”

And here is a quote from an anonymous Spaniard from a Stake holder interview taken from this 2013 publication:

“The government has capacity for offering more social housing than it currently does. […] Currently there are hundreds of thousand empty houses and hundreds of thousands of families with extreme difficulties affording a mortgage or a rent.”

So, there seems to be an even more impossible situation today compared to the 1930s. We have houses in abundance in Spain but yet “no one can afford to live in the houses that there are”. Or perhaps not everyone.

It is almost 2019 yet. Economics still needs to change.


I’m helping to organize a conference on MMT with the topic “Why money matters”. It takes place in Berlin on February 1-2, 2019 at EBC Hochschule. The Call for Papers is open until December 31, 2018 and registration opens on December 1st. Find more information on

Posted by: Dirk | November 28, 2018

Will the price of Bitcoin fall to zero?

Much has been written about Bitcoin, and the recent loss in price (in USD) has led investors to ask where this will all end. As an economist, I would say that it is quite likely that the price of Bitcoin will be zero.

When a currency – which Bitcoin is not – experiences a fall in the exchange rate to the USD, there is usually some demand for it at a lower price. Economic units with debt in that currency and assets that are denominated in others find it profitable to pay off debt while the exchange rate is low. This is what normally stops the decline of hard currencies. Speculation about this can dampen the over- and undershooting that we see with softer currencies, but it is roughly the same game.

The price level can react to the exchange rate, but normally prices are set in domestic currency. Therefore, changes in the exchange rate do not influence domestic prices much. This is an empirical fact, as the up and downs of the oil price in the last twenty years did not cause wage rates and prices to follow along.

Now, Bitcoin is different. When the price of Bitcoin falls, everything will be more expensive in terms of Bitcoin. Changes in the price of Bitcoin are translated into inflation one to one. With Bitcoins price falling, people holding Bitcoins and using them to buy things will experience hyperinflation. They need more Bitcoins to pay for the same basket of goods every day. This is not a nice feature. Where does this end?

If there are no debts denominated in Bitcoin, then it is obvious that the price of Bitcoin shall be driven to zero. Once the ship starts sinking – the price of Bitcoin goes down – it becomes clear that there is no stabilizing demand, like with currencies. Nobody is forced to use Bitcoin for tax payments either, as with normal currencies. Once Bitcoin goes down, expectations will be that it goes down further. Who would want to hold an asset with a declining price and no reasonable theory of why it should go up in price?

The price of Bitcoin should fall to zero. When, nobody knows.

Posted by: Dirk | June 2, 2018

Seminario en la Universidad de Zaragoza

Invitación Seminario Knapp.png

I recently read the book by the UK sociologist Zygmunt Bauman and want to comment on a few things that I really like and a few I did not. The book starts with interesting chapters (originally, articles) on, among other things, Amartya Sen’s Theory of Justice. Bauman writes on page 22 (source):

“Just society” is a society permanently sensitive and vigilant to all cases of injustice and undertaking to take action to rectify them without waiting for the search of the universal model of justice to be completed”. In somewhat different and perhaps simpler terms, a society up in arms to promote the well-being of the underdog; the “well-being” including in this case the capacity of making real the formal human right to decent life – recasting “freedom de jure” into “freedom de facto”.

This is very interesting, almost revolutionary in today’s Western societies. Yet I think that the societies we live have largely been built by people promoting the well-being of the many, assaults on the welfare state and the public sector in general in the last few decades notwithstanding. I believe there is today a very large gap between what we think is how societies, and with it, economies work and they way the actually work. Financial crises, trade wars, polarization and inequality do not spring up from out of nowhere. They are symptoms of underlying processes. Bauman picks up this topic on page 50 (source):

There were, in other words, “natural” limits to inequality and “natural” barriers to social exclusion; the main causes of Karl Marx’s prophecy of the “proletariat’s absolute pauperisation” turning self-refuting and getting sour, and the main reasons for the introduction of the social state, a state taking care of keeping labour in a condition of readiness for employment, to become a “beyond left and right”: a non-partisan issue. Also the reasons for the state needing to protect the capitalist order against the suicidal consequences of leaving unbridled the capitalists’ morbid predilections, their fast-profit-seeking rapacity – and acting on that need by introducing minimal wages or time limits to the working day and week, as well as by legal protection of labour unions and other weapons of workers’ self-defence.

This should be undisputed, but probably it is not be the mainstream view of today, at least not in Germany and those countries in Europe that were left relatively unscarred by the last economic crisis.

Now we come to the main issue that I do not agree with, written on p. 76 (source):

Watching the already exorbitant yet still fast rising federal debt of the US, one may feel excused if wondering whether Bin Laden and his successors might have managed to take a hint and learn the lesson, and are set to repeat Reagan’s feat.

The idea that the federal debt of the US is a problem is moot. The US is issuer of its own sovereign currency and hence faces no budget constraint. Stephanie Kelton wrote as much in her LA Times article last year:

In other words, the government spends money and then collects some money back as people pay their taxes and buy bonds. Spending precedes taxing and borrowing – STAB. It takes votes and vocal interest groups, not tax revenue, to start the ball rolling.

If you need proof that STAB is the law of the land, look no further than the Senate’s recent $700-billion defense authorization. Without raising a dime from the rest of us, the Senate quietly approved an $80-billion annual increase, or more than enough money to make 4-year public colleges and universities tuition-free. And just where did the government get the money to do that? It authorized it into existence.

Whoa, cowboy! Are you telling me that the government can just make money appear out of nowhere, like magic? Absolutely. Congress has special powers: It’s the patent-holder on the U.S. dollar. No one else is legally allowed to create it. This means that Congress can always afford the pony because it can always create the money to pay for it.

Now, that doesn’t mean the government can buy absolutely anything it wants in absolutely any quantity at absolutely any speed. (Say, a pony for each of the 320 million men, women and children in the United States, by tomorrow.) That’s because our economy has internal limits. If the government tries to buy too much of something, it will drive up prices as the economy struggles to keep up with the demand. Inflation can spiral out of control. There are plenty of ways for the government to get a handle on inflation, though. For example, it can take money out of the economy through taxation.

So, if you want to create a “just society” as Zygmunt Bauman envisioned it, there is no financial problem of “running out of money” or “rocketing public debt”. There are internal limits – you can only use the resources that government can buy for its money – and there is inflation, which can be handled by taxing people (which we already do).

Those reading Zygmunt Bauman should be warned. I applaud Bauman the sociologist for his clear thought and ideas. However, I would not recommend Bauman the economist who seems to believe that national governments like that of the US can be driven into bankruptcy by “over-spending”.

Here is a quote from John Maynard Keynes, writing in 1933:

If I had the power today I should surely set out to endow our capital cities with all the appurtenances of art and civilisation on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford – and believing that money thus spent would not only be better than any dole, but would make unnecessary any dole. For with what we have spent on the dole in England since the War we could have made our cities the greatest works of man in the world.

This insight – that the government, that we, can create and can afford is what should lead to better economic policy in the 21st century. My colleagues in the US at the Levy Institute have recently presented this:

Public Service Employment: A Path to Full Employment

Research Project Reports, April 2018 | April 2018 | L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, Stephanie A. Kelton

Despite reports of a healthy US labor market, millions of Americans remain unemployed and underemployed, or have simply given up looking for work. It is a problem that plagues our economy in good times and in bad—there are never enough jobs available for all who want to work. L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton examine the impact of a new “job guarantee” proposal that would seek to eliminate involuntary unemployment by directly creating jobs in the communities where they are needed.

The authors propose the creation of a Public Service Employment (PSE) program that would offer a job at a living wage to all who are ready and willing to work. Federally funded but with a decentralized administration, the PSE program would pay $15 per hour and offer a basic package of benefits. This report simulates the economic impact over a ten-year period of implementing the PSE program beginning in 2018Q1.

Unemployment, hidden and official, with all of its attendant social harms, is a policy choice. The results in this report lend more weight to the argument that it is a policy choice we need no longer tolerate. True full employment is both achievable and sustainable.

Given that the participation in the US economy is till below pre-crisis levels and we seem to be approaching the end of the boom, it might have to be recognized that private spending along is not enough to lift all boats, is not enough to give jobs to all those who want to work. It is a tremendous waste of human potential to let people be idle instead of making use of their imagination, their skills, their knowledge.

Reuters has published an interesting article on Bitcoin. Here is the end:

Fundstrat also said crypto exchanges posted record profit in November and December and are expected to have huge tax liabilities, which should add to further selling in crypto-currencies. Many of the exchanges have net income exceeding $1 billion in 2017 and keep their working capital in bitcoin and ether, the research firm added.

To meet these tax liabilities, exchanges need to sell bitcoin and ether.

This is very interesting. The more successful Bitcoin is as a speculative investment, the higher the pressure is to get out of Bitcoin and into US dollar because of the rising tax liabilities.

This reminds me of the bigger picture. The more the private sector borrows, the hotter the economy runs. The hotter the economy runs, the more taxes citizens and corporations pay. The more they pay in taxes, the less they spend on everything else. However, in the real world inflation usually ends the boom since the central bank hikes up interest rates before inflation goes through the roof. Nevertheless, the effect of public surpluses as a result of a private-debt financed boom is real. The Clinton surpluses in the 1990s belong in this category.

Seems like the Bitcoin story could be stopped by the fact that tax liabilities are payable in USD. Those that doubted the sustainability of the value (exchange rate to USD/purchasing power) of Bitcoin from the start probably nod their heads in agreement.

Back in 2013 I wrote on this blog: “I believe that Bitcoins are on overpriced worthless token, not a currency. That status can be changed, but I can’t see what any sovereign country would gain from that.” I still stand by my statement.

Last week, I posted an article about Ben Fine’s excellent book about Marx’s Capital. I criticized two points that were made about Keynes and Keynesianism, mainly these two claims (both are quotes from the book):

  1. “Even in Keynesian economics (and for Keynes himself), where monetary factors are specifically introduced, the rate of profit – represented by the marginal efficiency of capital – is equal to the rate of interest.”
  2. “underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate.”

Ben Fine has replied by email and granted me permission to publish the relevant paragraphs:

Thanks so much for your kind remarks on our book and for taking the trouble to point out what you deem to be a complete mistake in need of correction. However, and understandably, I totally agree with your eloquent and scholarly statement of Keynes’ position. But it does not contradict our own account at all. The first sentence, including Keynes, sets MEC=i. The second only refers to KeynesianISM (and not Keynes although this might be made clearer that he is not to be included although this is at least implicit). For Keynes, there is a much more sophisticated understanding of MEC than for Keynesianism to incorporate future uncertainties and expectations and it is this which is set equal to the rate of interest for investment purposes and not current productivity of existing capital stock or even new physical investment if all could be sold. This is brought out very clearly in my own account of Keynes versus Keynesianism in  Macroeconomics: A Critical Companion, with O. Dimakou, Pluto, 2016

Here we carefully distinguish the MMEC from PMEC, monetary and physical, in order to bring out difference between Keynes and Keynesianism, with MMEC < PMEC !


Taking it up from here, there are two things that I’d like to point out. Regarding the first issue, MEC=i, there is a quote in the General Theory that explicitly deals with the issue in chapter 18 (my highlighting):

There will be an inducement to push the rate of new investment to the point which forces the supply-price of each type of capital-asset to a figure which, taken in conjunction with its prospective yield, brings the marginal efficiency of capital in general to approximate equality with the rate of interest.

Keynes, in chapter 18, restates the General Theory, following chapter 17 on money and interest rates/yields (the issue is confused by Keynes’s use of ‘interest rate’ for both interest rate and yield). It is clear that the MEC is a schedule, not a single value (my highlighting):

The schedule of the marginal efficiency of capital depends, however, partly on the given factors and partly on the prospective yield of capital-assets of different kinds; whilst the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units.

So I cannot agree with the idea that “Keynes, sets MEC=i”. He sets marginal MEC=i. As long as the MEC is above i, investment is forthcoming up until the point where the MEC=i. In teaching, the schedule is drawn as a falling (sometimes in steps) curve in an interest rate / quantity of investment diagram, like here.

Regarding the second issue, Ben Fine refers me to the “the standard IS/LM model in which full employment comes about as long as all markets are sufficiently flexible (hence neoclassical synthesis as accepting Keynes pointed to money markets in particular and interest rate had to fall low enough to generate sufficient investment as cost of capital)”. Even there, I would say, it is not clear that there is one interest rate compatible with full employment. There are many possible IS curves, and for each of them there is one LM curve which would lead us to full employment. Turning things around, for every interest rate (given one LM curve) there is one IS curve that leads to full employment in the model. Therefore, even with complete inflexibility of the interest rate government spending can be adjusted so that full employment is reached. And this is exactly what Keynes argued in his letter to FDR written in 1933 (my highlighting):

Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

So, Keynes argued that in times when monetary policy would not work as hoped for (so, given that the interest rate is whatever it is), it is government spending that must lead the economy to full employment. A bit further down the text Keynes says that monetary policy should aim at “maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest”. Clearly Keynes thinks about combinations of interest rates and levels of government spending that lead to full employment, but it is government spending that is of utmost importance:

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices.

This, in our years of post-austerity, is why Keynes is still relevant for today. Why Marx is relevant for today you have shown in your book so I need not address this here.

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