There are five competing ideological groups of economists: Modern Monetary Theorists, Monetarists, Keynesians, Neoclassicals and Austrians. These five groups describe a spectrum of policy actions that are available to government because of its ability to print money, borrow money, spend money, lend money, write laws and enforce them. The government can insert money into the economy in a variety of ways using these tools, but the time frame it necessary to produce a result varies from the short term to the long term.
These five competing groups of economists represent ideological schools of thought. For practical purposes they function as political parties within the field of economics. Each of these schools is allied with some combination of political parties in government.
This list summarizes each school’s position, and it has at least the appearance of being funny. The list is ordered shortest to longest time needed for money to work its way into consumer hands:
1) MODERN MONETARY THEORY
Street Description: “Print money by diluting the existing pool of money and dump it directly into consumer’s hands, and it will work its way through the economy from the bottom up.”
Party Afilliation: Extreme Left, Ideological liberals. Ex-communists and their sympathizers.
Code Words: MMT
Slang Words: digital money, no-currency money, post-currency money
Description: In the narrowest terms, MMT means printing as much money as consumers need, and can afford to borrow, and lending it at zero interest. In the widest terms, it means elimination of nearly the entire consumer banking and credit system.
Criticisms: no one has ever tried to create MMT money, but in theory, inflation would rapidly expand making it impossible to plan anything in the future at all, and the entire economy would crash from the effect of the inability of anyone to plan anything.
Positives: As a targeted solution, bypassing the financial system and putting money directly in consumer’s hands isn’t always a bad idea. During the 2008 housing crash, some of us recommended that instead of using the normal channels, we just pay down all homeowner mortgages by 200,000 dollars, and give anyone who has yet to have a home, a 25% deposit against that home, for a period of six years, wherever that home loan is guaranteed by the federal government. (If you loans your kids money that doesn’t count.) There are a lot of little technical rules that have to accompany that legislation, like forcing recalculation of all home loans to a flat 3%. THis would punish the financial system but leave the rest of the economy and the pricing system intact. Because we didn’t do that, the entire world had to recalculate prices, was unable to plan production, and everything came to a halt, resulting in a lot of unemployment.
Street Description: Make money really cheap to borrow and it will work through the economy from the top down.
Party Affiliation: Mainstream Republicans and Democrats. The moderate right and left.
Code Word: Mainstream Economics. Monetary Policy
Slang Word: Freshwater School (per Krugman)
Description: The government borrows money and then auctions it off to banks. The banks add a few points of profit to it, and then try to lend it. The government constantly adjusts the price of credit while targeting a specific inflation rate. The objective is to allow the private sector to adjust to suppor the changes in the economy.
Criticisms: a) While you can make money cheap, you can’t force people to borrow it, and if people don’t borrow, then it doesn’t matter what you do. This was the problem from 2009-2011.
Street Description: Borrow money and have the government spend it. It will work its way through government institutions into the economy through the organizations the feed off the government.
Party Affiliation: Democrats. Mainstream moderate left and right
Slang Word: Tax And Spend Liberals, Statists, Big Government
Street Description: Borrow to Invest in creating and expanding competitive industries and it will work its way through the economy.
Party Affiliation: Republicans. Economic Conservatives in particular. Democrats because of union dependence upon large industries.
Code Word: Mainstream Economics. Industrial Policy
Slang Word: Corporate Subsidy, Corporatism.
Street Description: Borrow to Invest in human skills and knowledge, and people will create productive goods that will work its way through the economy, and create a robust and competitive economy.
Party Affiliation: Libertarians. Conservative libertarians, especially the Rothbardians.
Code Word: Hard Money Advocates
Slang Word: Gold Bugs. (And every other four letter word the other schools can come up with.)
Accurate Description: the government allows the boom and bust cycle to function without interference, under the assumption that all the government can do is encourage the continued misallocation of capital which will make the bubble larger and the recovery longer.
Involuntary Transfers: There probably aren’t any. It’s just that this model prevents the government from borrowing on behalf of the working classes in order to invest in businesses and infrastructure that that may employ them. In this sense, the people who have money are constraining the ability of the working classes to organize in such a way that they can invest in their future, and gives a substantial portion of that profit to people who do nothing but save and hold money already. While government abuse and corruption are universal, that’s not to say in principle the end result isn’t positive for labor.
Criticisms: The criticisms of the school are almost endless. However the most common are:
a) it takes a very long time for money to work its way into the economy.
b) the gold standard does not leave governments much borrowing capacity
c) the gold standard constrains growth.
Of course, an Austrian would argue that these are all good things that keep people focused on being competitive while preventing the government from creating an unstable economy and unstable society.
THE CONFLICT BETWEEN THE SCHOOLS OF THOUGHT
It is possible that ALL FOUR ARE RIGHT in their theories of policy recommendations. It is even likely that all four are right. It is simply unlikely that we can create a political system that can implement policy along that spectrum. Not because of the affect each of them has on the economy. But because the affect that each of them has on empowering or disempowering the government to interfere with our social lives. So, it’s possible to CONCEIVE of a political system that will make use of the entire spectrum of tools. It’s just not practically possible to implement it.
Why? Because the short term tactical approach favors consumption and redistribution while the long term favors innovation and concentration. And without a systemic and procedural means of balancing those two political extremes, it is not possible for the different advocates to compromise on policy.
The Propertarian Solution
Propertarianism says it doesn’t matter what levers you pull as long as it’s calculable, and is a voluntary inter temporal exchange. That may sound complicated, but all it means is that if you want to borrow now, you have to create a productive investment later to pay for it. The Keynesian and MMT position is that ‘demand’ only matters, and that production will serve to fulfill the demand.
Each of the different academic political parties represents a different constituency. And by feeding that constituency they transfer wealth from other constituencies to themselves. The solution is to render these transfers visible and calculable, so that inter-temporal transfers are simply loans from one another that help the entire population produce productive ends, rather than scramble steal from one another by way of the state.
Differences Between The Schools
While the terminology used in the field of economics is absurdly obscure, the differences between the schools are simple:
1) The progressives schools all assume that unemployment is politically and socially unstable, and morally intolerable. Therefore the government should attempt to use its ability to borrow and spend money, or borrow and loan money cheaply, to increase employment. By increasing employment we reduce human discomfort and stress. When people are employed they consume. When the consume business and industry produce. To increase production they hire. And in theory taxes on the increased consumption more than pay for the cost of restarting the economy. That’s the theory. And there is little dispute over whether this process will actually produce the short term consequences that we desire. The dispute is over the long term consequences.
2) Given that a government can borrow money and sell it, borrow money and spend it, or even just print it and either sell or spend it, the government can stimulate buying and selling in the economy. In theory, this spending fools the citizenry into thinking they have more money than they do, and so they start spending and consuming and this activity restores the economy (and forces people with savings to spend it rather than have it destroyed by inflation).
However, there are consequences to borrowing and spending.
A thought experiment
Let’s pretend we have four houses of government that roughly correspond to ‘The Fiscal House (Keynesians)’, ‘The Monetary House’ (Monetarists), ‘The Industrial Policy House’ (neoclassicals), and the ‘Human Capital House’ (Austrians). And then we have an executive branch that can only execute bills that are approved by all four houses. These houses cannot create laws in the sense that they cannot create binding obligations over the long term. They can only ‘print’, borrow, and allocate fixed amounts of money over fixed time periods with defined dates of conclusion. In that model, all four houses would have to compromise with one another in order for policy to be enacted.
The reason the different camps cannot agree on policy is that each side is actually trying to constrain the other’s political not economic preferences and can only do so by advocating the exclusive use of their methodology.
It is often impossible to maintain the perspective that the political battle is between the public intellectuals on the left, and the entrepreneurs on the right, over control of the government. Schumpeter told us this would happen. And he was right.
But we don’t have to control government if takings are prohibited, and exchanges are mandated. Its not hard really.