With seemingly half the country flirting with Modern Monetary Theory again to explain how to finance the Green New Deal, I'm enjoying reading articles from the Mises Institute site, including this one describing the origins of the Keynesian fad.
You don't have to have an IQ above 100 to be able to torpedo Keynesianism. You just ask these questions.
1. "Where did the money come from that the government spends into circulation?"
2. If the government runs a deficit, which is what Keynesians recommend in recessions, it did not get all of its money through tax revenues. "Did the borrowed money come from private lenders or from the central bank?"
3. "If the money came from private lenders, what would the lenders have done with their money if they had not loaned it to the government?"
4. If the money did not come from private lenders, then it must have come from the central bank. "How does money created out of nothing create wealth?"
These are really two questions. (1) "What would lenders to the government have done with their money if the government had not offered the promise of guaranteed repayment?" That money would have been spent either on consumption or production. This raises a second question: (2) "Why would either of these options be worse for the economy than spending by government bureaucrats?"
Money isn't value. Money is a promise of future value.  Money has value if the promise is credible.  Value in an economic sense is what people do or make that other people want badly enough to trade something for.  Value is not the same as virtue, though virtue can influence what someone wants.


E Hines said...

Couple things on this.

The answer to the first question in the cited excerpt is part of the misconceptions of Keynesianism as Keynes described it. The government's spending-as-stimulus does come from borrowed money or deficit spending (deferred borrowing)--but Keynes said that the stimulative effect is from the spiking in spending, not from a new, higher steady state of spending. The borrowing/deficits were supposed to be made good promptly.

For all that intended temporary nature of spending increase, the answer to the cited combined second question illustrates why even True Keynesianism can only fail: government as intermediary can never be as efficient as those putative lenders committing their monies directly.

The other thing is this: Money is a promise of future value.

That's only one purpose of money. Another purpose is realized current value spent on current consumption. Such differences in the philosophy of money is why the EU can never succeed. Greeks, among others, view money as being for current consumption whereas other members' citizens (vis., Germany's) do view money as that promise of future value. That's too great a difference in basic economic philosophy for a singly monetary union to bridge.

Eric Hines

Texan99 said...

The way to realize current value without receiving a current service or product is to accept a promise of delivery of a future service of product. Which is money.

E Hines said...

Yeah, but that's not the Greeks' way. They don't want future delivery--that's what Government is for. They want delivery now--current consumption.

Eric Hines

This comment has been removed by a blog administrator.
E Hines said...

0343 comment deletion was by me. It was a Vietnamese language spam claiming to tout a Vietnamese-based translation company.

Eric Hines

JP Blickenstaff said...

Money as a promise of future value allows for deferred compensation a hallmark of wealth creation. Current consumption attitude has a root in the distrust of the Promise.

E Hines said...

Current consumption attitude has a root in the distrust of the Promise.

Or it's an expectation of and reliance on Government to take care of the future as demonstrated by its taking care of the present for current retirees--and the Promise that Government will continue to do so in perpetuity.

Eric Hines

JP Blickenstaff said...

Reliance on the government is just a substitute for promise of future value. That might be a strategy in high inflation situations.

JP Blickenstaff said...

Money is a promise of future value. But also represents current value. That promise is only good if undergirded with societal stability, integrity, safety, quality and quality. Where those are lacking, current value is all there is. It is a continuum both above and below the line.

Promise of future value MONEY Current value
strong Societal stability, integrity, safety. weak

Don't know if the continuum lines will hold when this posted.

Ymarsakar said...

Money is part of the Divine Plan to let mortals figure out how to effectively and efficiently allocate resources in this time scape. In the realm before mortality, time is not a linear thing and thus money was unnecessary.

J Melcher said...

Money is more than a store of value. It's a unit of account -- a way to keep score in human trading games. It's also one of several intermediate mechanisms of exchange. The board game "Monopoly" (tm) has pretend money of no value except score-keeping and exchange. Players might trade deeds or houses directly but usually, they trade with "the bank" for money, then trade money with other players for hope of future game winning advantage.

In the board game there is a fixed amount of money issued to start. More money is introduced over time as players "pass Go" or random "Chance" events occur. The bank itself has a finite amount of scrip and, by the official rules, once the bank is empty no more money can be paid out. (The rules don't allow, for example, a player to pass Go and collect an I.O.U. from "the bank". ) The rule of fixed money supply resembles a "gold standard".

Slight enhancements to the game model would better resemble the real world.

New players enter the game in the middle (representing new labor or talent entering the real economy). Does the initial stake of funds for a new player come from the bank, or a "tax" per capita on each current player, or perhaps a pro-rated levy on the wealth of each old player to fund start up for the new player? In any case, how does the money supply change to reflect the change in play? Does the new money rule account for conditions when the bank is empty but a new player still wants to join play?

In real life, new enterprises arise. In the game, new properties may be discovered, invented, or developed. Airports appear in addition to railroads. The ISP internet providers are new utilities. Rural land near the city may be annexed in. In addition to houses and hotels, perhaps developers create skyscrapers. As new value appears in form of property, how is the money supply to be adjusted?

The game allows for neither wage inflation nor productivity bonuses. What if every tens passes through Go a player gets a five percent raise? It seems inflationary, yes, but it sort of represents,too, the necessary incentive to keep him in motion. Otherwise why not simply pass a turn -- or choose, when possible, to sit out several turns in jail? Again the question arises, if wages are to become more valuable where does the token of account for such value get created?

The Monopoly bank is simply a font of scrip -- and players hold scrip as they hold deeds and property tokens. A rule enhancement might allow a player with a pile of scrip to make a bank deposit in exchange for a Bank I.O.U. -- after all. And if so then Bank I.O.U.s suddenly become a new kind or level of money -- what does THAT mean? If a player passes Go, demands $200, and the bank is short on cash reserves, does it have the option of issuing a newly authorized I.O.U.? Does the bank pay a fixed interest on all such deposits (as borrowing from the bank against property has fixed rules and repayment rates) or does a player deposit into the bank get a newly negotiated rate for each I.O.U.? (One can imagine a game in which one player neither passes Go nor trades property but actually plays on behalf of the bank itself...)

Christopher B said...

Thought experiment - would you accept any form of currency as payment for goods or services that didn't have a reasonable expectation of being exchanged for a similar value of goods or services in the future?

E Hines said...

It's an incomplete thought experiment, since it (apparently) contemplates I'm concerned about the future. Were I not--because Government--of course I would, since I'll be spending that currency right away on my current consumption, not holding for some future that I don't need to worry about.

Eric Hines