MMT on International Trade

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out

Chapter 5 of Stephanie Kelton’s The Deficit Myth takes up international trade. Trump thinks the US is losing at trade simply because we import a lot more than we export. He promised to bring manufacturing jobs back to the US. This won him votes in many states where corporations closed US operations and moved production offshore. But it’s a lot more complicated than just the dollars. I’m only going to address a few of the points Kelton raises.

1. Trade has good and bad results

It’s true that for a number of years the US has run a trade deficit with the rest of the world. We import more than we export. This means we send other people dollars and they send us stuff we want, like oil, computers, cars and cars with computers in them that run on oil. That seems like a good trade.

Many poorer countries do not produce enough food, drugs and advanced equipment to meet their needs. [1] Their currencies are weak, so they need dollars to pay for those shortfalls. Giving them dollars for their goods is a partial fix. Also, it means their workers have jobs and can hope for better lives.

It’s a fact that we have lost a lot of good jobs, those with benefits and middle-class pay, and replaced them with poor jobs. Supposedly we get lower prices as a result, though people buying iPhones might wonder. However, most of the benefits from trade go to the richest among us, corporations and their top executives and the lawyers, accountants, and consultants hired to minimize their costs, taxes, personnel, and unions. [2]

Maybe someday foreign holders of US dollars will want stuff themselves, instead of dollars. They might buy stuff from us. If that means increasing our exports of goods and services, then it seems good. If they buy up our land, buildings and equipment, that might not be so good. If they buy our oil and export it to their countries, we might not like that. Its complicated.

2. What about the money?

This seems to bother Trump a lot. He seems to think sending dollars abroad is bad, even if we get useful stuff in exchange, which sounds stupid when you write it down. One real problem is that money spent abroad doesn’t circulate in the US. Your spending is someone else’s income. If American Airlines buys jets from AirBus, that’s money not spent in the US, and less money for Boeing employees to spend here. The result is lowered economic activity here. Kelton has an answer for this.

Let’s start with the two-bucket accounting system from the previous post. Deficit spending by the Federal Government creates a surplus in the hands of Everybody Else. So, if the FG spends $100 and taxes back $90, then FG has a negative balance of $10. EE has a surplus of $10, which is available to increase demand for goods and services.

Let’s now split the EE bucket into two pieces: US and Other Countries. Now suppose people in the US spend $5 on goat cheese from France, part of OC, and French people spend $3 on US movies. The US surplus drops by $5, and increases by $3, for a loss of $2, leaving $8. Those 2 dollars won’t be available to buy stuff in the US, reducing economic activity.

Trump’s solution to this problem is tariffs on imports from OC. Tariffs are taxes. They put money in the FG bucket, and remove it from the funds available to support domestic demand. Suppose the FG imposes $1 in tariffs on imports. The US bucket drops by $1, to $7. If the problem was reduction of demand, that’s perverse.

The real solution is more deficit spending by the FG on US goods. If the FG spends another $2 buying US goods, those two dollars add to the US surplus, returning it to $10. Problem solved, especially for people who like Crottin de Chavignol. [3]

3. It’s the jobs, not the dollars.

The real problem is not the dollars, but the good jobs that disappeared. Kelton doesn’t say so, but in fact sending jobs overseas is the result of corporate decisions, made solely in search of profits. The federal government does not explicitly support this corporate decision, but its policies do not discourage shipping jobs overseas, and in many ways support offshoring of jobs. For example, modern trade treaties contain provisions designed to protect US businesses in foreign countries, and the government is often willing to use force to protect US assets abroad which can cost the lives of our military people to protect the interests of the rich.

Mainstream economists have always praised trade deals as benefiting Americans, despite the fact that the benefits of trade for the most part flow to the rich while the burdens fall mostly on the poor and the middle class. The middle class is shrinking. Part of that is due to the loss of well-paying jobs. The response of Congress has been worthlesss, mostly job retraining and minimal recompense. [2]

Kelton once again offers the job guarantee as a solution. The proposals for legislation contemplate that all jobs will pay at least $15 per hour with benefits, which will keep people reasonably safe. But these are not an adequate replacement for good middle-class jobs. We need more effort put into solving that problem.

I’ll offer one idea. The pharmaceutical business model is to raise the price of their drugs at least annually, so as to increase profits, and thus the price of the stock. As part of the jobs guarantee, the federal government could build plants to manufacture drugs and compete directly. There would be no problem doing this with generic drugs, but the government could also do it with other drugs bearing extortionate prices, like insulin and coronavirus treatments like Remdesivir. Also see this.

The expertise is out there, and the government can buy it. People can be trained to operate these plants, and make an enormous contribution to their fellow citizens. I see this an an illustration of one of Kelton’s normative policy assumptions: the point of the economy is to make our lives better. This is a political choice. It’s not a choice we should abandon to the rich and powerful.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1]Kelton knows this is a problem. In short, it’s the result of a number of factors, including weak or corrupt governance. The Washington Consensus perpetuates this problem. With better governance and careful attention to some of the ideas in this book, that problem might be slowly corrected. See p.141 et seq.

[2] This entire problem was the result of a consensus among economists on the benefits of trade, a consensus that supported the desires of capitalists and giant corporations. Both liberal and conservative economists and politicians joined the chorus of assent. I discuss the impact of this disaster in four posts you can find here, beginning with The Problem Of The Liberal Elites. TL;dr: liberal elites squandered their influence pushing a bad economic theory. We have no reason to trust their judgment after the damage their advice created.

[3] Alternatively we could try to reduce the trade deficit. Kelton discusses this, but it raises several complicated issues, and I’ll just refer interested readers to pp. 135-6.

The Wonkish Myth of Crowding Out

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big

Chapter 4 of Stephanie Kelton’s The Deficit Myth takes up the theory that federal government deficits increase the cost of borrowing by the private sector. Here’s Kelton’s typically incisive description:

In its most common form, the crowding-out myth says that fiscal deficits require government borrowing, which forces Uncle Sam into competition with other would-be borrowers. As everyone competes for a limited supply of available savings, borrowing costs move higher. With interest rates on the rise, certain borrowers — especially private businesses — won’t be able to secure funding for their projects. This causes private investment to fall, leading to a future where there are fewer factories, machines, and so on. With a smaller stock of capital goods, society ends up with a less productive workforce, slower wage growth, and a less prosperous economy. It does sound ominous! P. 101-102.

Given the amount of capital floating around in the world, much of it US dollars, it’s hard to see why this makes sense. The big problem is not the availability of capital for US businesses, but the insistence of the rich that they not be exposed to any risk of loss. What could be a better solution for that than Treasury securities? But the crowding-out theory requires a chain of reasoning, and so it appeals to the self-regard of our wonk class. [1]

Kelton first addresses the idea that there is a limited pool of savings. As she does throughout the book, Kelton uses this myth to discuss the overall picture of money as explained by mainstream economists. They claim that private savings are the ultimate source of the funds that are available to lend. [2] If the government borrows from that limited amount, there is less for others. As you can see, it’s a pinched view of government spending. It seems to mean that government spending is lost somehow, instead of going into businesses and our own pockets, in the US and elsewhere when the government buys from businesses in other countries.

Kelton asks us to consider the flow of dollars in our economy from an accounting perspective. She starts with a two-bucket system: the Federal Government is one bucket, and Everyone Else is the second. Any dollar that leaves the FG bucket goes to the EE bucket. There is no where elso for it to go. Taxes take money out of the EE bucket and put it into the FG bucket. That leads to our first equation:

FG balance + EE balance = 0

So, if there is a FG deficit then there is an EE surplus of like amount.

FG deficit = EE surplus

Deficit spending has a good side! That’s something that seems to elude the practitioners of deficit scare-mongering. On the other hand, if the government runs a surplus, we get

FG surplus = EE deficit.

That seems bad. It means we are losing some of our wealth. Where does that wealth go? Well, it’s cash. Remember that cash is a debt on the government’s books, so the cash it collects in taxes just offsets the debt, and disappears. That might be bad! That’s something else the deficit scare-mongers never mention.

Kelton emphasizes that it’s the net that counts. So, if the FG spends $100 and taxes $90, there is a surplus of $10 in the EE bucket. That’s money in our pockets, increased savings. The federal government can just issue Treasuries in that amount, converting the green dollars into yellow dollars in Kelton’s parlance. So contrary to the myth of crowding out, FG deficits don’t eat up our existing savings, they actually increase the amount of savings. It’s not an opinion, it’s just simple accounting.

At this point we might ask if there was ever any real danger of a shortage of loanable funds. The Fed publishes a weekly summary of the balance sheets of all commercial banks in the US. As of July 1, total loans were $10.6 T and total deposits were $15.6 T. [3]. The Treasury has issued trillions of dollars of securities to cover deficit spending to date and there are still $5 T in available bank credit, and with the multiplier effect [2], there’s much more. There’s plenty more where that came from. Money Market funds have a total of about $4.6 T, all of it short-term, and much of that is available for longer-term investment if there were reasonable returns for the perceived risk. But there aren’t any decent returns to cash right now. Why?

That’s Kelton’s second point. Step 2 in the reasoning chain for this myth is that competition to borrow money drives up interest rates. Not so, says Kelton. She explains that interest rates are a policy choice. The Fed has always been able to control interest rates, both short and long term. In the past, it has done so extensively. During WWII, the Fed kept interest rates at specific levels to help control the economy during the war. That continued until 1951. We have had other bouts of serious control, including immediately after the Great Crash, though that didn’t last long. The Fed is currently keeping interest rates low for both short-and long-term loans.

At other times, the Fed has controlled short-term rates and allowed the private market to affect longer-term rates. Kelton explains how the Fed controls both long- and short-term interest rates, which I’ll skip over. It’s enough to say that this puts the nail in the idea of crowding-out.

Deficits have their good side, but they can create problems, like inflation or politically-driven mis-allocation of resources. MMT doesn’t argue for deficits or surpluses. It argues that we should pay attention to the state of the economy and pick policies that maximize our political desires. I think the government should do more to take care of our citizens. I think everyone should have a job, good schools, decent transportation, clean water and clean air, a planet that isn’t catching fire, and a world not ravaged by Covid-19. MMT supports those goals. Others think we should buy more tanks and guns and do nothing else, just let the market fix things. There are MMT prescriptions for that too.

Finally, it’s worth noting something Kelton doesn’t discuss: keeping interest rates low hurts savers, whether they are saving for a rainy day, for college for the kids, for a down-payment on a home, or retirement. These are funds that people mostly don’t want to put at significant risk. But if interest rates are low, there is a real danger that inflation will slowly erode those savings. For example, health care costs are one reason people save for a rainy day. It’s likely that inflation in that sector is higher than the overall inflation rate. Low interest rates will hurt those savers. Similarly, college costs are rising faster than overall inflation, and in some cities, house prices and rents rise faster. In each case, the saver is a loser.

We should be thinking about that if we want to see progressive uses of MMT achieve their full potential.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] That’s my view, not Kelton’s. She says there is some evidence that crowding-out can be a problem for non-sovereign currencies, but not for sovereign currencies.

[2] This is accompanied by the idea that bank lending results in deposits, and those deposits fund another round of lending, etc. Each round of lending is smaller because banks are required to hold a percentage of all deposits in their reserves at the Fed. I was taught that this is the multiplier effect; it’s now called the money multiplier. We can ignore it for these purposes, because it leads to a larger number, but still one defendant on savings.

[3] Respectively, H.8, P. 2 Line 9 and H.8 P. 3, line 34.

The National Debt Is Sooooooo Big

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth

Chapter 3 of Stephanie Kelton’s The Deficit Myth addresses the National Debt. It’s a very big number, and politicians use it to terrorize voters. Kelton tells a story about Senator Mike Enzi, R-WY, complaining about a CBO budget outlook report, saying it should put in the zeros instead of using the word “trillion”. And that’s how seriously we should take the problem. Remember what we learned in the last post: money is a debt on the books of the US government, but it’s also an asset in the hands of a currency user. That means that the National Debt tells us how much we collectively have received in assets from the Treasury.

Kelton says that fear of the National Debt is shared by everyone in and near government across the ideological spectrum, politicians, staffers, wonks and think-tankers. When she was Chief Economist for Bernie Sanders on the Senate Finance Committee, Kelton questioned the myth.

One of the most eye-opening things I learned came from a game I would play with members of the committee (or their staffers). I did this dozens of times, and I always got the same incredible reaction. I’d start by asking them to imagine that they had discovered a magic wand with the power to eliminate the entire national debt with one flick of the wrist. Then I’d ask, “Would you wave the wand?” Without hesitation, they all wanted the debt gone. After establishing an unflinching desire to wipe the slate clean, I’d ask a seemingly different question: “Suppose that wand had the power to rid the world of Treasuries. Would you wave it?” The question drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand. P. 77. [1]

Wiping out the National Debt means eliminating Treasuries, and that exposed the contradiction at the heart of the myth of the Very Scary Debt. We can’t get rid of Treasuries! But the raw number scares voters so many people continued to rant about the National Debt. They never asked why voters were scared, or questioned their role in creating that fear.

Intuitively, if deficits aren’t a problem unless they cause inflation, then the national debt isn’t a problem unless it causes inflation. In the same way interest on the national debt isn’t a problem unless it causes inflation. Kelton acknowledges that there may be limits on the size of the national debt, usually discussed in terms of the ratio between the national debt and the GNP. The US is nowhere near the size of the debt to GNP ratio of Japan, for example, so there’s no immediate problem. Assuming there is some limit, Kelton turns to the various ways we could eliminate the national debt.

One way would be to run government budget surpluses, as we did when Bill Clinton was President. We could easily do that by raising taxes on the rich and their corporations, slowly depleting their total wealth. That’s a good idea on its own terms, because it would reduce their political and economic power. Kelton says that in the past when the government has run surpluses for several years the result was depressions. I would add that if we did raise taxes we’d be destroyed in the shrieks of the rich saying that their money was being used to pay for social programs like Social Security.

Or, the Fed could get rid of all of the Treasuries with just a few clicks on a keyboard, by reducing the number in the Treasury Securities account and increasing the numbers in the bank account of the holders of the Treasury securites. Economists call this monetizing the debt.

Or, we could do it by continuing to spend as we see fit subject to the inflation constraint, but stop issuing new Treasuries. As the old ones mature, the Fed pays them by crediting the accounts of the holders with green dollars. We could stop that at any time we reached a level of debt that wouldn’t frighten even the most fearful Americans. or at some higher level. [2]

Once getting rid of Treasuries would have caused a problem, because the Fed used the market in Treasuries to control interest rates. That is no longer the only control mechanism available to the Fed. [3] But then what? Kelton discusses an article by Eric Lonergan, an economist and fund manager. Lonergan asks what would happen if Japan monetized all its bonds. I quote his analysis in full:

First, let’s go through the balance sheet effects: 1. The government now has no debt. 2. The value of the Japanese private sector’s assets is unchanged – they used to hold JGBs [Japanese Government Bonds], now they hold the same value in cash. So overnight, the government’s debt is eliminated, and the private sector’s net wealth is unchanged.

The income effects are also interesting: 1. The government’s budget position improves. 2. The income of the private sector falls because bonds paying interest have been replaced with cash holding none.

So what happens to the economy?

Most people tend to say, “hyperinflation”, but that makes little sense. Why on earth would the Japanese household sector rush out and buy things when their interest income has fallen, their wealth is unchanged, and they are used to falling prices. The private sector already has a high wealth to GDP ratio and are spending less than they produce (which is precisely why the government runs a deficit).

The Yen might weaken because the yield on overseas assets has risen relative to Japanese assets, but this spread is hardly offering much compensation for exchange rate risk. My conclusion is that nothing would change in Japan if you had 100% monetization of the stock of JGBs!

The takeaway is that getting rid of Japanese government debt wouldn’t affect the economy at least in the short term. Two possible problems: a) less spending because bond income disappears from the economy; and b) weakening of currency in international markets because there are higher return available on the bonds of other countries. In the case of the US, we can add that cash previously held as Treasuries suddenly isn’t producing any return, so its owners look elsewhere for returns. That might mean an increased purchases of assets by foreigners; purchase of the debt of other countries; or something else. But that’s not all bad, and I don’t know enough to work it out.

Kelton accepts Lonergan’s logic. Paying off US Treasury Securities is possible and likely would have minimal short-term effects. Late in the Clinton Administration the US ran budget surpluses, to the point that White House economists prepared a draft report titled Life After Debt. Here’s a discussion by David Kestenbaum of Planet Money. This report got labeled PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY”, and Planet Money got it through FOIA. Then the Republicans cut taxes for the rich, with the usual pennies for the rest of us, so the problem evaporated.

In sum, the national debt isn’t a problem as long as it doesn’t lead to inflation. A lesser constraint might be the impact on the value of the dollar, which might affect international trade in unpredictable ways.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] This is a good example of Kelton’s style. As you can see, it’s clear, simple, and direct English prose, the highest praise my high school English teacher, Brother Daniel, ever bestowed.

[2] Here’s a recent tweet from Scott Fullwiler, an MMT economist:

The core point is it should be done by the [Central Bank]—there’s no reason why the appropriate (for mkt conditions) change in risk-free, liquid securities should equal size of govt debt/surplus, & no reason for appropriate maturity structure to be same as what cost-minimizing [Treasury] chooses.

[3] For example, the Fed began to pay interest on the reserves commercial banks are required to keep at the Fed. There is a full explanation starting at P. 117.

[4] There are, of course, distributional issues for both Treasury Securities and for the interest they pay. This is a normative issue best dealt with by politicians, and not economists. One consideration is that many people benefit indirectly from interest on Treasuries through money market funds, investments by pension plans and direct purchase, because Treasuries are absolutely safe.

Reflections on The Deficit Myth

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation

The first three posts in this series address the Introduction and the first two chapters of Stephanie Kelton’s The Deficit Myth. In this post I add her definition of money and some of my thoughts, and invite readers to do the same, either questioning points she made or applying her ideas to our society.

1. Modern Monetary Theory starts by asking one question: how does money work in a fiat currency nation. Kelton defines money in her first published paper: The Hierarchy of Money. This is a very readable discussion of the range of opinions on this subject, focused on the argument between the Metalists and the Chartalists, which began over 400 years ago. [1] Kelton starts with a definition of money. [2]

Money represents a debt-relation or promise to pay that exists between human beings. It cannot be identified independently of its institutional usages, because money represents a social relationship. … The creation of money, then, is simply the balance sheet operation that records this social relation. (Emphasis in original.)

According to Kelton, the Chartalists called money any token representing a debt relationship. Thus, a postal stamp is a money: it represents an asset to the owner and a debt to the Post Office which is satisfied by delivering a letter. A plane ticket is money: it represents the obligation of the airline to fly the holder to a particular place at a particular time. Bank deposits are money: they are a liability of the bank which must deliver money at the direction of the account holder. The rule for creation of money is the agreement by one person to hold the debt of another. [2]

Now consider the dollar. The dollar is a creation of the federal government. Kelton writes:

Thus, State money is created when the public agrees to hold (as an asset) state-created money (a liability to the State) which is required in payment of taxes.

This explains why currency and other forms of dollars (bank deposits, treasury securities, and bank reserves at the Fed) are liabilities of the federal government. We users agree to hold these dollars as assets. We can use them to acquire different forms of assets from sellers, obtain services from providers, and pay taxes. When the government collects taxes, it matches that asset with a corresponding liability and clears to zero.

The point of this exercise is to demonstrate that money is a balance sheet representation of the debt/asset relations between human beings, a social relationship. That understanding is crucial to the arguments advanced in The Deficit Myth.

2. Kelton calls for a Copernican Revolution in the way we think about money. This, of course, is a reference to the Copernican Theory, which said that the earth revolves around the Sun, and not vice versa, despite what we see with our own eyes. The ramifications of the Copernican Revolution eventually led to a complete change in our understanding of the nature of reality. [3] The revolutionary change she describes is that US government spending is not constrained by its ability to tax and borrow, but by the actual resources available, labor, material, and the organization of production. One important part of The Deficit Myth is the description of the kinds of changes we have to make in our own thinking. But there are many more revolutions. Here are three.

a. Congress ducks policy arguments by turning them into discussions of budgets or into political games. That never made sense, because all budgeting is about priorities. Games like pay-fors or one-upmanship on military spending were always perverse, but both parties pretended these were real arguments. They aren’t. MMT strips away one more layer of pretense.

b. Mainstream economists refuse to look honestly at MMT. Marion Fourcade and her colleagues at Berkeley published a paper examining the economics profession titled The Superiority of Economists, a devastating critique of their pretensions. Among other things, economists tell us that markets should make our decisions about allocation of resources, and that anything that interferes with the operations of markets is harmful to society. When government spending is between 35 and 45% of GNP prior to the pandemic, it’s stupid to argue that markets are the best form of allocation of resources. When capitalists exercise outlandish control of government spending priorities, it’s stupid to argue that markets should determine what we can and can’t have.

Many economists hold themselves out as experts on all sorts of things, including the pandemic. In the MMT world, as Kelton points out, economists would concentrate on predicting the inflationary effect of spending choices, and get completely out of the business of telling us how we should make decisions about allocation of resources.

c. Historically, people thought that the most important problem facing an economy was to accumulate capital and turn it to productive use for the benefit of society. The chosen solution was Capitalism, and to encourage capitalists to invest, we allowed them to reap outlandish profits through monopoly, grants from the Crown, and other favors, while ignoring the fraud and corruption those policies entailed. This continued in the US, with gigantic giveaways to railroad and mining companies, ludicrous levels of patent protection, and grotesquely unfair tax rules, while mostly ignoring or even praising graft, corruption and fraud. The results of coddling capitalists are rubbed in our faces every day.

MMT gives us space to think about the way society could operate to make our lives better. It allows us to make decisions about what we need and want. We do not have to accept whatever is on offer from Capitalists. We can decide based on our principles, morals, values and dreams. MMT puts us in charge, and frees us from the domination of the rich. It opens the door to the “euthanasia of the rentier”, as Keynes calls it in The General Theory of Employment, Interest and Money.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Fun fact, Adam Smith may have held Chartalist views. Kelton quotes him thus:

A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money.

[2] Kelton doesn’t go into the history of money, but this BBC article is a fascinating picture of trade in Ancient Sumeria, and gives a tantalizing hint about the origin of money in record-keeping and accounting for trade.

[3] For a fascinating and occasionally comprehensible discussion of this new understanding, see Reality Is Not What It Seems, by Carlo Rovelli.

MMT On Inflation

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth

The second chapter of Stephanie Kelton’s The Deficit Myth deals with inflation. In Chapter 1, Kelton explains that the deficit is not a constraint on government spending. Instead, inflation is the important constraint. A deficit does not prove that the federal government is overspending. Only an increase in inflation proves Congress is overspending. Kelton says Congress shouldn’t tax and spend so as to deliver a balanced budget. Congress should spend and tax so as to deliver a balanced economy, one that serves all of us. She says that historically we have not done this, that we have chosen to focus of deficits and in so doing our economy has not served us well.

Definition and Description of Inflation

Inflation means a continuous rise in the price level. A bit of inflation is considered harmless and even something economists like to see in a healthy, growing economy. But if prices start rising faster than most people’s incomes, it means a widespread loss of purchasing power. Left unchecked, this would mean a decline in society’s real standard of living. In extreme cases, prices can even spiral out of control, gripping a country in hyperinflation. P. 44.

The danger of eroding incomes explains why everybody worries about inflation, and explains why politicians can use the threat of inflation to terrorize voters. It works, even though the problem for more than a decade hasn’t been too much inflation, it’s been too little. Ever since the Great Crash inflation has been less than 2% annually despite efforts of the Fed.

Kelton says that economists think of inflation as either cost-push or demand-pull. Demand-pull inflation occurs when consumer spending rises faster than the economy can produce goods and services. That hasn’t been a problem for a long time. Cost-push inflation can arise from disasters, which reduce the supply of something; from pricing power, as in the case of Big Pharma with its patents and trade secrets; or from workers gaining market power and demanding higher wages which businesses pass on to consumers. That last one is the only fear mainstream economists suffer, as far as I can tell.

The dominant theory of inflation stems from Milton Friedman’s monetarism:

According to Friedman, “inflation is always and everywhere a monetary phenomenon.” What he meant was that too much money is the culprit in any inflationary episode. If prices weren’t stable, it was because the central bank was trying to force the economy to create too many jobs by allowing the money supply to increase too rapidly.

The early neoliberal Friedman insisted that the Fed must never interfere with the workings of the market. Specifically, the Fed should not try to reduce unemployment below a certain level, which came to be called NAIRU, the non-accelerating inflationary rate of unemployment. Friedman thought there had to be some minimum level of unemployment in the economy. [1] The Fed bought into this view, as did politicians of all stripes. They all agreed that to keep prices stable, the US has to accept a certain level of unwanted unemployment. And to be on the safe side, maybe a bit higher level of unemployment. In practice, Congress dumped the problems of inflation and unemployment on the Fed.

But problems arose. The NAIRU isn’t visible or measurable. It can only be seen in retrospect. And now we are pretty sure there isn’t a clear relationship between inflation and unemployment, as the Fed assumed. [2] The Fed Chair, Jerome Powell, freely admitted to Rep. Alexandria Ocasio-Cortez that the Fed has been wrong about NAIRU, but defended its use on the grounds that “We need to have some sense of whether unemployment is high, low or just right.” P. 53.

2. The Problem of Unemployment

It turns out that the Fed used the purported correlation between inflation and unemployment as its primary tool for controlling inflation, ignoring all other causes of inflation. When the economy heated up and unemployment dropped, workers gained market power, and their share of national income increased. That led the Fed to raise interest rates leading to a tightening of the economy and usually a recession, as the following chart shows.

Gray bars indicate recessions.


Kelton calls this a “human sacrifice”, forcing some people out of the workforce when they want to work and can be productive. She thinks we are asking too much of the Fed. It can’t spend money into the system; only Congress can do that. All the Fed can do is change the cost of borrowing. If unemployment is too high, the Fed can make borrowing cheaper, but it can’t force anyone to borrow. Usually when unemployment is high, no one wants to borrow. I note that this was what happened after the Great Crash. The Fed cut interest rates to zero and lowered bank reserve requirements, hoping to increase money going into the economy. It didn’t work.

3. The Job Guarantee

Kelton argues that a better way to deal with unemployment is a job guarantee. Every person who wants to work should be able to get a decent job with decent pay and decent benefits. If the private sector won’t provide those jobs, the government should. [3] Kelton discusses this idea and its foundations.

It would probably be impossible for Congress to monitor the economy closely enough to manage full employment by tweaking taxes and spending. A job guarantee would act as a safety-valve and an automatic stabilizer for the economy and help solve this problem, leaving the Fed free to focus on inflation. If the private sector needs all the workers it can find them. If not, the government hires people to do jobs that need doing. There is plenty of work that needs doing, and, as Kelton pointed out elsewhere, we can always use more flowers in our parks and boulevards.

4. Preventing Inflation

So how should Congress budget knowing that the only effective constraint on spending is inflation? What would change? The way Congress currently works is that every bill that calls for expenditures gets a score from the Congressional Budget Office that assesses the impact of the expenditure on the deficit over a ten-year period. If inflation were the constraint, then the CBO would offer a score based on the probable impact of the expenditure on inflation. If the economy is, as now, operating well below its capacity for producing goods and services, the possibility of inflation would be low.

If the economy is close to capacity, either as a whole or in part related to the area of expenditures, then Congress has to make hard calls. How important is the expenditure? Can we create “fiscal space” for the expenditure with taxes? For example, in the case of the entire economy humming along, a general income tax hike would take money out of most people’s hands so they would not be buying as much, leaving room for the government to buy more. If there is a bottleneck, a more focused tax or some other step might be necessary.

Conclusion

MMT recognizes that inflation is a crucial problem. It shows how it arises and how we should protect ourselves from it.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Marx said that the reserve army of labour is a necessary part of capitalism. Hmmm.

[2] This relationship is embodied in the Philips Curve. I discuss it here.

[3] Other economists favor a universal basic income. Both have the added benefit of freeing workers from abusive or irritating employers. Your family won’t starve if you walk out on a bad situation.

Debunking The Deficit Myth

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index

The first chapter of Stephanie Kelton’s book The Deficit Myth takes up the biggest myth about federal government finances, the idea that federal budget deficits are a problem in themselves. The deficit myth is rooted in the idea that the federal government budget should work just like a household budget. A family can’t spend more than its income will support. The family has income, and may be able to borrow money, and the sum of these sets the limit on household spending. Those who propagate the deficit myth say government expenditures should be constrained by the government’s ability to tax and borrow. First the government has to find the money, either through taxes or borrowings, and only once it has found the money can it spend. The way things actually work is different.

In the real world, it goes like this. Congress votes to direct an expenditure and authorize payment. An agency carries out that direction. The Treasury instructs the Fed to pay a vendor. The Fed makes the payment by crediting the bank account of the vendor. That’s all that happens. It turns out that the real myth is that the Treasury had to find the money before the Fed would credit the vendor. That’s because the federal government holds the monopoly on creating money. U.S. Constitution Art. 1, §§8, 10. In practice this power is given to the Treasury, which mints coins, and to the Fed, which creates dollars. [1]

It also turns out that for the most part, the Treasury does cover the expenditure by taxing or borrowing, but because the government is an issuer of dollars, it isn’t necessary. [2] In the last few months, the Treasury has been selling securities and the Fed has been buying about 70% of them. Here’s a chart from FRED showing Fed holdings Fed holdings of treasury securities. The Fed may or may not sell those securities to third parties. If it doesn’t, they will be held to maturity and remitted as a dividend to the Treasury.

The recognition that spending comes first, and finding the money comes second is one of the fundamental ideas of MMT. Kelton describes her meeting with Warren Mosler who introduced her to these ideas; the stories are amusing and instructive. I particularly like this part:

[Mosler] began by referring to the US dollar as “a simple public monopoly.” Since the US government is the sole source of dollars, it was silly to think of Uncle Sam as needing to get dollars from the rest of us. Obviously, the issuer of the dollar can have all the dollars it could possibly want. “The government doesn’t want dollars,” Mosler explained. “It wants something else.”

“What does it want?” I asked.

“It wants to provision itself,” he replied. “The tax isn’t there to raise money. It’s there to get people working and producing things for the government.” Pp. 24-5.

Put a slightly different way, people accept the government’s money in exchange for goods and services because the government’s money is the only way to pay taxes imposed by the government. Kelton says she found this hard to accept. She spent a long time researching and thinking about it, and eventually wrote her first published peer-reviewed paper on the nature of money. [3]

The monopoly status makes governments the issuers of money, and everyone else is a user. That fundamental difference means that governments have different financial constraints than households, and that it certainly isn’t constrained by its ability to tax and borrow. Kelton offers several interesting and helpful analogies that can help people grasp the Copernican Revolution that this insight entails.

Once we understand that government doesn’t require tax receipts or borrowings to finance its operations, the immediate question become why bother taxing and borrowing at all. Kelton offers four reasons for taxation.

1. Taxation insures that people will accept the government’s money in exchange for goods and services purchased by the government.
2. Taxes can be used to protect against inflation by reducing the amount of money people have to spend.
3. Taxes are a great tool for reducing wealth inequality.
4. Taxes can be used to encourage or deter behaviors society wants to control. [4]

She explains borrowing this way: government offers people a different kind of money, a kind that bears interest. She says people can exchange their non-interest-bearing dollars for interest bearing dollars if they wish to. “… US Treasuries are just interest-bearing dollars.” P. 36. Let’s call the non-interest-bearing dollars “green dollars”, and the interest-bearing ones “yellow dollars”.

When the government spends more than it taxes away from us, we say that the government has run a fiscal deficit. That deficit increases the supply of green dollars. For more than a hundred years, the government has chosen to sell US Treasuries in an amount equal to its deficit spending. So, if the government spends $5 trillion but only taxes $4 trillion away, it will sell $1 trillion worth of US Treasuries. What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars. P. 36-7.

It might seem that there are no constraints, but that is not so. Congress has created some legislative constraints on its behavior, including PAYGO, the Byrd Rule, and the debt ceiling, but these can be waived, and always are if a majority of Congress really want to do something. They also serve as a useful way of lying to progressives demanding public spending on not-rich people, like Medicare For All. We have to pay for it under our PAYGO rules, they say, while waiving PAYGO for military spending (my language is harsher than Kelton’s).

The real constraints are the availability of productive resources and inflation. The correct question is not “where can we find the money”, but “will this expenditure cause unacceptable levels of inflation” and “do we have the real resources we need to do this” and “is this something we really want to do. As Kelton puts it, if we have the votes, we have the money.

In my next post, I will examine some of these points in more detail. Please feel free to ask questions or request elaboration in the comments.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Art. 1, §8 authorizes the federal government to create money; §10 prohibits the states from issuing money. That leaves open, for now, the possibility that private entities can issue money. Banks and from time to time other private entities play a role in the creation of money, but I do not see a discussion of this in the book.

For those interested, here’s a discussion of the MMT view from Bill Mitchell. I may take this up in a later post. In the meantime, note that every creation of money by a bank loan is matched by a related asset. Thus, bank creation of money does not increase total financial wealth. In MMT theory this is called horizontal money. It is contrasted with vertical money representing the excess of government expenditures over total tax receipts, which does increase financial wealth. Here’s a discussion of this point.

[2] There are, of course, constraints on government spending, especially inflation and resource availability. We’ll get to that in a later post.

[3] Kelton cites the paper in a footnote: The Role Of The State And The Hierarchy Of Money.

[4] Compare this list to the list prepared by Beardsley Ruml, President of the New York Fed, in 1946.

The Deficit Myth By Stephanie Kelton: Introduction and Index

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Posts in this series.
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out
MMT On International Trade
Social Security And Other Entitlements
Reviews Of The Deficit Myth

The last two chapters of Stephanie Kelton’s The Deficit MythThe Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy is now available, and I will be discussing it in a series of posts. [1]

Kelton lays out the structure of the book in her Introduction. She starts with a common bumper sticker approach to the federal deficit: Uncle Sam looking abashed while holding out his pockets to show they’re empty. That image dominates most discussion of budgeting in the US. It depicts an individual facing the limits of personal finance. It relies on this image to create panic about federal deficits. This is the dominant view among politicians of both parties. In a New York Times opinion piece, Kelton reminds us that a group of 60 Congressmen, 30 from each legacy party, are terribly worried about the deficit. This kind of deficit hawkery hit President Obama in 2010 after the weak financial stimulus offered by Democrats after the Great Crash.

That month, in his State of the Union address, he committed to a reversal of fiscal stimulus, telling the nation, “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.” What followed was a sustained period of self-inflicted harm.

These 60 legislators learned nothing from the misery created by Obama’s turn to austerity, and just like Obama are prepared to hurt Americans in desperate need of assistance following the collapse of the economy, a pandemic, and political upheaval. These supposedly principled people couldn’t agree on actual proposals to increase taxes or cut programs.

Instead, they called for the Government Accountability Office to issue an annual report detailing the government’s fiscal health. They also endorsed legislation introduced last year that would create “rescue committees” to recommend fixes for Social Security, Medicare and other trust funds that are projected to become insolvent.

And they called for adopting goals for managing the debt, such as setting a limit based on its share of the economy. Such a move, they said, “would reduce debt-limit brinkmanship as long as the budget remains on a responsible path.”

It would serve them right if the GAO read Kelton’s book and concluded, as she does, that they are dangerously wrong. By the way, the Fed disagrees with these spineless wonders, and says more fiscal stimulus is needed. It goes without saying that the Fed is more likely to be right than legislators mired in the economics and politics of the past.

Kelton calls for a Copernican Revolution:

MMT changes how we view our politics and economics by showing that in almost all instances federal deficits are good for the economy. They are necessary. P. 7.

There is no doubt that Modern Monetary Theory would require a revolutionary change in our understanding of economics. Here’s a tweet from Paul Krugman [2]:

No revolutionary thinking needed says Krugman, carry on. I assume this is a reference to Krugman’s general view that the US can borrow cheaply thanks to the low interest rates set by the Fed, and that bonds will be issued to “pay for” economic support. That’s not what’s happening. The Fed is buying the securities issued by the Treasury to “pay for” whatever Congress said to pay for. Between February 27 and May 31, the national debt increased $2.4 trillion while Fed holdings of treasuries increased by $1.657 trillion. [3] In other words, the Fed bought about 70% of the new issuance, simply by marking up the Treasury’s account at the Fed. That’s blatantly creating money out of thin air. It’s important to add that no one is going to pay off the securities owned by the Fed unless the Fed decides to sell them to third parties. I wonder if the 60 Representatives who signed that letter know that. Or care. Or understand why it’s relevant.

Kelton takes up six myths about the economy in her book.

1. The US government should budget itself like a household.
2. The deficit is evidence of overspending.
3. Deficits will burden the next generation.
4. Deficits crowd out private investment undermining long-term growth.
5. Deficits make the US dependent on foreign investment.
6. Entitlements will cause a huge future problem.

Then she discusses our real crises:

The fact that 21 percent of all children in the United States live in poverty—that’s a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America’s Gilded Age is a crisis. The fact that the typical American worker has seen virtually no real wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won’t be able to “afford” anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all. These are real crises. The national deficit is not a crisis. P. 11-12.

And I’ll add one more: the grotesque skewing of wealth and income to white poeple is a crisis.

This book is a joy to read. It’s written for non-economists. The language is lucid and precise, with no jargon. I hope people will discuss it in the comments as I move through it. I’ll try to answer any and all questions to the best of my ability.

I will also add my own comments, but I will separate my thinking from Kelton’s. I know of two areas I want to discuss in more detail. First, as I see it MMT is an example of a pragmatic approach to the study of economics. I offer a primer on pragmatism in three posts, here, here, and here. In contrast, mainstream economics rests heavily on Bentham and Mills’ Utilitarianism, but it’s buried deeply in the history of economics, and is never discussed as a normative principle. For an introduction to this area, search the site for William Stanley Jevons.

The value of pragmatism is that it strives to be non-normative. It leaves discussion of what should we do to political or some other discourse. Mainstream economics claims to know how things should be: the market is all-knowing and politics should never interfere with its operation.

This book lays out an argument for MMT as the foundation for an economics for progressives. It offers an understanding of the way our government funds itself which can free us from the constraints demanded by the rich and powerful. It shows us how to use federal monopoly control over money for the benefit of all of us, not just the filthy rich. With this book, we can master the basic concepts and teach them to our friends and neighbors, and especially to our politicians.
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[1] My original plan was to discuss John Dewey’s The Public and Its Problems, but that was derailed by a bad case of quarantine brain. I’ll return to that excellent book next. One of the reasons to discuss that book is that Dewey, the leading pragmatist, opens with a discussion of that theory.
[2] I replied to this tweet.
[3] The Fed’s weekly balance sheets are here. Debt figures from the Treasury are here.

…

[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

Covid-19 and Class Structure

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The Covid-19 pandemic demonstrates the class structure of the US. I’ve written several posts on the issue of class in the US, but most such analysis takes an index of some kind, wealth, education, income, and places people sequentially, then divides the line into groups which are called classes. For example, in this post I described Thomas Piketty’s classes based on wealth.

I discussed a modern Marxian class structure analysis here. Class is defined in terms of social and ownership relationships. Typically we think of three classes, the capitalists, the workers, and a small class of professionals and artisans who own their own means of production and work for themselves, but are to some extent dependent on the capitalist class. [1] This simple structure leads to difficult problems for people trying to use the analysis for social change.

1. In a large corporation, those at the bottom of the hierarchy own nothing but their labor and can only survive by selling that labor. They have little, if any, control over their working conditions. They are subject to the orders of those above them in the hierarchy. In higher levels of the hierarchy workers have limited control over the means of production, and have the power to control the actions of their subordinates. In even higher reaches, people achieve actual control over the means of production and control the actions of larger numbers of people. At the top are people who control the means of production through their power to direct their subordinates. In this more complex setting, the boundaries of class are blurred, and it is easy for people to misunderstand their position in the class structure.

It’s also difficult for people to understand that the problems they face in their jobs are common across all jobs. It isn’t just your boss who’s a jerk, your employer who has appalling policies on health care, sick leave, vacation and day-to-day irritations. Everyone faces those issues.

2. People don’t understand that capitalists exploit workers. This chart shows that the share of national income going to the labor sector has trended down since 1960. It dropped dramatically and stayed low during the last 20 years. That loss goes to the rich. I discuss the way in which capitalists justify this exploitation in this post.

3. Most people do not understand how they are exploited operationally, because everything they experience seems natural. That’s because capitalists exercise substantial control over the public understanding of issues of political economy. Their version of business history dominates. Their theory of economics, neoliberalism, is not threatened by any widespread alternative. Their concept of the role of government has controlled since the 1950s. They have an out-sized input into our choices for political office in both legacy parties. They have used that power to hold onto and increase their power.

But.

This pandemic has the potential to wake people up from their torpor. This article by Robert Reich is a good starting point. Reich identifies four classes defined in relation to the lockdown.

A. The Remotes: “…professional, managerial, and technical workers – an estimated 35% of the workforce” who are working and reasonably well-paid. They are largely unaffected by the lockdown.

B. The Essentials: the people who are required to go to their workplaces despite the lockdown, including health care workers, care-givers, farm workers, meat packers, grocery store and pharmacy employees, employees of gun stores and liquor stores.

C. The Unpaid: the non-essential workers who are now unemployed and subjected to lockdown, about 25% of the work force. Most of them lost their health insurance as well as their income, and face an unpleasant future.

D. The Forgotten: those “…for whom social distancing is nearly impossible because they’re packed tightly into places most Americans don’t see: prisons, jails for undocumented immigrants, camps for migrant farmworkers, Native American reservations, homeless shelters, and nursing homes.” The lockdown doesn’t affect them, as their lives sucked already.

Reich doesn’t mention the Fifth Class, those who are largely unaffected by the lockdown. This group has two segments. One is retirees and those near retirement, who presumably have the income and assets they need and to maintain their lifestyles. They have Medicare, stable housing, access to grocery stores and pharmacies, and generally can shelter in place with no discomfort. The second segment is people who have so much money they are not at all affected. They can just hop on their private jets and come and go as before, maybe with fewer people to serve them drinks.

The Covid-19 pandemic has sharpened the blurred lines described in Point 1. There are only two groups: the Reomoters and the Fifth Class who can can stay home and protect themselves; and the Essentials and the Unpaid. The Essentials who can’t stay home, and are at risk of serious illness and death, with whatever insurance they can cobble together. The Unnpaid are unprotected from financial ruin. The serious risks facing the Essentials and the Unpaid are the same across all jobs.

The exploitation described in Point 2 is now in the open. The rich and their politicians value capital over the lives and well-being of the Essentials and the Unpaid. First, capitalists were heavily subsidized by the Fed and Congress, Second, politicians are granting the demands of the capitalists to reopen the economy and shield them from liability if they don’t protect their workers from deadly illness. Republicans force people to choose between working for the rich or protecting their health at the cost of their unemployment benefits and their life savings.

The domination of discourse raised in Point 3 has been eroded by the rise of the political rhetoric of Sanders, Warren, and others. A large number of working people of all incomes don’t accept the assertions of the rich and their media giants as gospel. They can see the impact of Covid-19 on themselves and everyone they know. They can read about the problems faced by other workers, and see that they are in the same position.

The practical outcome? Workers at a number of giant corporations are planning a work action for May Day.

“It’s more powerful when we come together,” Chris Smalls, a lead organizer of the May 1 walkout, who was fired from Amazon’s Staten Island fulfillment center after staging a walkout on March 31, told Motherboard. “We formed an alliance between a bunch of different companies because we all have one common goal which is to save the lives of workers and communities. Right now isn’t the time to open up the economy. Amazon is a breeding ground [for this virus] which is spreading right now through multiple facilities.”

The strikers are asking consumers to boycott Amazon, Whole Foods, Instacart, Walmart, FedEx, Target, and Shipt. They say that many of the workers will walk out, call in sick, or take other action. Their demands are astonishingly minimal: personal protective gear, paid sick leave, hazard pay, and a few company specific needs.

The Essentials and the Unpaid are forced to risk their health and their finances so the Remoters and the Fifth Class can live comfortably. That’s a concrete way of showing people their position in the class structure. Where are the politicians and media people capable of articulating this so everyone gets it?

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[1] In this post, I use the term “capitalist” to mean the top .1% in wealth and the top managers of the largest businesses. It’s useful here where the basis of the analysis is more or less Marxist, but I’m ambivalent about it because I’m not particularly a Marxist. I’m just a guy who reads books. I usually use the term “filthy rich” which my mother loved, but it seems perjorative.

From Flickr, Creative Commons License

We Have Never Been Modern: Conclusion

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Posts in this series. In earlier posts I focused on the parts of We Have Never Been Modern by Bruno Latour that seemed relevant to my discussion of neoliberalism and its discontents. I did not discuss a number of fascinating issues raised by Latour about the state of philosophy today, and I did not exactly describe his overall project. This post will conclude my discussion of this book with two thoughts.

Background

Latour thinks the big problem with modernity is that it enables us to ignore quasi-objects and their impact on us as individuals and as a society. We do this because the tools we use to learn about things are focused on the separation of culture and nature through the work of purification. We assign objects for study to one or the other category, and use the tools we developed to study that domain to look at the problem. Latour thinks these tools are inadequate to study things that are combinations of culture and nature, which he calls quasi-objects.

The Role of Neoliberalism

Latour is worried about the unregulated and misunderstood quasi-objects that have overrun our society. He thinks what he calls the Modern Constitution facilitated the onslaught. He was writing in the early 1990s, as neoliberalism was emerging into our consciousness as the dominant economic structure. It’s not surprising that Latour ignored the important role played by this economic system. We didn’t even have a name for that system when he wrote. Latour’s foresight in recognizing the the problems that would result from failure to control quasi-objects was impressive.

Looking back, I’d argue that a big part of the blame for the failure to control quasi-objects should be assigned to the free-market economists who shilled for the capitalists, ignored any negative consequences of the changes that were underway, and assured everyone that markets were the only solution to any problem that involved the allocation of resources. One obvious example of the contribution of neoliberalism to our current plight is the failure of economists to pay attention to rising inequality and the possibility of domination of the economic and political systems by the richest capitalists and their minions.

As another example of the contribution of neoliberalism, consider the outbreak of the coronavirus COVID-19. We first saw a coronavirus in the SARS epidemic of 2003. The study of the SARS virus ramped up and began to produce results. Then the possibility of an epidemic evaporated, and work slowed to a crawl. Then the new coronavirus, COVID-19 emerged. Now we are forced into a panic-driven research project.

There was no profit in studying the coronavirus family, and therefore there was no reason to think about it during the 16 years since the emergence of SARS. The role of government is to fill that gap, but the neoliberal state is supposed to operate like a business, so government funding dried up. The government was further weakened by the selection of an incompetent and ignorant businessman as President:

“I’m a businessperson. I don’t like having thousands of people around when you don’t need them,” Trump said. “When we need them, we can get them back very quickly.”

This is a perfect example of the consequences of electing fools. But it’s also an indictment of neoliberalism.

The Role of Purification

Latour blames a lot of the problem on the work of purification, the separation of nature from culture. Purification weeds out all aspects of culture when we study the objects of nature, and weeds out all aspects of nature when we study society/culture. Obviously it’s impossible to study a rock or a proton or COVID-19 without isolating it from all other aspects of nature and culture. The work of purification is essential to any formal study of material things. But we seem to think it should be used to study culture, and that we can learn all we need to know about society through specialized tools developed to study canonical societal categories, such as politics or the economy.

The choice of things to be studied, and to some extent the methods of study, are embedded in our social structures. This fact is perhaps less important in the study of nature, but it remains a crucial fact. There are many areas of scientific research that would be valuable. The selection of the things to be studied is a function of culture, not nature. Stupid choices have horrible effects, as the failure to study coronaviruses demonstrates.

The study of culture works the same way. There is some value in looking at specific aspects of culture through closed-off academic study, such as political science, sociology, or economics. We can gain some insights into the workings of our broader culture through these disciplines. But they are not exhaustive of our understanding of culture as a whole, or of society in the broadest sense. For that we need new modes of thinking. In addition, these disciplines ignore the role played by science in the way society operates. This last is the central insight of the Nonmodern Constitution, which I discuss here.

Latour emphatically rejects postmodern thought as a way forward. In this book, he suggests applying the principles of our broadest discipline, anthropology, to our own society. That would be possible if we stripped out the Modern Constitution with its absolute separation between culture and nature and its insistence that we are not like our ancestors and our society is not like theirs in any way.

In later works, he offers a broader method of studying quasi-objects. which is generally known as Actor-Network Theory. He doesn’t like the name, for reasons discussed in this article. For further discussion, check out this Wikipedia entry.

Conclusion

We can no longer ignore the way quasi-objects change us as individuals and as a society. We have to face up to the changes they make in nature, through climate change, piles of waste, and consumption of resources. Latour thinks we need a new kind of intellectual discipline for the study of what he calls collectives, which include all groupings of people and things. I think this is a fascinating idea.

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The Nonmoderns

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Posts in this series. The first posts in this series discuss some of the main terms used by Bruno Latour in We Have Never Been Modern. The book defines ours as the age of the Moderns, as contrasted with the Premoderns who came before; that’s the subject of the previous post. In this post I discuss Latour’s view of the conceptual underpinning of the Moderns, and his proposal to amend that constitution for Nonmoderns.

Latour describes the conceptual basis of the moderns by stating what he calls its constitution. The meaning of a constitution is its guarantees. Here are the four guarantees of the modern constitution, taken from figure 5.2, Kindle Loc. 2834:

The first guarantee is that Nature is transcendent, that is, it cannot be affected by us humans. At the same time, it is immanent, in the sense that once we discover something about nature, we can use it as we see fit. The second guarantee is that society is immanent, meaning we create it and can modify it, but at the same time it transcends any individual, and so it is at the same time transcendent. The third guarantee is that nature and society are totally separate things. Neither affects the other. The fourth guarantee is that the Crossed-Out God is present in our hearts for the purpose of deciding on moral issues that confront us, especially when they involve conflicts between society and nature.

Latour says that the hallmark of modernity in action is the combination of the conscious work of purification which proceeds from the third guarantee, and the unacknowledged creation of quasi-objects. That is underwritten by the third guarantee, which essentially says that everything is either culture or nature, society or science. By implication, there is no space for quasi-objects which are combinations of these two separate things.

I won’t go into all of the implications of this set of guarantees, which Latour works out over Chapters 3 and 4. This part of the book shows how pervasive these guarantees are, and how deeply we rely on them in the way we structure our approach to studying both science and nature and the way we create our society. He also discusses the reactions to modernity by the antimoderns and the postmoderns.

The antimoderns firmly believe that the West has rationalized and disenchanted the world, that it has truly peopled the social with cold and rational monsters which saturate all of space, that it has definitively transformed the premodern cosmos into a mechanical interaction of pure matters. But instead of seeing these processes as the modernizers do – as glorious, albeit painful, conquests – the antimoderns see the situation as an unparalleled catastrophe. Except for the plus or minus sign, moderns and antimoderns share all the same convictions. The postmoderns, always perverse, accept the idea that the situation is indeed catastrophic, but they maintain that it is to be acclaimed rather than bemoaned! They claim weakness as their ultimate virtue, as one of them affirms in his own inimitable style: ‘The Vermindung of metaphysics is exercised as Vermindung of the Ge-Stell’ (Vatimo, 1987, p. 184). Kindle Loc. 2475. [1]

The antimoderns are reactionaries. Latour dismisses the postmoderns as useless. [2] Latour calls for us to become nonmoderns, disavowing the Constitution of the Moderns and the anti- and post- criticisms. He proposes a new set of constitutional guarantees.

The point of this new constitution is to make explicit what we are actually doing. The first Nonmodern guarantee recognizes that the form of our society is in part generated by the things we create, including quasi-objects. Scientific inquiries are driven by what we as a society need or would enjoy far more than by scientists seeking knowledge for its own sake. The second Nonmodern Guarantee recalls the first two guarantees of the Modern Constitution, but recognizes that the transcendence of nature and the immanence of society are related.

The third Nonmodern Guarantee tells us that our society and the nature we are studying are a continuous whole with those of out forebears and of other existing and previous nature/cultures. We are not distinct and new, just the same human beings with different and shinier stuff and some cool new ideas. The fourth Nonmodern Guarantee says that the process of hybridization should be democratically controlled. In a nice turn of phrase, Latour refers to this democracy as the Parliament of Things.

Discussion

The first three Nonmodern Guarantees seem to me to make the processes of society explicit. We use science to create stuff. The processes of science are not some black box, but something we do for a purpose. Each breakthrough leads to exploitation, and it’s the exploitation that leads to quasi-objects. To take an example, the creation of the transistor was a breakthrough, but the exploitation of the breakthrough has recreated our society in fundamental ways.

The Fourth Nonmodern guarantee seems to me to be the most challenging. The founding principle of the US Constitution is the protection of property rights. One of those rights is ingrained in us from birth: I can do whatever I want to with my property. Only grudgingly do we allow laws to restrict that freedom, and not infrequently the Supreme Court strikes down those laws. Let’s examine what I hope is a neutral example: the dramatic increase in the use of liquid soap.

On one hand, liquid soap has benefits. It is easy to use, and possibly more effective than bar soap. It’s easy to replace and clean up in public lavatories, and it encourages and speeds up hand-washing. That’s also the case in medical facilities and kitchens.

On the other hand, liquid soap uses lots of water and one-time plastics. The water has to be purified, then shipped, so there is an increase in the use of fossil fuels for those purposes. One-time use plastics are made out of fossil fuels, have to be moved several times before final production, and then shipped. Then they wind up in waste dumps.

Liquid soap has become the norm for many of us, so much so that bar soap is becoming rare. Fun fact, the bar soap I like, Trader Joe’s Green Tea soap, has disappeared. I don’t think that was a total market choice. I think it was driven by capitalism’s urge to make money. It’s an example of the US way: Lever Brothers and Colgate-Palmolive can do what they want to with their money, including encouraging the use of liquid soap. They don’t have to and don’t care about any of the negative consequences of their actions. They make their decisions based strictly on the amount of money they can make.

The Fourth Nonmodern Guarantee says that we as a society have a right to weigh the positive and negative consequences of the uses of property. That’s a bold claim in the case of liquid soap. It’s a crucial claim in the case of climate change.

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[1] I have no idea what that last quote means. I tried to figure it out, but I can’t, and strangely I don’t care.
[2] Here’s a taste:

The postmoderns have sensed the crisis of the moderns and attempted to overcome it; thus they too warrant examination and sorting. It is of course impossible to conserve their irony, their despair, their discouragement, their nihilism, their self-criticism, since all those fine qualities depend on a conception of modernism that modernism itself has never really practised. Kindle Loc. 2687.