Wednesday, August 28, 2019

A Micro-Economic Analogue for MMT

MMT describes how modern governments can create money at whim and goes on to describe how government can give everyone a job. This attractive theory lacks a micro-economic analogue which hinders in understanding the implications of MMT. This post will outline a micro-economic analogue to complement macro MMT.

First the Similarities

Our analogue model will be a small business whose owner has the ability to offer price relief by making valuable coupons available to customers. Coupons are redeemed in the issuing store for merchandise whose price is effectively reduced by the value represented by coupon. The use of coupons is a common practice in the retail sector.

We now claim that a small business which offers discount coupons is effectively creating a locally-valuable money. This locally created, locally valuable money is used to discount posted prices in hope of improving sales. A customer in possession of locally produced money takes it into the issuing store and receives credit as if he was bringing in normal money. Intellectually, both customer and store owner know that the effective price-at-time-of-sale has been reduced to the extent that a coupon has been presented and accepted.

Crucial to understanding the implications of this model is the realization that locally created coupons are created without expenditure of meaningful amounts of labor or resources. Equally crucial is the observation that two customers, one with coupon in hand and one with only normal money, will pay the same price for an item. That noted, the one with a coupon will receive the item with less actual effort having been expended in acquiring money for purchase. The coupon owner comes into the store in a wealth enhanced position when compared to the no-coupon buyer.

A fundamental nexus of unequal pricing has been created to the extent that the store owner has given coupons to some buyers and not to others.

When government issues new money (whether created by actual new printing or by borrowing without intent to reduce total borrowings)  government is acting as if it were the owner of a national store who elects to issue coupons.  Similar to the small business owner, government is looking for enhanced product movement. For example, government can borrow money and give it to people needing health care. Health care sales should improve which would be the desired outcome. The customer would be indifferent to the actual cost to the extent that part of the cost is a gift. Government knows (or should know) that the macro economy has actually collected less money than was received because some fraction of the collected money was first produced locally at no cost in labor or resources expended.

A fundamental nexus of effort-exchanged-for-effort has been broken when government prints money as if it were a coupon to be used to reduce prices to improve sales.

When a store prints coupons, the printing store will have some estimation about how the local money will be used. The net effect will be to reduce gross-retail-valuation by the amount of local money redeemed. Merchandise will leave the store in exchange for a reduced collection of base money. This will obviously have serious implications for a store's cash flow position and net wealth position, implications which the merchant will certainly take into consideration.

Merchants create coupons for a number of different purposes just as government may create base money intended for a variety of economic enhancements. The exact micro or macro-economic effect of each enhancement would depend upon the circumstances surrounding each unique event.

Now the Dissimilarities

While the business enhancement parallels of this analogue fit together well, the duration of the two types of coupons (local and government) are vastly different. A look at the differences is instructive.

Coupons issued by small business have a very limited lifespan. On the other hand, coupons printed by government are not redeemed or canceled when they are used, giving them unlimited longevity. First we look at the balance sheet implications for small business.

A small business owner who considers offering a discount coupon must remember that he is about to give away some part of the gross value of his store. No longer will the apparent value of merchandise be calculated by multiplying posted prices times stock numbers. The existing apparent gross value will be reduced by the expected return of valuable coupons. The act of offering valuable coupons increases the wealth of customers at the expense of the merchandise owner. The same thing occurs when government prints coupons.

When government prints money, the measurable monetary wealth of the nation must instantly increase. The individuals receiving this money will have a wealth increase that comes at the expense of those who do not get a direct payment. One group receives a printed-money enhanced government check while the second group must both work to achieve the same monetary position and endure increased competition for available goods.

General Comments

There is no reason that either small business or government needs to limit coupon issue to a one-time event. Both can issue coupons repeatedly.

In the case of repeated coupon offers, small business simply builds a probability based coupon-return-rate into it's business model. The gross value of merchandise would be reduced by the value of expected coupon return. Additionally, knowing that coupons are coming, customers routinely wait before buying until the coupons arrive. Coupon practices get built into the economic environment. The same thing happens when government repeatedly issues coupons.

When government routinely, repeatedly, increases the wealth of the nation by sequentially issuing more money, the economy creates a business model built around that expectation. A central bank expectation of a 2% annual inflation rate is a good example of a national business plan built around continued coupon issue.


MMT describes how government can issue money pretty much at whim. Small business can do the same thing by issuing coupons.

Small business is careful to not 'give away the store' by unlimited coupon issue. Government needs to be equally careful.

(c) Roger Sparks 2019