Funny Money

Ep. 3 - The Real Story of Money with Randy Wray

• Funny Money • Season 1 • Episode 3

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Funny Money is a show about the economy, how it works, and how it can work better. In this episode, Ka and Andrés are joined by Prof. Randall Wray to discuss the origins of money, macroeconomics, and the intellectual battles that led to Modern Monetary Theory. We cover Adam Smith, John Maynard Keynes, and Karl Marx. We cover money history in the early United States. And we discuss why conventional supply and demand analysis is bunk!

Link to Visuals discussed in the episode: https://bit.ly/RandyWray

Guest Bio: Randall Wray is a Distinguished Visiting Professor at  @willamette University and Professor of Economics at the  @levyeconomicsinstitute of Bard College. He has also taught at Bard College, the University of Missouri-Kansas City  @UMKC, and the University of Denver  @uofdenver. Professor Wray is the author of several books including some of the most important introductions to both MMT and macroeconomics, but his latest book is Making Money Work for Us: How MMT can save America. And of course, Randy is one of the founding thinkers of Modern Monetary Theory.

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Hosts: Jessica "Ka" Burbank & Andrés Bernal
Producer: Mike Lewis
Sound Mixed By: Curtis Clogston

#FunnyMoney #MMT #Money #Economics #Politics #News #History

Hello, everybody. Welcome back to Funny Money. This is a podcast about the economy, how it works and how it can work better. And today we have a real treat of an episode. I want to thank all of our subscribers and listeners. Make sure you're sharing the podcast out with your friends and family and everybody who's confused about what's going on with all of the funny money that's out there. So we are going to talk with Randall Wray today, who is a brilliant economist, a brilliant thinker. He's going to walk us through the story of money. When did money start? Where did it come from? How did it become a thing? What's the story there? Randall Wray is the guy that can walk us through that. What's the function of money today? Is it functioning well? And what is economics even as a field? Where did the invisible hand come from? Do economists really believe in that? What do we know for sure? What do we get wrong and where do we go from here? Randy Wray is really going to walk us through all of that. And I'm particularly excited just because I love to use history as a framework for understanding where these ideas come from. So I'm going to go right into it because today's episode was a real treat. Randy Wray is a distinguished visiting professor at Willamette University and a professor of economics at the Levy Economics Institute of Bard College. But he's also taught at the University of Missouri, Kansas City, and the University of Denver. Professor Wray is the author of several books, including some of the most important introductions to both Modern Monetary Theory and Heterodox Macroeconomics. His latest book is called Making Money

Work for Us:

How MMT Can Save America, and he's written a more recent children's book with lots of pictures. And, of course, he's one of the founding thinkers of Modern Monetary Theory. So without further ado, Professor Randall Wray, thank you so much for coming on the show. Thank you for having me on. Or I'm going to kick it over now to my co-host, Jessica. I am so excited we're sitting down with you. Randall Wray I never really understood where money came from until you explained it. And I think maybe a lot of people feel that way. So I really want to start with the the basics or start at the beginning, rather. Where did money come from and how did we get money as it is today? And maybe we'll start from where you usually start, which is from where did writing come from? Yes. So I think we can quickly look at a slide one. Okay. So the book on the left actually is the latest book. And this one is an illustrated guide to money and contains a series of cartoons. And I'll make use of a few of these. We can move to slide two John Maynard Keynes, who I think we're going to talk about a little bit more later, said that money, the origins of money, are lost in the mists of time because he speculated that money might have originated about 4000 years ago. It turns out it's actually a bit longer ago than that. So while we imagine that use of credit is a modern invention from the very beginning, most purchases that were made using money actually were based on credit, meaning that somebody had to keep records of debts. And so writing had to be invented. So what I'm going to argue is that the origins of money can be found in the origins of writing. We can go to the next slide. Mesopotamia is very unusual because it provides about 10,000 years of evidence for the evolution of writing. If we go back to 8000 B.C., so that's 10,000 years ago. What archeologists have found is these little tokens, and there are about 300 different kinds of tokens that have been found. The tokens look sort of like what they're supposed to represent. And so you have a token for a goat, you have a token that represents sheep and so on. And a bit later than that, they started producing these clay balls and they would push the tokens inside. And so it seems they were keeping track of something. Exactly what we don't know, except that we do know what each token represents. And you would have to break open the ball to see what tokens were inside. And so it seems that that was a disadvantage having to break the ball open. So they started pushing the tokens into the ball to make an imprint on the outside and then poking them through a hole. So the tokens would still be in the ball. But you had a record of what tokens were inside the ball, so you weren't required to break the ball open, but you could finally, in the end, break the ball and make sure that the record on the outside matches the record kept in terms of tokens on the inside. Then they had the technological innovation of saying, you know, we don't really need the ball and we don't need a whole bunch of tokens. We can press a cow token into a piece of clay four times to represent four cows and so on. And so around 3200 B.C., they dropped the balls and they just used rectangular pieces of clay and push a token into that. And the clay rectangle that we're showing here, 3200 years ago, there are two different kinds of things being represented on this clay record. Around 3000 B.C., there was another technological innovation. They realized you don't actually have to make the tokens. You can use a stylus to draw the token on a piece of clay, and then of course, you let it harden. And so that occurs around 3000 B.C. and that continually evolves to the point of just 300 years later, 2700 B.C., we start to see clay tablets that look an awful lot like the more modern clay shubati tablets on which cuneiform writing starts to appear not too long after that. Okay. And so we have this historical record. So if you look at the period from 2700 B.C. to 8000 B.C., more than 5000 years, all the records of writing that you find

have something in common:

they are keeping track of debts and so I always joke writing was not invented by poets. Writing was invented by accountants for keeping records, keeping track. and why do I say debts? It's true that we do not know that those clay balls were representing a debt of a certain number of cows. But we can read the modern ones because the cuneiform writing developed out of these token imprints in clay, there's a direct progression of the writing. It becomes more stylized, but we can read it and so we can speculate that probably from the very beginning these were keeping track of debt. So finally, around 2500 B.C., we start to get writing That is not record keeping where it is of a religious nature in the beginning, and then finally they develop literary texts. 1,000 years later around 1500 B.C., the alphabet is invented and now we get writing that is much more like human language. The earlier writing is not at all but modern writing with alphabets. They're trying to write down words as we speak them. Okay, let's skip to the final slide for this part of the discussion. So what we find is debt records kept on clay tablets. Now, that's Mesopotamia. When we look at Europe as far as we can tell, money doesn't go back nearly so far. And the medium that was used or you could say the technology for keeping the records was very different. It was notches in sticks called tally sticks. We still use the term tally. You tally up your bill at the end of your meal and they would cut little hash marks across the surface of the stick. That was called a score in the case of a score that's worth 20, say,£20 in Europe. And this is how they kept records of debts in Europe. And in spite of what people think most transactions by kings in Europe took place in tally sticks, not in coins. So most spending by the King took the form of issuing a tally stick. And we have this term raise a tally, which would be telling your Treasury Department the Exchequer to go cut some sticks so that the King could spend and the sticks would then be split in half. The king or his agent would keep half one of the halves and the other half was given to the seller of something to the king. Then the king would collect those other halves in tax payment. The purpose of splitting the stick is to make sure that nobody was counterfeiting. The lines had to match up perfectly before the king would accept. The other half of the stick called the stub and the one half is called the stock. The other half is called the stub. We still use those terms as in ticket stubs in order to match, just like they do at the concert. Right. To make sure that you have not counterfeited. Okay, so that's the story of the origins of money and the origins of writing and the link between the two. I think a lot of people would be surprised when they hear this at first. I know I was because when I think of debt or accounting, I think the money comes first. First, you have to borrow money from someone else to be in any kind of debt. But that's not really how it works. Can you say more about the function of debt in a society and how that led to the creation of of money, as we might understand it today? Yeah. Well, there is a very common we say institution defining institution is different from the way people usually what you say, Well, my church is an institution. My school is an institution, but as a practice. So human practice that we find throughout tribal society. So humans lived in tribal society for the first million years, depending on how far you know, which species you want to count as humans. They lived in tribal societies and they had a practice that was named Weregild in the case of the German tribal society. Germans were still living in tribal society when Rome was civilized, and Roman scholars studied Germans to see how do people live in a tribal society. So the first anthropologists were studying German tribal society, and they found this practice called very guild, which is if I do something to injure a member of your family, I owe you. I owe your family. Say I accidentally kill your brother, then I owe your family. And they had a system of fines that would determine what I had to pay. So something like for a death, it would be significant. Here would be a cow or a horse or something like that. I would be in debt to you. You would be my creditor until I repaid my debt. Now, we are speculating if we carry this back and say, Oh, that's what those tokens were all about in ancient Mesopotamia, because we don't know for certain that that is what they were doing. But this practice of indebtedness is as old as humans. In fact, we know that chimpanzees have the notion of debt and credit. If I help defend you against some really mean chimpanzee, then you owe me. And if I'm challenged, you've got to repay that debt. So even animals have this notion of indebtedness. So the speculation is that probably this is where the notion of indebtedness comes from. Now, in tribal society, they don't have money. So the debt is always in terms of, well, for this infraction, I owe a goat. For that infraction, I owe a bushel of wheat. So there's a different item that needs to be delivered in payment for the particular injury that I caused. Money is a conceptual leap because we're going from a payment of a horse or a cow to a payment in terms of a unit of measurement, a money of account, and just as it took 10,000 years to develop writing, there's little doubt that it took thousands of years to develop this idea that, you know, I can measure different kinds of debts in the same measuring unit. Now, measuring units are also very old. You know, we've got the inch, we've got the foot, or in Europe, they got the meter, they got the centimeter. So units of measurement are much older than the money unit of measurement. And in fact, all the money, the early units of measurement of money were borrowed from the measurement for the

most important grain:

wheat or barley or rice, depending on which society you look at. And the word used would be the same as the word that was used for measuring a quantity of grain. And just think about it. What is the British money unit? It's called the pound. What was the Italian money unit before they joined the euro? The lira, which means pound. Okay, If we go back to Mesopotamia, it's the Mina. In the Bible, it's the Shekel. All of these are weight units. They got transformed into money units. So let's skip to the next slide. So what is money? Money is an IOU. It's a record of indebtedness. Okay? That's what all money is have in common. So it is a record of indebtedness that tally stick was a record of indebtedness. That clay shubati tablet was a record of indebtedness. Our $1 bill is a record of indebtedness. In the case of the $1 bill, who is in debt? Well, it's the U.S. government. And if you're holding a dollar bill, you're the creditor. That's kind of nice to think of, isn't it? The government owes you. You are the creditor. In the case of a bank check, If you write a check to your landlord, you are the debtor. Your bank is actually going to make the payment for you, but they are going to debit your bank account. So you are indebted and you're using the banks debt, which is a checking account at the bank, in order to make a payment to your landlord. And the way that it works is the bank will debit your demand deposit and credit the landlord's demand deposit. That's how payments are made. So let me tell you a story about the the earliest creation of paper money in the West. We can skip to the next slide. The Chinese invented paper money as just simply it's a way to record an IOU. Instead of recording it on a clay tablet or on a stick, you record it on a piece of paper. So the Chinese were doing that. And in the West we had not come up with that technological innovation yet. The American colonies were colonies of Britain and they were not allowed to issue coins. The British crown had a monopoly on coin issue. They wanted the American colonies to have to earn coins by shipping exports to Britain, because that was the whole reason for having a colony that you would be able to get the output of that colony. The colonists needed the British coins. It was their source of currency, but they were not allowed to issue their own coins. But the British, the colonial governments, were always short of money. They didn't have enough money. Mostly to defend the colonists against the Native Americans, against the French in Canada. And so they needed to provision their armies and they hit on a loophole. They couldn't issue coins, but there was no prohibition on issuing IOUs that were recorded on pieces of paper. And so the colonial legislatures, it turns out all 13 of them did this with various deviations. They would pass an act that allowed for the printing up of, say, 10,000 Virginia pounds. They were using the pound money account because, after all, we were British colonies. But these would be Virginia pounds, not British pounds. So they would issue the £10,000 of Virginia notes. A shilling is just a lower denomination of the pound. And at the same time the legislature would pass a new tax and it was called a redemption tax. And I'll get to why they called it that. And it would be expected to raise about £10,000 of Virginia pounds over the course of a couple of years. So they would pass a law authorizing printing money. And at the same time, there would be a twin law that would authorize imposing a tax. Okay. So then the colony, the colonial government, would use that paper money in order to buy what it needed. In the case of this cartoon, it shows you that what the colonial government wanted was a mule and a wagon, so they would issue the paper money in order to purchase the the mule and the cart. Now, why would anyone sell their mule and cart for a piece of paper? Well, the reason was because they had to pay a tax, and the only way to get the money to pay the tax was either to sell something to the British king and get coins because you could pay your tax in coins. But that was hard to do. There weren't nearly enough coins, so you also could sell to the colonial government and get the paper money. That was much easier to do. So it turns out that about 75% of all the tax revenue came in the form of that paper money. About 25% came in the form of coins because they were much harder to get ahold of. Let's go to the next slide. So what did the colonial government do when they got that paper money back in tax payment? They burned it, all of it. We know that they burned all of it because they kept very careful records. When the money came back, they burned it. Why were they called redemption taxes? Because the money would be redeemed in paying taxes. And once redeemed, it would be destroyed. If you think about a free pizza coupon. So Joe's Pizzeria issues free pizza coupons to build up customers. When you go in with that free pizza coupon and you give it to Joe, you are redeeming the coupon. And we use that term, of course. And what does Joe do with the pizza coupon? Does he put it in the cash register? No, he burns it. So revenue is for redemption. It's for burning. That's what they did. And that is the fundamental principle of money IOUs. When you return them to the issuer, they are burnt. If you write IOU, a cup of sugar to your neighbor because you borrow a cup of sugar when you redeem yourself and take a cup of sugar back to the neighbor and they return the IOU, You don’t say, Oh boy, now I'm rich. I've got an IOU because it's your IOU. What you do is you tear it up and throw it away. Okay? So we're done with the slides. I love this story so much. It's one of my favorite stories because it makes so clear that a currency issuing government has to put the currency out there before they can tax it back. They spend and then tax. And with this misconception that the US government badly needs our tax dollars in order to have any money to spend on public programs. And that's just not how it works. And I think this story demonstrates that in such a more simple way. It's a little bit easier to understand. But I also like that it demonstrates in a way that the tally sticks doesn't where the tally sticks, it's like, okay, I have to have these tallies for the king and they have to match up at the end of the year. And I have to do this because this king has this great big army and controls what happens in the country, and it evokes people's biggest fears, I think, about ah we have this authoritarian who makes us use this currency and they can threaten us with violence if we choose to not use the currency and not pay the tax. But this story of the Virginia Pound shows, okay, we're trying to start a society from scratch, right? It's a colony. We need people to do jobs. We need people to grow food. We need people to run banks and schools. And this really shows how issuing the currency helped to mobilize resources and labor. And it really shows how money can be a tool of social organization. Just a tool to help our society function at all. So I just love everything we get out of this story, and it really demonstrates why a fiat currency might be preferable to alternatives. So can you say what happened? Like why did everyone adopt like a Medallist view of like a gold or silver backed currency or a Metallist view of money? Yeah, well, the short answer is that I think that it it fits with an anti-democratic. I mean, today we would say Neoliberal view. And I don't want to deny that there hasn't been a fascination with precious metals for a very long time. And I don't want to deny that precious metals were used in coinage because that is true. And so you can sort of get blinded by the gold. And gold is fascinating to people and the thing about metallic coins is they last a long time and they don't get destroyed in fire when all the revenue is paid. So with tally sticks, the British did exactly the same thing with tally sticks that the colonists were doing with paper money. They burned all of them. In fact, they burned down the House of Parliament in the 1840s when they were finally getting rid of tally sticks. The Treasury they called the Exchequer in Britain, hated the tally stick so much because it was a huge, time consuming process to match the stock and stub. So they were so happy they weren't going to have to deal with tally sticks anymore. They threw them all in the fire at the same time, burned down the house of Parliament is sort of funny, but it's true that metal was in coins and there's a very long story about why they did it, but that goes all the way back to the Greek city states where precious metal had a an appeal to people So lots of people think, well, you know, gold standards were normal that pegging your currency to a quantity of gold, but it's actually the exception. It's very rare. It really was the 19th century when a large number of the most developed countries established gold standards. They weren't natural, they were purposely established. And part of the reason for that was to constrain government and to try to make money operate as if the free market would work. So Karl Polanyi who's a very famous anthropologist and social scientist, makes this argument that this was intentional. It was trying to make money work as if it were a commodity. And what it actually did was severely constrain the governments ability to spend and made us rely more on the market and less on the government. So I think that it was an anti-democratic move. And if you look today at who calls for a return to the gold standard, it's going to be the free market, Austrian leaning, very conservative people like Ron Paul. I want to echo Jessica's appreciation and gratitude that you're giving us this historical story because that's just so rare in a lot of economic conversation these days. And I know a lot of our viewers and listeners, including my own father, shout out to Jaime, our history buffs and and this is just going to be right up their alley. So if we go now to to this place that you're speaking to. Right. The 19th into the 20th century, it's it's a perfect transition because we start to see like the formalization of economics as a discipline, as a field. And what they seem to be talking about at the time is focusing on the individual as this utility maximizing rational agent that is just encountering other individuals and trying to trade. And of course, if we aggregate this up, we can think about firms trying to compete and do the same thing. But, you know, markets are balancing themselves out that we even have a little graphic here that I think is kind of funny because if we can pull that up, Mike, There we go. Right. There is this idea that you hear from economists. Everything they say is supply and demand, right? If you if you teach a parrot economics, what they will say is supply and demand. So how then do we go from this view? Right. Which is very focused on the micro economy or micro foundations, as they say, to a more systemic perspective, which I think really places importance on what you're talking about, which is the role that society provisioning itself, the role that governments have in a system as a whole, or what we might call a macro economy. Yeah, well, so anyone who studied economics knows that Adam Smith is claimed to be the father of economics, and he's the father of two traditions, really. So one, is this what you called micro or individual based view of society, supply and demand, And pursuit of individual profit maximization and so on. And the notion of an “Invisible Hand”. Okay. And it's true that Smith seems to have mentioned invisible hand only twice, and it's not clear that he didn't mean God by that, but it's interpreted as he meant the market. The market is the invisible hand that sends you signals and you react to that. And that is supposed to lead to the best possible outcome for everybody. Okay, so there is that branch. The other branch was very skeptical of capitalism. Adam Smith said that, you know, the producers rarely meet except to conspire against the public. Okay. And he was very doubtful that capitalism actually was in the interests of the majority of people. He thought that factories tended to make workers very stupid because they had to do the same task over and over and over again. Okay. And so there is that tradition, too. These two traditions come to a head in the 1870s. So in the 1870s we get the development of what is called Neoclassical economics, and that is the free market branch. That's the small government branch, and that's the branch that wants to constrain the government and is going to promote things like the gold standard. Okay. The other side culminates in the development of Marxian economics, the Marxists. So Karl Marx wrote Capital and published in 1867, and that leads to an alternative view. It is focused on the economy as a whole. We could say that that is where macroeconomics came from. However, in the United States, Marxism is a bad word. And so we date the development of macroeconomics to John Maynard Keynes, who we can talk more about later. And it is a non Marxian approach to macro, but it's pretty easy to show that you can map the main ideas almost 1 to 1 to the Marxist approach too. So this is an anti free market approach. It's looking at the macro, performance of the macro economy as a whole. Modern macro really comes out of Keynes, not out of Marx. And it rejects the idea that free markets act as if an invisible hand is guiding them. Now, somewhat surprisingly, if you look at economics in the United States at the end of the 19th century and in the beginning of the 20th century, this neoclassical version was thought to be the English economics. It's called political economy. Most economists in the United States were not Neoclassical economists. Keynes didn't exist yet, so they were not Keynesians, but they were Institutionalists. If you look at the founding of the top United States Economic Journal in the 1880s, the American Economic Review, that was an Institutionalist journal. So it really was not taking that Neoclassical path. Neoclassical economics took over in the United States much later after we had gone through a Keynesian period. So we were somewhat different. Institutionalists were interested in the business cycle and they were developing a different approach to economics, and they really were dominant in policymaking until believe it or not, President Kennedy. President Kennedy is when we got to the conversion over to Keynesian economics. So let's talk about Keynes for for a second here. Some would say that Keynes is like the Shakespeare of economics. And by some I mean Jessica and I who made that up yesterday. But, you know, he's seen as a figure that really influenced the conversation on economics. Can you tell us what some of his core and most important ideas are And if you could find value in Keynes, if you also care about class issues, workers from that more radical Marxist perspective as well? Okay. Well, so Keynes’s most famous book is 1936, and it's called The General Theory of Money, Interest and Employment. But keep in mind General Theory. What was he mimicking? Einstein The General Theory of Relativity. So what Keynes was doing for economics was what Einstein had done for physics and what Darwin had done for evolution. And those are the three greatest figures in science. Darwin, Keynes and Einstein. So I would say much more important than Shakespeare. Okay, it's nice, but Keynes is just much more important. All right. He is. In fact, if you look at all of his contributions, I would say it goes beyond Einstein and Darwin. Keynes was already famous when he wrote the General Theory. His dissertation, so his college dissertation was a complete rethinking of probability theory. At the end of World War One, he wrote a book, The Economic Consequences of the Peace, and he said the peace treaty that the allies have signed against the axes is going to generate another world war. And he was right. We got World War Two. He wrote the Treatise on Money in 1930, extremely important contribution to monetary thought. And much of what becomes MMT is there in the Treatise on Money before the General Theory In 1926, he wrote a book, a very short book called The End of Laissez Faire. What is a laissez faire? It's the theory we were talking about earlier that free markets are the solution to everything. In 1926, Keynes writes this book and he says it's just not true. And no economist really believes this. This is a political agenda. This is not an economic theory. It's a political agenda to remove the government and democratic governance from society. Okay. And he predicted that that we're going to go into a great crash, which is the Great Depression. Okay. So when the depression hits, Keynes realizes that his 1930 book was fatally flawed. He had not come up yet with what we would now call macroeconomics. So he knew the free market approach was wrong. So that branch of Smith was wrong, but he didn't know what to replace it with. The General Theory, he replaced it with the theory of effective demand, which is the basis for modern macroeconomics. And so to explain this really simply is difficult. But just as an example, he starts off the book this way. So the theory is that labor is, you know, like bananas or anything else. You have a supply of labor and you have a demand for labor. So despite labors, people who want to work and earn an income and the demand for labor is the firms that want to hire. And if the free market is allowed to work, then demand and supply. So we always have this cross of demand supply that will determine the wage and the wage will clear the labor market, which means anybody wants to work at the market wage will be able to get a job and so you'll have no unemployment and Pigou, who was a famous economist, had written a book at the beginning of the Depression saying, you know, the solution to the depression is just the wage fall. If wages fall, all those unemployed people will be able to get jobs. So the only reason that we have unemployment is the wage is too high. Okay? The problem is the wage was falling and unemployment was getting worse. So in the United States, the wage kept going down, prices kept falling and more and more people were losing their jobs. Okay. And it looked like if we let the market work, we would end up with nobody has a job and nothing is produced. So Keynes says that theory has to be wrong. Okay? Falling wages is not the solution. Okay? Why doesn't it work? Because if wages go down, people have less income to spend. If they have less income to spend, then firms can't sell as much. If firms can't sell as much, they're going to lay workers off. So falling wages actually reduce employment. The problem with the theory was that it is, we would say, micro based. It ignores what happens when wages go down. It looks only at the labor market. It doesn't look at what happens to people's spending if their wages go down. So in technical terms, we would say it's not independent of what goes on in other markets. Now, Keynes starts off talking about labor, but the argument can be extended generally to all markets. You can't do the supply and demand analysis. It's fundamentally flawed because it requires independence. What goes on in one market doesn't affect other markets and so what you need instead is to approach it from the macro view, from the view of the economy as a whole. Okay. And that's what macroeconomics does. Keynes talked about a fallacy of composition. You can't just add up from, you know, the decisions made by individuals to get what goes on in the economy as a whole. And so, again, just one more sort of technical explanation. It's called the Paradox of Thrift. Okay. So we're all told that saving is good, it's good for individuals to save for the future, and it's good for society to save for the future. Okay. So how do we say, well, we spend less? So what if everyone decided that tomorrow they're going to spend less because they want to save more? Because that's good for them. They get to save for their college education for them or their kids, or save to buy a house, save to buy a car. Okay. Well, if they spend less, that means that sales will be lower. If sales are lower then firms need fewer workers. If firms hire fewer workers, then less income is generated. And Keynes argued that we'll end up with no more saving because incomes will fall by enough to reduce total saving instead of increasing it. You as an individual, can choose to save more. Of course you can. You just skip McDonald's this week. But if we all do that, everyone's skipping McDonald's this week. McDonald's will have to lay workers off so their incomes will be lower and the savings of everyone who lost their job will be lower and offset your increase of saving. And that's why it won't work in the aggregate. That's why the supply and demand analysis is wrong, because it assumes your saving affects nobody else. But that's not true. And it effects receipts by the firms that are trying to sell output. So when you're in the car with mom and you're like, Oh please, we have to go to McDonald's on the way home. And mum says, No, we have food at home in the kitchen, So you're going to tank the economy! We have to go. That's very important. Go ahead and save, but you should feel guilty. So you heard it here, folks, right? Because our lives and our economy is interdependent and connected. The conventional supply and demand model just doesn't work. The thing that they try to force on us in any high school economics class or, you know, people love to say it's economics 101. Right? This model ignores that we are all part of a society and there's all these institutions that are connected. So I just think that's so important. One of the things I'm really interested in we're really interested in is how today people talk about Keynes and Keynesianism, but they think of it as having not changed since Keynes wrote, and they think of figures like Paul Krugman, even Larry Summers. And there's this straight line as if all scholars or thinkers who are influenced by Keynes are the same. Can you tell us how that trajectory played out to where these figures that we now think are Keynesians came to think how they do and then where the other branch leads to, which thinks about other schools of thought? The American Institutionalists that you mentioned, even the things Marx was saying and that story and this divergence. Yeah. So economics is very unusual as a discipline. If you look at other social sciences, also the hard sciences, there are different approaches. So in political science you would study of variety of approaches. When you are in a college class. Same would be true in psychology, the same would be true in political science. So there would be different approaches to studying society from that perspective of political science, sociology, anthropology, and so on. Economics is very strange. In the vast majority of classrooms in the United States, you're going to get an economics textbook and it's going to present one approach. It's going to be the mainstream approach that has been true since the end of World War Two. So in the beginning, the first textbook was Paul Samuelson, and it presented a version of Keynes that accepted some parts of Keynes, but tried to marry it to that Neoclassical supply and demand approach. And it was always fundamentally flawed and incoherent because so you're learning what goes on at the micro level, and then you have sort of a theory of effective demand at the macro level. And the two really don't fit. And I so it sort of leads to two reactions. One is the people who actually read Keynes and they say, Oh but so much of this is not in Keynes. And what you're presenting is -- I am going to use a word I think it's okay bastardized because that's the term that was used by Joan Robinson, who was probably the greatest female economist and should have won a Nobel Prize. We encourage plurality of words here on Funny Money. So you're good. So anyway, she said well that's Bastard Keynesianism because we know who the mother was and that is Neoclassical economics, but we don't know who the father is. It's not Keynes. So that's why she called it that. And so she was sort of the leader of a splinter group of followers of Keynes. And they finally settled on calling themselves Post Keynesians because everybody's post Keynes, because Keynes is dead. It’s like B.C. before Christ BK, before Keynes. So it's going to be the people who try to stay true to the General Theory. Okay. And it has various branches too, which is fine. People go in slightly different ways, but they all accept the General Theory as the basis of the approach. And so they're distinguished from the Samuelson version of Keynes. But then there's another reaction against Samuelson, which is that, well, hold it. The macro is not consistent with the micro. The micro should be the foundations because so we've got a theory of how individuals behave and then we have a theory of how society behaves and those two aren't linked. So we need to link the two and so we need to get better micro foundations into our macro economics. And what that eventually leads to is completely throwing out Keynes because this cannot be done. You cannot have a Keynesian macro that's consistent with individual utility maximization It doesn't work. And so that led to sort of a a complete revolution or counter revolution in mainstream macro. They just throw Keynes out, okay? And that becomes the new mainstream theory. It's carried to an absurdity, absurd level called Rational Expectations. I don't want to get into the details, but it becomes just so obviously laughable that you have a guy named Robert Lucas who I think just died, got a Nobel Prize for arguing that all the people in those breadlines during the Great Depression were voluntarily unemployed. They chose not to work. Okay? They're maximizing their utility standing in the unemployed bread line to get a handout of a piece of bread and a cup of soup that was voluntary, not involvuntary unemployment. Okay? They voluntarily were not working. Anyway. Absurd. He got a Nobel Prize. Okay, but it becomes embarrassing when you argue such complete nonsense. And so you get a bit of a reaction against that. You try to make things a little bit more realistic, even though less coherent. And that is how you get a Paul Krugman. So these are the New Keynesians. They want to be able to say things that aren't completely ridiculous, but they don't embrace Keynes. So that finally becomes a massive consensus is built, which takes all the crazy ideas and then tries to add a few more sensible ideas. And that becomes the New Monetary Consensus. That is now the dominant. And that is the only thing that is taught in most classrooms in the United States. Okay. So that's what's so strange about this discipline economics. You get no variety. if you as a student try to talk to your teacher about Keynes or Marx, they all say, we don't do that. Okay, that is not allowed in our classroom. All right. So it's very strange. How did we get in that position? I'm not quite sure why. Economics is not like other disciplines, why it's completely intolerant of any ideas that challenge this mainstream view. That doesn't mean that alternatives don't exist. I'm just saying they're not taught. Okay, So there are heterodox economics, heterodox economists who take either Keynes or Marx or both of them as fathers of their approach, and they try to extend the thought and use it for economic analysis. And the various groups are, as you said, Institutionalists, Post Keynesians, Marxists and sub branches of each of those. And then finally, Modern Money Theory is also a heterodox approach that takes good ideas from a variety of approaches. So can you tell us a little bit of that story? How did we get to MMT? And now I feel like we're all coming full circle now. That was such a brilliant exposé of the history of these these different ideas and how they developed these traditions. How then did we get to MMT, to Modern Monetary Theory? Well, the people who contributed to the development all had backgrounds in these heterodox approaches. I had background in Post Keynesian Institutionalist and Marxist Bill Mitchell more heavily in Marxist and Post Keynesian. Stephanie studied with me in the beginning and with John Henry, so she also was exposed to all three of these approaches. And so we are out there, we're doing heterodox economics and Bill did more labor economics. Stephanie and I were doing more monetary economics and there was a post Keynesian thought discussion group. I don't remember what year, but very early nineties that had most of the well-known post Keynesians, quite a few Marxists, some Austrians and other people who deviated from the mainstream on this discussion group. And in January of 1996, this hedge fund guy named Warren Mosler came on. And I think that's where we would date the beginning. It was the day that Warren came on the discussion group and started posting these comments that, you know, on the surface appear very strange. But many of us recognized that what he was saying, maybe you use different words, but it was correct. And so some of the discussion continued to take place on the PKT, but there was a lot of hostility to it. And so most of my discussion with them took place off It and whatever that very early version of email was and and Bill Mitchell was there an active even more active than I was by that time. Stephanie was there in the background, but within a year or so we were talking each other offline and I don't remember, but I think I probably met Bill in person at the, main American Economics Association meetings in January, maybe in 97, If it wasn’t 97, it was 98. I met Bill in person and we started we created a center at UMKC, and he created a center in Australia and we started trying to promote the ideas. So that where it began. So before we get to our last question and kind of wrap up a little bit, we have a clip you might recognize one of the people in it. Mike, can we cue it up? Does the Green New Deal add up as the top priority? And I'd start with Mr.. Let me start with you. What would it cost? It depends on what you include in the Green New Deal. Say pick a number. Okay. Well, I can say the complete package of greening programs could be as much as 5% of GDP for the next ten years. Which is give me a number. Just pick a number because I've heard$73 trillion. I've heard. No. Not that. So, Professor Wray, do all great economic thinkers also have to have great beards? That that actually was also before COVID, too. To wrap it up and unpack what's in that question. Right. Why is MMT important for the many crises that we are facing today? You were on that committee. They were talking about climate, right? Why do people like us insist so much with this theory, with this framework and perspective? So occasionally the Democrats do propose very good policies and the Green New Deal, Biden's Build Back Better had good components in those things. And what we consistently see that kills them is the pay for. So that that I think that was a Republican answer asking that question but you know well what does it cost right So they're always going to ask that question. And the the Democrats will then have to come up with some tax. And when you tie good progressive policies to new taxes, you've sort of doubled the opposition. So you've already got opposition to good progressive policies because there are many conservatives who do not want those policies. They don't want policies that would improve the lives of most Americans. That's just not in their interest. You know, they they have their constituency and that is not it. Their constituency might be Wall Street, it might be the military industrial complex. It is not American living standards. So they're going to oppose it quite naturally. And so you've got opposition and then you add a tax. Well, you know, there's nobody who really likes more taxes, at least on themselves. And Americans traditionally have been very peculiar because they would even oppose taxes on high income people. And when you dig deeper, it's because a lot of them bought this American dream, well, I might be rich someday and I would hate to pay higher taxes. So I oppose taxing the rich more. And so this plays into the hands of conservatives. Now, I think it's much less true now because the the hopes of Americans have been pretty well squashed by 50 years of Neoliberalism. So I think most Americans recognize that that American dream, if it ever was true, is no longer true. You're not going to become rich. Okay? We do not have more social mobility than Europe. You know, we've always thought we did, but it's just not true. Americans are not more likely to move up the ladder, and it's become increasingly hard for each succeeding generation to move up. In all likelihood, you're going to live worse than your parents did, and Americans are starting to recognize that. But you still are going to have lots of opposition to tax increases. And I that the truth is that taxing the rich doesn't help something like the Green New Deal anyway, but that's a different topic we could go into. So anyway you've doubled the opposition when you tie the two things together. So what we need do is, get rid of this notion that you need to pay for spending by by matching tax revenue to the spending. And we do not need to balance the budget. We do not need to limit the debt, which is a huge issue now that is being used as an excuse to cut the social safety net, to reduce Medicare, Medicaid and Social Security. So what MMT is trying to do is to change the understanding and to change the focus of the debate around pay fors and balanced budgets to recognizing that money is never the issue. If you issue your own currency, finance is not the problem. The problem is resources. So in the case of the Green New Deal and what I was trying to get at at that meeting of the Budget Committee is the only question that's important is can we find the resources. So for the Green New Deal, can we find the resources to completely restructure our economy, to make it economically, socially and environmentally sustainable? Because right now all three of those in all three ways, we have a completely unsustainable society. We will not survive. So the question is, do we have the know how and do we have the resources to completely restructure the economy? And the answer to both those is yes, we do. And I'm not an environmental scientist, but the environmental scientists seem to say that, yeah, we have the technical know how. And, you know, if we come up against things that we don't know how to do, we can figure it out. Do we have the resources? Well, it looks like we do. We certainly have enough labor. There may be some questions about, you know, can we find the lithium we need for batteries and so on, and we've got to release those resources. One of the books by Keynes that I forgot to mention earlier, 1940, he wrote a book, How to Pay for the War. So think about 1940. Okay. World War Two and countries that in the past had engaged in big wars always had high inflation. World War One, Britain had high inflation. World War One wasn't so big for the United States, but the Civil War was a big war. High inflation. Revolutionary War, high inflation. So Keynes wrote a book to prevent that from happening. So he titles it How to Pay for the War. And it sounds like he's asking, where will we find the money? But that's not it at all. He wasn't worried about that at all. He was worried about the resources. How will we find the resources to devote to the war effort? And he laid out the strategy. So he said money is not problem. What we need to do is release resources from current use and move those to the war effort. So he talked about the role of taxes, not to create money to spend, but to reduce private consumption. He talked about the role of selling bonds not because the government's going to borrow money, because it can't borrow its own money, but because he wanted you to save so that you wouldn't be buying output. And then rationing and wage or price controls. So he set out the strategy. And for the most part, the UK followed it and so did the United States. We used all of those methods and both of us managed to get through World War Two with relatively low inflation. It worked. But anyway, what I'm saying is we need the same sort of strategy for the Green New Deal, for Build Back Better for Reparations for African Americans and Native Americans. All of these are the same question. It's not the dollars, it's how do we find the resources? So I'm sure you know, Sandy Darity’s work on reparations. And people went, Oh no.$800,000 to every descendant of African slaves. They're going to spend all that money and we're going to get massive inflation, you know, or where we find the money to give it to them? No the question is just how can we allow African-Americans who are descendants of slavery and have faced discrimination for 400 years, how are we going to allow them to share in an American living standard? Okay. It's a matter of finding the resources. That's the only question that matters. Thank you so much, Professor Wray. This has been really great. There's just so much to take away from everything you've said here, and I feel like we could talk for hours and hours and hours. But seriously, your contributions to MMT and just the field of economics are great, and the way you explain things I think will help a lot of people understand things that they didn't before. A lot of this stuff I always say should be taught in K-through-12 education, and it's a crime that it's not. So thank you. And that's why we have the cartoon book. It may be too difficult for kindergarten, but it's going to be fine for fourth, fifth, sixth grade on up. You got to start them early, five years old learning about tally sticks. That's the only way to go. Professor Wray, thank you so much as well. This has been a fantastic conversation and we hope to see you again soon. Okay. Thanks a lot. All right.