Ep80 [1/2] Andrew Chirgwin: Economics that stays in its lane (and the end of the world)

Welcome to episode 80 of Activist #MMT. Today I talk with sixth-year MMT activist Andrew Chirgwin. Andrew graduated from the University of Sydney with a Bachelors of Science in Chemistry and Pure Mathematics, and a masters in secondary teaching. Andrew's introduction to Modern Money Theory, or MMT, was in 2015 when he stumbled on the blog of University of Newcastle economics professor and original MMT developer, Bill Mitchell. Andrew spent the next nine months reading five years of Bill's blog posts. Those who are familiar with the blog will understand how this is no small feat. (Here's a link to part 2.) The heart of our conversation, however, was influenced by a February 2021 Facebook post by Steven Hail (the text of which can be found below). Steven is an economics professor at the University of Adelaide and the author of the 2018 book Economics for Sustainable Prosperity, which is a good introduction to MMT. In the post, Steven discusses how neoclassical economists don't "stay in their lane". What this means is that economists impose themselves onto and dominate conversations about healthcare, when they should be led by healthcare professionals and their patients. They dominate conversations about education that should be led by educators and their students. And to bring it back to today's episode, neoclassical economists dominate conversations about mitigating the climate crisis that should be led by true experts in the field, such as climate scientists, energy specialists, chemists, and so on. This domination is in the form of forcing all conversation and concepts to be expressed in financial terms, as exemplified by the "how're you gonna pay for it?" question. This essentially gives those in power and their economists veto power over every facet of our lives, subjecting us to their biases, ignorance, and ideology. It prevents the true experts from ever being able to complete their highly-complex and critical conversations, and it also keeps the public unaware of the depths of the problems they face. Finance is a purely-human-created concept. Therefore, purely-financial crises are also purely-human-created concepts. This means we can prevent and mitigate financial crises merely by choosing to do so. It also implies that the Great Depression and the Great Financial Crisis are largely man-made disasters, caused and exacerbated by the actions and inactions of those in power and their economists. And yet this is who we allow to dominate highly complex conversations on topics that are largely outside of human control, such as mitigating the climate crisis. In other words, if neoclassical economists can't get their own house in order, then why do we allow them to be in charge of every house?! And of course, when problems are framed in financial terms, then problems that face the rich are always more profitable to solve than those that face the poor. An analogy I keep coming back to is viewing a child only through their report card. Doing this will do nothing to help the student if she is hungry and homeless, and suffering from abuse. It is very unlikely the problems will even be seen. In the same way, forcing the climate crisis and other real-world problems to be seen through a financial lens basically guarantees that these problems will never be acknowledged, let alone properly and fully dealt with. Part two of our conversation turns decidedly dark, as we consider our fate as a species and our choices as parents of young children, if we continue to leave the climate crisis in the hands of neoclassical economists. There's no solving a problem if you don't understand its depth. So buckle up. But that's next week. For now, let's start part one of my conversation with Andrew Chirgwin. Resources Steven Hail's Facebook post (that inspired much of our conversation) and Andrew's Twitter debate with John Hearn can be found below. The 2006 paper by S. Abu Turab Rizvi, The Sonnenschein-Mantel-Debreu: Results after Thirty Years Steven Hail, February 2nd, 2021, Facebook post: Some people I respect think you should value our ecosystem in financial terms and then manage a portfolio of natural assets the way a fund manager might use portfolio theory to manage a diversified portfolio of financial assets. I could not disagree with them more profoundly. Never mind the fact that this buys into the notion of a simple link between GDP per capita and well-being, which should have been dismissed by now in all high income countries, where there is demonstrably no such link. Never mind that they habitually use a measure of ecological footprint which allows rich countries to 'export' their pollution to poor countries, allowing them to claim that ecological impact does not rise as GDP rises beyond a certain point. My biggest problem with this approach is the idea that the financial economics of portfolio management implies the safe management of anything - let alone the natural environment. Portfolio theory requires measurable risks and known probability distributions, or in other words the absence of complexity, non-linearities, feedbacks and fundamental uncertainties. The complexity and feedbacks and resulting uncertainties of financial systems is the reason we have so many endogenously driven financial crises in our history. The thing about financial crises is you can recover from them. Our natural environment is far more complex, has far more feedbacks and non-linearities and connections, and is as a result far more uncertain than our financial system. So if you can't trust economists to manage the financial system so that it remains healthy and robust, why would you imagine that by financialising ecosystem services, you will be able to trust them to manage that far more complex 'portfolio'? It is a profound mistake to financialise the natural world, in my opinion. Instead, we should identify where it is safe to be, add a big margin to allow for unavoidable uncertainty (if we can), and then set limits on what we can tolerate. Dollars shouldn't come into the limits. Then we should take a step back and identify what we need to allow people to have the best possible chance of a good, secure, just, engaged life. To an extent, this has been done in the UN Sustainable Development goals, but it is done better in Kate Raworth's doughnut, which can be and is being applied at national, regional and local levels. What is someone who has spent a career training finance professionals doing saying we ought not to be applying the tools of financial management to our natural environment? I am saying it is entirely inappropriate, misleading and liable to bias the narrative, policies and outcomes in potentially dangerous ways. Andrew's conversation with economist John Hearn Many line breaks have been removed. Andrew: What is a stock of income? Hearn: There is no stock of income only a stock of money. Andrew: Flow of incomes become stocks of money. Accounting 101 Hearn: Accounting 101 is wrong. A stock of money is used to measure a flow of income. Economics always teaches accountants not the other way round. Andrew: Accounting is incorrect? So your conjecture here can't even stand up to basic bookkeeping? The net sum of flows is a stock. Hence the net sum of incomes is a stock of incomes, and the stock of incomes is savings or money. Hearn: Accounting is bean counting it does not require any understanding of what it is counting. Flows are not stocks so there is no hence. Andrew: If accounting is just beam counting, how do you measure any of your work? Economic activity is measured using accounting... that's how Taxes are determined, savings calculated, policy assessed into potential outcomes. Your statement here is like saying "physics ignores distance" Hearn: Economists understand simple accounting, accountants rarely understand economics. Andrew: That's a nice hasty generalisation there. You seem to be shaky on elementary accounting Professor, especially about credit creation by balance sheet expansion. Hearn: Test me. Andrew: Credits are created with a matching debts. Currency is is therefore both a credit and a debt. Money, as a credit issued by other entities, are both a credit and debt. Hence currency, and all other money, are debts created by balance sheet expansions. Hearn: Yes it is double entry bookkeeping. A deposit at a bank is double entered as an asset and liability. It is not the currency. Money can be created by a net increase in newly created loans. Fiat money is not a debt, commodity backed currency is. Andrew: Fiat money is a debt, because it is also a credit. It is a balance sheet expansion of a different balance sheet. I thought you said you were good at accounting... Hearn: Think assets and liabilities as these appear on a balance sheet not credit and debit. Andrew: That's another red herring professor. You should be running a cafe at this rate. Red herring for everyone. Currency and other money are accounted for on balance sheets along with other credits as assets of the balance ledger. Stop trying to play coy. Hearn: Explain how the Aussie dollars in your wallet are a debt Andrew: Because the federal government created a credit by balance sheet expansion, hence making them also a debt. Hearn: Think liability not debt, asset not credit. Andrew: See my other response. This is a red herring and we both know it professor. Liabilities, and debts, are accounted for on the balance sheet as much as assets and credits. Your accumulated credits appear as assets. But again, a red herring to avoid the actual topic. Andrew: It's also their liability to me. The Treasurer signed it. Hearn: How will the Treasury fulfil its liability to you? Andrew: When they contract their balance sheet. Until they are willing to do so, they recognise the liability exists because they recognise the asset existing. Hearn: You are wasting your time and your intellect trying to play word games rather than understanding what you are talking about. Spend the rest of the day trying to understand that fiat money is not debt and commodity backed currency is. Come back tomorrow when it is solved. Andrew: Apparently, Professor, balance sheet contractions and expansions bother you. The collection of an national import duty is a balance sheet contraction of the Issuer of Currency. The collection of a fee for operating a company by the national government as above. The issuing of a, now very limited, UK Passport comes with a contraction of the balance sheet of the UK Government. The settling of a debt incurred from a court case at the National Law level comes with a contraction of the balance sheet of the national government. Four concrete examples all generalised as: "The liability to me will be expunged when I do something that the Currency Issuer will contract its balance sheet in response."