Power of False Names

We have all read fiction about how true names give us the power to control the named objects. The comment on my previous post (MMT Macro Final 1/3) by Gregg Hannsgen, regarding my use of orthodox terminology and frameworks, led to me to reflect on the tremendous real power exercised by false names. From this reflection, I realized that the power lies in the ability to name things, and to popularize the use of these names. The article on Framing Modern Monetary Theory  by Connors and Mitchell in JPKE states that one of the central obstacles to the widespread acceptance of MMT is “The deployment of key macroeconomic terms (incorrectly) in the context of pervasive cultural metaphors to support policy interventions that effectively benefit a privileged few at the expense of the majority.” Personally, I first learned about the power of false names from a discussion by Noam Chomsky. With reference to the Vietnam War, the public debate was between the Hawks and the Doves. The Hawks felt that it was the responsibility of the USA to defend freedom, wherever it was threatened, across the globe. The Doves felt that the USA did not have this global responsibility. Effectively, the truth that US was actually replacing the previous imperial power France, and establishing its own hegemony over the Far East, was buried deep under, and made almost impossible to think of, by the terms of this debate.

In a similar way, just the name “deficit” exercises a tremendous power over the minds of the public, and ensures that the terminology of “financing the deficit” makes perfect sense to everyone. It fits perfectly with everyone’s lifetime experience of balancing household budgets. This name is used to justify policies of austerity, raising taxes, cutting spending on social welfare, raising interest rates, and other types of interventions which favor the 1% against the interests of the 99%. Thus Gregg’s complaint about my use of orthodox terminology and framing for the “financing of deficits” (see Q2 of  MMT Macro Final) is perfectly justified. Acceptance of orthodox terminology furthers the conventional agenda, even if it is used to debate against the merits of orthodox policy recommendations. Of course, this creates a real dilemma and difficulty for those who would make Radical Paradigm Shifts.  We cannot introduce new frameworks and concepts, while simply ignoring dominant terminology, since everyone uses that framework. But engaging with the terminology by using it, even for debate, further strengthens that conceptual framework.

Anyway, I propose to make up for my sin by devoting this post to explaining why it should be a crime to use the terminology of “financing the deficit”, as I did in my last post. One of the strategies suggested in the paper “Framing MMT” is to re-introduce the true names which have been replaced by false names of power. As a prime example, we should re-name Government Deficits as Government Injections (which I did in a later question on the MMT Macro Final).

A central MMT insight is that the government creates money in the process of spending. It does not acquire money in order to spend it. A large portion of government expenditures is not discretionary. The government is legally obligated to pay salaries, pay for various kinds of legislated public works programs, etc. Payments are made by government in form of checks written on its account at the Central Bank. This account is just an electronic entry created by the Central Bank. There is no limitation on the ability of the Central Bank to modify this entry to any amount. That is, the amount of money held by the government in its account at the Central Bank is really a fiction — there is no such number.  When the government writes a check, the Central Bank bank creates a corresponding entry in the government account to cover the check, effectively creating the high powered money which will end up as reserves with private banks. For deeper understanding of this process, see my posts on The Origins of Central Banking and Monetization, Maturity Transformation, and MMT. In order to maintain the fiction that the government “should” try to balance the budget, when the Central Bank writes an entry into the Government account, it also creates a corresponding entry calling this deposit a loan from the Central Bank to the government. This is pure fiction, in the sense that the Central Bank is an integral part of the government. It is as if I give a loan to myself. It does not make any real sense. However, now that the Central bank has acquired an artificial number as a target for the government budget, it CAN proceed to seek financing for this number, and this is what is actually done.

The magic of false names is amazingly powerful. The whole nation is engaged in an intense battle, fighting the mythical monster of the Deficit Dragon, using the sword of taxation, and other weapons for revenue generation. Just recently, while in the midsts of a foreign exchange crisis, Pakistan agreed to pay USD 1 billion to improve taxation systems.  The truth is that when the government spends, high powered money automatically comes into existence, by that very act of spending. The issue of where we will get money to finance this spending does not make any sense, even though this is where the maximum amount of policy discussion takes place. The real issue which must be discussed is going forward: what are the consequences to the economy of this new money which has been created by the government? This real question receives little or no attention in the literature. The answers which are available in the orthodox canon are shallow and nonsensical. One of these answers is given by the Ricardian Equivalence: government spending will drive out private spending on a dollar for dollar basis, so that total aggregate demand remains unchanged. Another answer is the hyperinflation will result.

Instead of these magical answers, designed to prevent us from looking at what really happens, we need to study step-by-step the consequences of government spending. Once we do that, it is almost immediately obvious that the consequences will depend on where this money goes. One of the immediate conclusions is that if government spending is targeted at the rich (reductions in taxes for the wealthy, or bailouts for billionaires), there will be very little effect on aggregate demand. The marginal propensity to consume of the rich is very low. The aggregate demand for super-luxury products will increase – for example genetically tailored personalized medical treatments for billionaires. Alternatively, if government spending, or injections, go to middle class or the poor, then aggregate demand will increase. Atif Mian and Amir Sufi in House of Debt made the point that if government bailouts had been correctly targeted, the Great Recession which followed the Global Financial Crisis could have been prevented. Similarly, if government injections are targeted at sectors which have excess capacity for production, then they will create additional output, and hence not be inflationary. It is this insight which leads to Job Guarantee programs by the government, designed to produce Employment for All.

To close, I seek forgiveness from God for my sins in using wrong terminology, which provides power for policies which keep millions in misery, and hope that this present offering compensates by creating clarity. Below, I link a 90m video lecture on the paper “Framing Modern Monetary Theory” by Connors and Mitchell referenced above:

2 comments
  1. Dingo said:

    This is a great insight Asad. In one court case I read a while ago the judge said the greatest obstacle facing the administration of law is the loose use of language.

    I would take what you have written a step further. It has become more and more apparent to me the more I read anything related to economics, that very few economic writers are willing to “speak” to anyone other than other economic writers – like its some club. Unfortunately, when the subject of economics affects everyone, then I would have thought that language which everyone would understand would be an absolute essential feature of anything any economic writer says, and more importantly, the average person wants to know why anyone who calls themselves an economist or an economic writer should be trusted with anything? It is not like they have a track record or anything. The average person I speak to in general thinks economists and economic writers effectively contribute nothing to society.

    Maybe economists need to come out and actually try to reach the average joes out there, ask all the average joe’s what exactly it is they want and then show them in words they understand how it can be done. Wouldn’t this be better time spent by economists?

  2. Ken Zimmerman said:

    Assad, it’s good to see framing discussed. Bourdieu was one of the first to write about framing. He discussed it in the context of distinguishing between gift and calculative economic interactions. The emergence of a calculative agency, says Bourdieu, depends on a time frame. Either the return gift is in the frame, and the agency is calculative, or it is beyond the frame and she is not. In the first instance the decision considers the return gift, in the second it ignores it. This considering depends only on the framing, the tracing of a boundary between relationships and events which are internalized and included in a decision or, by contrast, externalized and excluded from it. Michel Callon broadens Bourdieu’s definition of framing by stressing its multidimensionnality. Callon shows that if calculations are to be performed and completed, the agents and goods involved in these calculations must be disentangled and framed. In short, a clear and precise boundary must be drawn between the relations which the agents will consider and which will serve in their calculations and those which will be thrown out of the calculation as such. The extreme case of framing is that in which, as Bourdieu describes it, no relationship whatsoever is considered. The frame is empty-which is another way of saying that no framing has taken place-and the agent finds itself faced with its decision alone. The agent consequently switches to pure generosity for all possibilities of calculation, which implies that at least two terms relate to each other, are eliminated. However, to explain this extreme case we need to consider the question of framing mechanisms in all their generality. How can we account for the fact that the openness of the homo apertus (open, explicit) of social networks can be made variable, so that it passes through all the forms of agency from the most purely noncalculative to the most purely calculative? How is the delimiting, or framing, of relationships at a point in the network achieved? This involves understanding contextually what an agent is, entanglement and disentanglement is, and actual case studies of how this all fits together. You use Bourdieu’s notion well.

    Economists certainly use disentanglement and framing, even if they don’t entirely perceive what it is, they are doing. Economists invented the notion of externality to denote all the connections, relations and effects which agents do not consider in their calculations when entering into a market transaction. If, for example, a chemical plant pollutes the river into which it discharges its toxic waste, it produces a negative externality. The interests of fishermen, bathers and other users are harmed such that in order to pursue their activity they will have to make investments for which they will receive no compensation. The factory calculates its decisions without considering the effects on the fishermen’s activities. Externalities are not necessarily negative; they may also be positive. Take the case of a pharmaceutical company which wants to develop a new drug. To protect itself it files a patent. However, in so doing, it divulges information which becomes available to competitors and can be used by them to develop their own research and development.
    The notion of externalities is essential in economic theory because it enables us to emphasize one of the possible shortcomings of the market, one of the limits of its effectiveness. But it is also very useful for understanding the meaning of the expression “constructing a market.”

    Social network analysis reminds us that any entity is caught up in a network of relations, in a flow of intermediaries which circulate, connect, link and reconstitute identities (Callon, 1991). What the notion of externality shows, in the negative, is all the work that must be done, all the investments that must be made in order to make relations visible and calculable in the network. This consists of framing the actors and their relations. Framing is an operation used to define agents (an individual person or a group of persons) who are clearly distinct and dissociated from one another. It also allows for the definition of objects, goods and merchandise which are perfectly identifiable and can be separated not only from other goods, but also from the actors involved, for example in their conception, production, circulation or use. It is owing to this framing that the market can exist, and that distinct agents and distinct goods can be brought into play. Without this framing the states of the world cannot be described and listed and, consequently, the effects of the different conceivable actions cannot be anticipated. What economists say when they study externalities is precisely that this work of cleansing, of disconnection, in short, of framing, is never over and that in reality it is impossible to take it to a conclusion. There are always relations which defy framing. It is for these relations which remain outside the frame that economists reserve the term externalities. The latter denotes everything which the agents do not consider, and which enables them to conclude their calculations.

    This story goes on, but this is a convenient place to stop for now.

    On a more practical note, money is also framed to create calculative agencies. The most decisive contribution of money is not, however, where one would expect it to be. To be sure its main contribution was to provide a unit of account without which no calculation would be possible. However, the essential is elsewhere. Money is required above all-even if this point is often overlooked-to delimit the circle of actions between which equivalence can be formulated. It makes commensurable that which was not so before. The case of negative externalities, for example the effects of pollution produced by a chemical plant, clearly illustrates this point. Once identified and acknowledged, overflowing, if it is to be framed and thus internalized, must be measured. This measuring involves the establishment of a metrology, anchored in techno-scientific instruments, which enables the agents concerned to establish quantitative correspondences between a cause (e.g., the discharge of dioxin) and an injury (eg, a probability of cancer). This correlation between a risk of death and the activity
    of a factory, established by means of laboratory experiments and epidemiological research, creates a link between two distinct series of events. But if this relationship (between a discharge and deaths) becomes calculable by the agents, it is not enough merely to prove its existence; it must be expressed in the same units. This is where money comes in. It provides the currency, the standard, the common language which enables us to reduce heterogeneity, to construct an equivalence and to create a translation between a few molecules of a chemical substance and human lives. Money comes in last in a process of quantification and production of figures, measurements and correlations of all kinds. It is the final piece, the keystone in a metrological system that is already in place and of which it merely guarantees the unity and coherence. Alone it can do nothing; combined with all the measurements preceding it, it facilitates a calculation which makes commensurable that which was not so before: grams of dioxin and a human life. Thanks to it the agents can measure the investments required to reduce the risk of death below a certain threshold. Money establishes an ultimate equivalence between the value of a human life and that of investment in pollution abatement.

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