4.  Sector balances

4.1  Public, private and foreign sector – accurate or simplistic?

/81/ MMT refers to a sector model of the economy to which it attaches great importance. Sector balances date back to Keynes and play a role in neo- and post-Keynesianism. The MMT model just includes two broad national sectors, the private and the public sector. This is occasionally extended into a three-sector model which includes a foreign sector as 'rest of world'.

The approach assumes an aggregation of individual accounts into overall national accounts. Since the approach is based on double-entry bookkeeping, all financial assets are another's financial liabilities. All accounts together – private, public, foreign – net each other out to zero. In a two-sector model only one of the two can run a net surplus, while the other runs a corresponding deficit. One sector's deficit equals another's surplus. In particular, net public debt is equal to net private financial wealth.[1]

Keynes wanted to develop sector balances as part of a 'monetary theory of production'.[2] Models developed later by Stützel, Godley or Barro include a separate financial sector. In Barro, for example there are four sectors: commodity markets, labour markets, rental markets and financial markets.[3] MMT claims to start from Godley, but in MMT's model the 'integration' of finance is done by making banks and other financial institutions disappear into the private sector, as the central bank merges into the government or public sector, respectively:

'We [MMT] prefer to consolidate treasury and central bank operations. ... There are two reasons for this―simplicity and generality. ... We argue that the appropriate general case is the consolidated Treasury/Central Bank, but the reader should not confuse this attempt at defining a general case with a description of actual operations for any particular country. Unfortunately, this is precisely what our critics do, repeatedly.'[4]

The critics seem to be right. It remains unclear what the advantage of such a 'consolidation' might be. /82/ It is clear, however, that it obscures a number of relevant monetary and banking realities as explained in 2.5 and 3.4–8. It helps to maintain a theory of alleged sovereign currency which in reality is a banking doctrine legitimising bank credit-money. MMT assumes that with regard to the overall result, it does not make a difference whether, in institutional detail, something is done by the treasury or the central bank (or, in the private sector, by banks or companies or households). However, actions of the central bank, the banking sector, government/par­lia­ment and other nonbank actor groups have different effects on public and private finan­ces, the economy and income distribution.

Furthermore, to 'consolidate' central bank and government into one account 'consolidates' monetary and fiscal policy. The same applies to MMT's interpretation of government bond sales as being part of the central bank's interbank-rate policy rather than being a normal act of borrowing. Treating monetary policy and fiscal policy as two separate responsibilities is not among MMT's concerns. To others, however, the difference matters. The interdependencies between monetary and fiscal policy cannot be analysed if one does not keep them apart. MMT retorts to make any institutional differentiation if need be. But why then obscure important structures in a model which does not correspond to operational facts?

MMT argues that starting from operational reality would be unnecessarily complex and that 'the added complexity is counter-productive ... because it leads to poor understanding among economists, poor modelling, and bad policy choices.'[5] This, though, remains unsubstantiated and sounds rather smug. MMT tends to think of its two-sector model as 'elegant'. Well, beauty is in the eye of the beholder. The model actually gives a much too coarse, deceptive resolution of realities. The two- or three-sector model looks like just another piece of economic-model Platonism.

If it is true that in post-Keynesianism and MMT, money is key to understanding the economy – a position clearly held by NCT – one would expect a sector model to make this explicit rather than making it disappear in an inadequate aggregation. Analyses of basic pathways of circulation have hitherto failed to disaggregate the equation of circulation into a real-economic hemisphere and a hemisphere of self-referential dealings in a semi-detached financial economy. /83/ To put it in the words of Werner, there are transactions that contribute or do not contribute to GDP – in short, GDP transactions and non-GDP transactions.[6] This is why monetary reformers have proposed disaggregating the Fisher/Newcomb equation (M ´ V = T ´ P) into a real-economic and a financial hemisphere. [7] Here again, one cannot analyse the interplay between the two if one 'consolidates' them into one account.

An exemption among MMT scholars is Hudson. His approach is to subdivide the private, public and foreign sectors into a real-economic and a financial subsector. The financial subsector he calls the FIRE sector (FIRE = Finance, Insurance, Real Estate).[8] This allows for necessary distinctions such as those between earned income and capital income; real-economic and financial investment; trade credit, secondary and primary credit; self-limiting organic growth of the economy, and unlimited exponential growth of bank credit creation and compound interest, recurrently resulting in financial over-investment, over-indebted­ness and violent destruction of assets and savings. MMT has not adopted the FIRE model so far; maybe because it spoils 'simplicity' and 'generality'. In particular, it would put an end to 'consolidating' central bank and government in one account.       

From an NCT perspective, the need for sector balances with regard to the monetary questions dealt with here is not obvious. NCT does not dismiss sector balances. These can be a useful tool of macroeconomic analysis – of economic diagnostics, so to speak – especially in identifying persistent sector imbalances: provided that the structure of sector accounts is useful and there are criteria for assessing when imbalances become dysfunctional. In this respect the approach of disaggregating the money flows in the economy, and of subdividing each sector into a FIRE sector and a real-economic sector, could in fact help to clarify certain aspects of the role of financial markets for commodity/labour markets and interdependencies involved. But is this part of monetary theory sensu strictu?

/84/ It appears that the actor arena in the two-tier banking model still is a better starting point for analysing the money system: central bank – banks – nonbanks; the latter composed (not 'consolidated') of government, nonbank financial institutions, businesses/com­panies, households. This institutional setting can be combined with distinctions such as primary and secondary credit and types of transactions (transfers, real-economic transaction payments, financial upstream and downstream investment, and others more) and is then also suited as a starting point for analysing financial markets.


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[1] Wray 2012 xv, 1–38.                                                                               

[2] Cited in Schmidt 2011 112. Keynes is said to have uttered this in a contribution to an anniversary volume in honour of Arthur Spiethoff in 1933.

[3] Stützel 1958, Godley/Lavoie 2007, Barro 2008 122–168.

[4] Fullwiler/Kelton/Wray 2012 3, 5.

[5] F5ullwiler/Kelton/Wray 2012 8.

[6] Werner op.cit., Ryan-Collins/Greenham/Werner/Jackson 2012 22–25, 103, 139, Jackson/Dyson 2013 pp116.

[7] Werner 2005 pp185, Huber 1998 pp224.

[8] Hudson 2006.