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Wednesday, August 17, 2016

Book Review: Diagrams & Dollars

Diagrams & Dollars: Modern Money Illustrated by J.D. Alt is a brief ebook that introduces the national accounts flow concepts used by Modern Monetary Theory (MMT). The book is written for a general audience, covering what is unfortunately the most non-intuitive parts of Functional Finance. The concepts are actually easily understood if they are taught properly, but are difficult to understand if you have been taught that the central government is just like a household.

Book Description

 J.D. Alt is an architect and author, and he produced the diagrams that are the heart of the book. As the book cover shown above indicates, he illustrates the money flows within the economy by drawing an analogy to hydraulic flows.

The ebook is quite short, and the price reflects this. This is one of the advantages of the ebook format; it is unclear whether it makes sense to have a 200 page paperback book to introduce some basic economic concepts. (Such short paperback are unlikely to make it into bookstores; one of the side effects of a low page count is that the name of the book cannot fit upon the book spine. This makes the book almost unsalable if the front cover is not exposed to the reader, while publishers pay a lot of money to get their books displayed with the cover out instead of the spine.)


This book is aimed at non-economists. The concepts are introduced by stepping through a number of diagrams, each adding new features. Since people are not used to thinking about how flows work in an aggregated economy, this has to be done at a relatively slow pace.

Although I am presumably a more advanced reader, my feeling is that the text should be understandable to readers with very little background in the subject. Conversely, people that consider themselves experts on the topic might find the development too slow. At the same time, I could think of a few alleged "experts" on government finance who probably should have read this book before they started opining on the imminent default of various developed countries.

For readers who have stumbled upon my articles and found them to assume more background knowledge than they have, Diagrams & Dollars would be good place to start learning about the subject. (Although I try to keep most of my writing at what I call an "introductory" level, that is based on the assumption that the reader has at least some familiarity with macroeconomic debates. For example, a junior analyst in fixed income with a non-economics background.)

Is MMT Correct?

The book does not bog itself down with hand-wringing discussions regarding the different schools of thought within economics. Instead, it presents the concepts following the MMT/Functional Finance line. This leads to policy conclusions that many people would find surprising (renaming the "National Debt Clock" the "National Savings Clock").

Since I am in the MMT camp, I obviously do not have a lot of complaints with the editorial slant. However, a reader who is unfamiliar with economics might wonder whether this MMT stuff is just some wacky cult, since other economists have wildly different conclusions.

Such a debate is beyond the scope of the book, and I would recommend that readers put aside such concerns at least until they absorb the basic concepts. The description of the monetary flows given by J.D. Alt are correct; the only real debates are about fairly arcane concepts. The credible anti-MMT arguments sound like, "Yes, the description of the budget processes are correct, but it does not take into account {insert complicated factor here}." (You do run into simple-to-understand objections, such as those raised by "hard money" advocates, but those obvious stories are also obviously incorrect.)

The correct way of looking at this is to absorb the Functional Finance (link to primer) party line, and then worry about whatever complication critics can come up with later. A good portion of my blog is slogging through the various reasons economists have invented to justify their predetermined conclusions. Needless to say, the complexity of the topics increase, and you start debating ridiculous things like the consumption preferences of infinitely-long-lived households. Luckily, that sort of nonsense is nowhere to be found in Diagrams & Dollars.

Concluding Remarks

Diagrams & Dollars is probably the most straightforward introduction to Modern Monetary Theory for general readers. More advanced readers will probably need to go to the textbooks written by MMT academics for treatments that take into account the other schools of thought regarding governmental finance.
(c) Brian Romanchuk 2016

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