Modern Monetary Theory

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Modern Monetary Theory (MMT) is a neo-Chartalist, heterodox economic theory primarily aimed at developed countries that issue their own free-floating currency (a, "sovereign currency"). The theory states developed countries with a sovereign currency cannot involuntarily default on their debt, that any inflation in those countries from federal deficits would have more to do with the amount of real resources available than the fact that a deficit exists, and that the ultimate role of taxes is to create demand for government work. MMT is a variant of Post-Keynesian economics, and differs from some other Post-Keynesian schools in that it focuses more on fiscal policy as determined by national legislatures, rather than on bank loans or private sector debt.

MMT's proponents generally do not regard their theory as a political agenda, but more of a descriptive economics theory which people may apply however they please. However, the primary policy agenda of MMT proponents today tends to be a guaranteed-jobs program run by the government to get as much of the working age adult population into wageslavery as possible. MMT proponents are also notably usually against a UBI, or other high amounts of, "helicopter money", as they argue such a thing would create a collapse of the dollar if continuously adjusted for inflation.

While MMT has often been criticized as lacking institutional support, many institutions have been getting increasingly obsessed with appropriating "MMT" as a catch-all snarl word to refer to literally anything even remotely ambivalent towards debt as "MMT".

Basic views

• A country that issues its own currency (either via minting coins, printing paper money, or crediting bank accounts) can't default on its debt. It can always issue more money..
• Taxation destroys money, and therefore reduces demand-pull inflation (too much money chasing too little goods).
• Inflation is not caused by an increase in the money supply, and is caused by a variety of other factors. (Rejection of the Quantity Theory of Money)
• The money supply is endogenous and is controlled by the demand for loans. Therefore, the central bank is incapable of controlling the money supply.
• The central bank controls the interest rate.
• The rejection of the money multiplier.
• There is no direct relationship between unemployment and inflation. (Rejection of the Phillips Curve)
• There is no natural rate of interest, and there is no natural rate of unemployment. (Rejection of the Expectations Augmented Phillips Curve)
• The free market has no tendency towards equilibrium/full employment. (Rejection of the Invisible Hand theory)
• Rejection of Homo Economicus.
• Rejection of the crowding out effect. Government spending instead creates a crowding in effect that spurs business growth.
• The interest rate should be zero.
• Like other Post-Keynesians, MMT uses stock flow consistent models.

Explanation of views

Rejection of the Quantity Theory of Money

MMTers reject the Quantity Theory of Money (QTM), which states that MV = PY, where M is the supply of money, V is the velocity of money (how often money changes hands), P is the price level of money, and Y is the total output of the economy. It also states that M is only controlled by the central bank, V is constant (because people will develop consistent spending habits), and Y is at the full employment of resources. MMT rejects all of these assertions. MMT believes that the money supply is endogenous, and thus non-central banks can create and destroy money via loans/credit/debit at will, therefore controlling M via the central bank is meaningless. V can't be constant because of the paradox of thrift and people may change their spending habits over time. Y also may not be at full employment, especially in a recession. The idea that money printing causes inflation comes from believing the QTM. If V and Y are constant, then changes in M directly cause changes in P, and so an increase in the money supply causes an increases in prices..

MMT's theory of inflation

Here is a simple equation for MMT inflation: g_P = (g_w - g_Apl)s_W+(g_U-g_Q)s_U. g represents the growth of the subscript variable, P represents price level, w represents the wage rate (how much workers are paid), Apl is the average productivity of labor, s represents the share of the national income of the subscript variable, W represents the amount of money paid to workers (wage rate * time worked), U represents the gross profits of capitalists (business owners),and Q represents the total output of the economy. As seen an increase in the growth of prices (inflation) can be caused by an increase in the growth of worker wages, a decrease in the growth of average labor productivity, an increase in the growth of capitalist profits, or a decrease in the growth of total output.

MMTers argue that the inflation the USA saw after getting off the gold standard was not due to inflation due from government spending and demand-pull inflation. They argue that 1970's US price inflation was mostly caused instead by cost-push inflation from the OPEC monopoly which the US government allowed to affect their own domestic prices by not using long-term oil contracts with foreign countries. MMTers argue that US inflation after the 1970s was also almost exclusively cost-push inflation, the government allowed to occur, including through the government permitting enormous business monopolies and increased land scarcity in certain areas. Therefore, as MMTers don't see current inflation as coming from government spending, at all, US income taxes are currently unnecessary from an inflation perspective according to MMT. MMTers, like other Keynesians and most of the world, see mild inflation as desirable in order to increase consumer spending.

There's another part to MMT's theory of inflation, and it involves a concept called Monetary Sovereignty.

Monetary sovereignty

Countries that have monetary sovereignty have the following characteristics:

• The government issues currency and requires taxes to be paid in that currency.
• The government's currency is neither pegged to a resource nor another currency. The currency operates via a floating exchange rate (The value of the currency is determined via supply and demand relative to other currencies)
• The government owns minimal debt in foreign currency.

Countries that have monetary sovereignty will only experience dangerous levels of inflation when the government attempts to increase deficit spending when the full capacity of resources within a monetarily sovereign country are used. This does mean that developing countries may be constrained by inflation, as they often won't have enough resources and will need to import them at the cost of borrowing from a foreign currency. However, countries like the U.S, Japan, U.K., China, and Australia are capable of maintaining high deficits that by themselves, won't cause inflation. Additionally, it is possible for all of these countries to pay back any debt they owe.

Countries that don't have monetary sovereignty are financially constrained

• Countries that don't issue their own currency are incapable of paying off their own debt. A good example of this are the countries within the European Union. When the Great Recession happened, E.U. countries were unable to pay back their own debts without outside assistance. This led to the European Debt Crisis.
• Countries that peg their currency are vulnerable to price shocks. A great example of this is Venezuela. Venezuela pegged their currency to the U.S. Dollar and they were highly dependent on oil exports. Unfortunately, when oil prices dropped, the value of Venezuela's currency also dropped as oil exports were no longer as valuable to sell in the U.S. dollar.
• Countries that own foreign debt in other currencies cannot repay that debt instantly without their currency losing value. For example, after World War I, the Weimar Republic gained a lot of foreign debt. They tried to instantly repay that debt, but were unable to and eventually defaulted. Eventually production slowed, devaluing the currency, and forced to still pay the debt, the Weimar Republic started printing money. This increase in the money supply didn't really lead to an increase in productivity, and so it devalued the currency even more.

Summarizing and combating inflation

Essentially inflation can be caused by one of six things: an increase in growth of worker wages, a decrease in growth of worker productivity, an increase in growth of capitalist profits, a decrease in total output, a currency peg, or excessive debt in foreign currency. Therefore, policies to combat inflation can be derived and include:

• Wage and income policies to combat the increase in growth of worker wages
• A Job Guarantee and improved education to increase the growth of labor productivity
• Higher taxes on capitalists to combat the increase in growth of capitalist profits
• More government spending on infrastructure and technology development to increase total output of the economy
• A floating exchange rate to prevent price shocks from a currency peg
• Debt relief on countries that owe debt in foreign currencies

Essentially inflation becomes a political problem. Some of these policies may be politically hard to implement. For example wage and income policies are generally despised by workers and unions (since they prevent the growth of worker wages).Capitalists will probably try to shoot down higher tax policy. Another issue is that each of the policies above only really works for a specific inflation cause. If the wrong policy is used to fight inflation, then inflation will continue to occur. For example, in the 1970's, the Nixon administration attempted to fight inflation using wage and income policies (known as the "Nixon Shock"). However, the inflation was actually caused by increases in labor costs due to supply shocks, so inflation continued to rise, and workers ended up getting hurt. Many of these supply shocks were due to large amounts of the male labor force being sent over to Vietnam... who knew that sending your workers to a foreign war (the U.S. had 500k troops in Vietnam at one point) means fewer products made at home, crunching supply and raising prices on the fewer products that remain on the shelves? Certainly not the Democratic and Republican Presidential administrations who both supported the mass wars. Ditto for Iraq and Afghanistan, not to mention that many of those sent to war died or became disabled, which meant they often couldn't come back and raise supply by doing what they did before.

MMT vs. other economic schools

MMT vs. New Keynesians

Mitchell vs. Mankiw

A response from the conservative branch of the New Keynesian School came from the Harvard Professor and bestselling author Greg Mankiw, who berated MMT. According to professor Mankiw, MMT gained support in the world of politics despite its alleged academic irrelevance because it has a cool name and it gives easy answers that some politicians are looking forward to. Mankiw's analysis concludes that MMT advocates for inflation, and its proponents are just unaware of that:

“”I agree that the government can always print money to pay its bills. But that fact does not free the government from its intertemporal budget constraint. I agree that the economy normally operates with excess capacity, in the sense that the economy’s output often falls short of its optimum. But that conclusion does not mean that policymakers only rarely need to worry about inflationary pressures. I agree that, in a world of pervasive market power, government price setting might improve private price setting as a matter of economic theory. But that deduction does not imply that actual governments in actual economies can increase welfare by inserting themselves extensively in the price-setting process. Put simply, MMT contains some kernels of truth, but its most novel policy prescriptions do not follow cogently from its premises.

Prominent MMTer William Mitchell attempted to publicly engage with Mankiw after being contacted by him for input on a paper, but Mankiw cut off correspondence early; as a result, Mitchell had to argue with Mankiw indirectly, rather than in a continuing conversation/debate. One of Mitchell's main arguments was that Mankiw didn’t understand MMT rejects an accounting identity (the "GBC") which states inflation operationally limits the governments ability to purchase real goods and services.

MMT vs. Centrist New Keynesians

MIT professor and ex-IMF Chief Economist Olivier Blanchard said that MMT is “plain wrong” while discussing the problems and benefits of a public debt in a lecture, claiming, just like Mankiw, that MMTers don't understand the mainstream views on public deficit Blanchard wasn’t also impressed with the MMT views on Japan even if we consider them cherry picking:

“”The day on which Japan has to pay a positive interest rate on bonds, it will have to pay a positive interest rate on the money, otherwise people will not hold it, or there will be hyperinflation.

Latter on his Twitter account, Blanchard also claimed that the MMT idea that government spending is automatically financed by money creation is “both right, and utterly irrelevant"

Blanchard is not the only the only centrist mainstream economist with mild opinions over the public debt that criticizes MMT: the former US Treasure Secretary and ex-president of the Harvard University Larry Summers said that MMT is “fallacious”. and a “recipe for a disaster that violates the laws of arithmetic” . Summers stated that MMT is pretty much what governments in the UK, France, Germany and even the US tried to do at different moments during the 70s 80s and 90s with alleged failed results, adding that the valid opinion that government spending might help the economy in many cases was transmuted by MMTers into the idea that deficits are almost irrelevant, adding that appropriate fiscal stimulus is totally different than saying that all the government debts can be paid by printing money. Just like Mankiw and Blanchard, Summers also finds MMT views on inflation wanting.

MMT vs. Austrian economics

See the main article on this topic: Austrian school

MMTers argue that Austrian economics is merely a blueprint for a gold standard from an era already bygone. Individual Austrian school proponents like Bob Murphy have very mixed opinions on MMT, as Austrians share the opinion with MMTers that government is a violent imposition on people rather than a naturally peaceful phenomenon.

For example, in a debate Bob Murphy had with prominent MMTer Warren Mosler, Murphy argued that MMTers are "not wrong necessarily", and that their ideas encourage what Austrians consider government overreach or personal fiscal irresponsibility. However, Murphy would later go on to contradict himself on Mises.org, where he wrote:

“”Unfortunately, it seems to me to be dead wrong. The MMTers concentrate on accounting tautologies that do not mean what they think.

—Bob Murphy

MMT vs other Post-Keynesian

MMT vs. Palley

Prominent Post-Keynesian economist Thomas Palley panned MMT heavily quite a few times, claiming that "MMT adds nothing new warranting its own theoretical label. Instead, its over-simplifications represent a step-back in understanding.". According to professor Palley, MMT proponents "fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero".

Palley argues that MMT is wrong that money ultimately comes from the state and cites central banks as a possible counter-example. MMTers counter that, "banks are designated agents of government". This is a common area of disagreement between MMT and economists from others schools, for example this topic took up most of a debate between MMTer Warren Mosler and economist Michele Boldrin. MMT is "neo-Chartalist", and they believe money doesn't naturally arise from individuals peacefully, but is rather imposed on individuals. MMTers believe group violence (typically in the form of government) is the source of money, (note: not "value") rather than, "a tool invented peacefully to enhance natural barter", or whatever. Most MMTers believe that if inflation should ever show signs of rising during a public works program, it could likely be easily controlled by the government of a more developed country that uses the sovereign currency system, through explicit price controls, taxation, and/or simply slowing the program.

MMT vs. Baker

MMT proponents have been at odds with the prominent Post-Keynesian Dean Baker as well, including a few public debates. Their primary beef with Baker is over the government's ability to effectively provision resources for large-scale public works programs during economic booms when most of the country is already employed to begin with. MMT proponents are more dovish on the government's ability to, say, retrain large segments of the work force for a restructuring of the economy, whereas economists like Baker are more hawkish and warn such a thing would create too much inflation.

Spread of the theory

Academia

You likely won’t find any MMT supporters among the most well-known economics scholars. However, the theory appears to have gained a little traction among a few professors of economics at some state colleges; among these, its physical capital is arguably the University of Missouri-Kansas City's Center for Full Employment and Price Stability. Another major MMT stronghold is Bard College's Levy Economics Institute- which Prof. Hyman Minsky, a major influence on MMT, taught at.

While both of these schools are considered mediocre, Bard College is more relevant overall. Close to 0 currently prominent, academic economists agree with MMT . The most prominent economist outside the MMT lecture circuit who supports the theory seems to be James Galbraith.

Outside the US, a major MMT center is the University of Newcastle, Australia, where Bill Mitchell, one of the founders of the theory, and Martin Watts, teach.

Politicians

See the main article on this topic: Alexandria Ocasio-Cortez

The most publicized kinda-sorta-maybe-ish MMT supporter currently in US government is Congresswoman Alexandria Ocasio-Cortez (D-NY), who has stated Modern Monetary Theory should be "a larger part of our conversation." This not-quite-endorsement is spun by AOC's political opposition as a commitment to radical economic ideas intended to punish the wealthy and reduce the United States to the economic status of "third-world" countries.

Criticism

Accusations of not addressing inflation enough

Monetarism vs. MMT

According to MMT, inflation generally does not result from government spending in, "monetarily sovereign nations", when there is spare productive capacity, and that the size of the total supply of money is not a chief determinant of inflation. According to MMT, the availability of real resources in proportion to spending is the determinant of inflation from government spending ("demand-pull inflation"). MMT also agrees with Keynesians that cost-push inflation, or inflation as a result of business monopoly, cartel, production price-increases etc, exists.

Milton Friedman disciples, who often call themselves 'monetarists', usually assert to the contrary, that the size of the money supply in proportion to economic output is the chief determinant of inflation. Friedman and his disciples also do not believe cost-push inflation exists, which is convenient for business monopolies.

MMT does not hold a mainstream monopoly on the rejection of monetarism, or the rejection of the idea that large money growth necessarily causes inflation. In fact, monetarism has fallen out of academic favor in general, even though the microeconomic New Keynesian school is still academically dominant.

“”Monetarism has fallen out of favor because, among other things, it has been shown that neither basic assumption of the quantity equation holds—V is not constant and the real economy, Q, is affected by changes in the money supply, M.

—Microeconomic Theory Old And New: A Student's Guide, by John Gowdy

Debt hawks vs. MMT

According to Professor Wray, the most important conclusion of Modern Monetary Theory is that:

“”(...) the issuer of a currency faces no financial constraints. Put simply, a country that issues its own currency can never run out and can never become insolvent in its own currency. (…) [F]or most governments, there is no default risk on government debt.

—Professor L. Randall Wray

Another common criticism regarding MMT is the belief that money growth is not sustainable over the long term and is an indicator of incoming hyperinflation and/or federal government default.

A quick look at Japan and the fact that it's had a large growth in the money supply since going off the gold standard, and has been running a larger debt/GDP ratio than most countries for decades, and has been battling deflation for decades disproves this argument. It's safe to assume therefore that, "large growth of the money supply", does not necessarily lead to inflation or government default. This is a form of empiricism that proponents of this critique dislike, as they are not fans of the real world. Debt/deficit hawks may consider Japan or similar countries to be examples of cherry picking, due to the history of countries with pegged currencies inflating their currency by increasing the money supply. However, MMT only has the most dovish federal deficit position for developed countries that issue their own free-floating currency and have a trade deficit. This includes countries such as Japan, the UK, Canada, and the USA.

Price control wariness

MMT disciples say that:

• The government can prevent inflation during full productive capacity by seizing the means of production taxing the rich and controlling the prices.

• Economies typically operate with spare productive capacity.

On the other hand, MMT's critics point out that its proponents fail to provide evidence to any of their points, instead pointing to thousands of years of failed price setting as "evidence". MMT proponents often do prescribe explicit price setting during times when the government spends massively on extensive public works programs, while also arguing that in modern countries with a "sovereign currency", the government itself is always the price setter, whether people like it or lump it.

MMT doesn't apply much to countries that are still developing

MMT as a prescriptive theory is, simply put, about as wrong for third world countries as the ideas of Murray Rothbard and Walter Block are for money. Prominent opponents of MMT like Hillary Clinton and anarcho-capitalists often cite developing countries like Zimbabwe and Venezuela as examples of how large government deficits do not work (in their minds) for developed, first-world nations.

Argued as too conservative on human nature

UBI proponents, left-wing small government advocates, and communists, sometimes argue that MMTers believe too much in traditional wage-work being necessary for human happiness. According to the MMTer Warren Mosler, nothing would ever get done without a government forcefully making people work, often enacting a thought experiment where he tells the audience to clean the lecture hall after his talk, and asserts there are no volunteers before pretending there are armed gunmen waiting outside should the audience not collect his business cards from him as payment for cleaning the room. Mosler simply asserts that grown adults avoid work naturally, but never provides evidence for the assumption. Contradicting himself, Warren Mosler has also acknowledged that many tribal societies have achieved, "full employment", without traditional wage-work or a state for thousands of years.

Similarly, the MMTer Stephanie Kelton was in a few debates with UBI proponents and was accused of conservativism by the UBI proponents for assuming that people have a natural tendency to avoid traditional work. Kelton did something of an apology saying that the job of an economist is to increase employment, and she didn't argue further with the UBI proponent on that point. Stephanie has at times tweeted insinuating that a lack of traditional wage labor leads to drug addiction and despair, while not providing sufficient evidence for this being a natural, human response to a lack of traditional work.

Argued as an elaborate workfare excuse

Liberal columnists such as Matt Bruenig argue MMT is a sophisticated excuse for meritocracy, wageslavery, and workfare due to MMT's aversion to handouts in favor of regular traditional work through a national jobs program. While conservatives deride MMT as a "free lunch", many left wingers point out MMT is in fact a, "costly lunch", and too much for them. Left-wing critics of MMT bring up 20th century economist Hyman Minsky being a primary influence on MMT, and Minsky's obsession with traditional work over a transition away from such. Minsky, for example, once derided government food programs as, "overly sentimental" and to be done away with.

The Calvinball problem

Some MMT critics state that they are told that they simply don't understand MMT. When critics refute one aspect of MMT, MMT proponents will respond by saying that the critic hasn't understood MMT enough. Paul Krugman has coined this the "Calvinball" problem.

Controversy over the origins of money

Adam Smith's - a father of the "free market" - economic theory is often credited with popularizing a theory that money arose out of inefficiencies of "natural", "barter economies". This is the mainstream narrative about money origins. MMT (among others) argues that this story is entirely wrong.

A number of anthropologists, including Caroline Humphrey, have made the argument that no example of a pure and simple full-fledged barter economy in the sense of a crude proxy for modern money as Adam Smith formulated, has ever existed, even in the undeveloped world, and is entirely a hypothesis without evidence.

“”No example of a barter economy, pure and simple, has ever been described, let alone the emergence of money… . All available ethnography suggests that there has never been such a thing.

—Anthropologist Caroline Humphrey

An academic argument against Adam Smith's conception of money in, "The Wealth of Nations", was summarized by Randall Wray, an MMTer, in an academic paper called, Introduction to an Alternative History of Money. In his academic texts, Wray borrows from 20th century economics texts specializing in the prehistory of money from economists including Gunnar Heinsohn, Otto Steiger, David Levine, George Dalton, as well as the aforementioned anthropologist Caroline Humphrey.

Heinsohn and Steiger (1983) argued that credit/fiat money predated commodity money, and that the unit of account function of money predated money as medium-of-exchange or payment, in other words, that money did not develop out of primitive "exchange/barter".

MMT also cites George Dalton, an internationally known expert on the economies of Third World countries as well as pre-industrial societies, who argued that primitive barter exchange was not market exchange “without money” and that the primitive “monies” do not emerge from the reduction of transactions costs in the exchange process.

Keynes himself argued that post-civilizational money was Chartalist, but not pre-civilizational money, differing from MMT in origin stories, but not modern conclusions on Chartalism.

Barter economy assumes that individuals “organize their activities with the idea of marketing in mind”, as they make things that they don't need in order to satisfy a barter. MMT and various non-MMT economists differ from Keynes and argue that pre-civilizational exchange not only was not barter, but wasn't a market and instead took the form of gift economies.

Cato Institute

The right-wing libertarian Cato Institute has explicitly pushed back on this narrative from Randall Wray, obsessing over a book by a 21st century anthropologist named David Graeber who had summarized much of the anti-Adam-Smith conception of the origins of money. In their critique, Cato asserted that absence of evidence is not evidence of absence and that the existence of gift economies doesn't nullify the barter-origin-story as articulated by Adam Smith.

Direct criticism of MMTs story of the origin of money seems to be sparse and also hyper-focuses on Graeber like Cato does. It's worth noting that MMT proponents do not cite Graeber in their academic literature (although Randall has acknowledged him in a lecture once) and Graeber is a much later thinker than those who MMT cite in their literature. Another person who has piled onto the Cato criticism of MMT, while referencing Cato, includes the blogger Jeff Hummel.

See also

• Post-Keynesian economics