MMT for Dummies
|Edward Harrison||Mar 1, 2019|
In the last few weeks, I’ve been seeing a lot of buzz about Modern Monetary Theory aka MMT. And most of what I’m seeing is reductionist to the point of absurdity. When I see critics of MMT talking about it, they’re mostly using MMT as a shorthand for saying ‘unbridled fiscal expansion without any concern for deficits’. I think this has been a very poor and uninformed debate. My guess is that it’s been sparked by the public policy views of people like Alexandria Ocasio-Cortez, given the objections some people have to her as a political figure. I could be wrong. But, as someone who’s been following this evolving conversation for several years, I thought I’d tell you how I see it.
My introduction to MMT
Before I start in, let me tell you where I’m coming at this from. I have a lot of friends in the MMT community. And I have great respect for the leading economists. But, I am on the outside looking in.
About a decade ago, my friend Marshall Auerback introduced me to the MMT crowd. The first economist he introduced me to was Randy Wray. And the way I remember it, I was pretty rude to Randy about what he was saying. I’ve told Randy this subsequently. And he’s told me he didn’t think I was rude at all, which I appreciate. But, in my mind, what he was saying was a shock. And I was rude. It’s only when I looked at what he was saying with an open mind that I began to process it and critique it objectively.
And I ended up liking a lot of what I heard. While I would never call myself an MMT adherent, I do think MMT does a pretty good job of outlining the various pieces of the macroeconomy and the constraints on fiat currency issuing governments.
My biggest criticisms of MMT are three-fold:
- I don’t think MMT takes enough into account the political and legislative realities of using fiscal policy to control inflation. I know the trauma of the 1970s is long gone. But 15, 8, or even 5% inflation can really hurt people, especially if wages lag.
- MMT’s adherents often sell MMT as a prescriptive school of thought rather than a descriptive one. They come out of the gate with all sorts of big spending policy proposals they say are based on MMT. Well, that loses half of the audience right from the start – even me! People need to understand how the economics fits together first. Then they can buy into the prescriptions. And even then, they may not buy the policy prescriptions MMT adherents hawk. For me, MMT is not about policy prescriptions, it’s about a description of how an advanced economy works for a fiat currency issuer.
- Finally, its acolytes can be pretty ‘rabid’ in an almost cult-like way. It’s disconcerting because, if you criticize MMT, a whole swarm of what almost seem like MMT groupies comes and attacks you. New Keynesians say they hate engaging with MMT economists, even though they share a Keynesian kinship, because the economists’ online followers are often aggressive and mean-spirited.
So that’s my beef. Here’s my dummies guide.
Let me start here. Randy wrote a piece last January, whose introduction started like this:
In recent years an approach to macroeconomics called Modern Money Theory (MMT) has been developed. In my view, it is a synthesis of several strands of heterodox—largely Post Keynesian—thought. It draws heavily on the work of Georg Friedrich Knapp, A. Mitchell Innes, John Maynard Keynes, Abba Lerner, Hyman Minsky, and Wynne Godley, to integrate the state theory of money, endogenous money, functional finance, financial instability hypothesis, and sectoral balance approaches. I would characterize it the way that Minsky (1977) characterized his own attempt at a synthesis: it “stands on the shoulders of giants.”
– L. Randall Wray, A Comparison of the Evolution of the Positions of Hyman Minsky and Abba Lerner, Jan 2018
So, in terms of MMT for Dummies, we can stop right there. All I’m going to use is:
- Knapp for “State money” or “Chartalism”
- Innes for “The credit theory of money”
- Keynes for macro
- Lerner for “Functional finance”
- Minsky for private credit
- and Godley to describe how the sectors of the economy interact
Basically, one can boil it down to those six economists and those six areas. Let’s see how quickly I can do that.
John Maynard Keynes – Macro
Abba Lerner – Functional Finance
Knapp – State Money
Innes – Credit Theory of Money
Minsky – Private Credit
Wynne Godley – Sectoral Balances
In terms of who I find most compelling of MMT’s economist forefathers, this is my rank order – at least for now:
Let me know if that was useful.
Liked by Edward Harrison
Just saying I came up with what is now MMT back in 1992 and wrote Soft Currency Economics in 1993 without having read:
or any other writings related to MMT’s contributions.
I introduced it to the academic community in 1996 who then looked back and associated it with some of the writings of those economists.
Yes, Warren, you are The Godfather, the progenitor of MMT. To those who say it is ‘kooky’ or gibberish, I say look at these economists who were saying exactly the same things as you and your colleagues. The specialness of your creation of MMT is in putting these concepts together into a coherent framework.
MMT White Paper
Click Here for the White Paper on Modern Money Theory