MMT revisited

Simon Wren-Lewis’s recent post on why MMT is so popular makes a number of important points. The Twitter response to Simon’s post was fairly representative – to its credit, MMT has a committed community of online followers. I have written on MMT before, and have learnt a lot from online discussions with advocates, notably with Scott Fullwiler, who produced a legendary response to Paul Krugman on how banks work.

I am hugely sympathetic to much of what MMT has to offer, but inevitably I focus on weaknesses. I also think it is interesting in the context of the sociology of ideas. In particular, it intrigues me how a large number of highly motivated adherents flock to a fundamentally nerdy and technical school of economic thinking.

The defining ideas of MMT are the following:

(1) A theory of public finance, with advocacy that fiscal policy should dominate;

(2) A belief that money is a liability of the state.

Points (1) and (2) are importantly linked, and neither are particularly unique to MMT. The fundamental theory behind MMT is almost indistinguishable from that of the fiscal theory of the price level, advocated by textbook ‘classical’ economists, such as John Cochrane, and nobel laureate Chris Sims (with the caveat that they draw almost opposite policy conclusions).

In addition, MMT is a minor social movement in its own right. It has vocal followers. This is testimony to two things. Primarily, its explanation of public finance is brilliantly clear, and comes with catchphrases. It debunks important myths about the budget deficit in the US, which has obvious political appeal. And some of the leading lights in MMT also have the eccentric dogmatism necessary for leaders of movements.

What is the ‘MMT’ theory of public finance? It’s pretty much Milton Friedman’s and Abba Lerner’s, which is one reason Brad De Long and I are fans of MMT. The only budget constraint the government faces is inflation, because (in theory) governments can finance themselves by issuing bonds or by printing money. If bond markets were to go on strike, the central bank can finance the government.

This simple observation is extremely important and powerful. It immediately shows that simultaneously worrying about inflation being too low and engaging in ‘austerity’ is inconsistent, or less politely, dangerous and stupid.

I have addressed point (2) before, at length, and engaged in a detailed exchange with Randall Wray. The typical position of MMT is false: base money is not a liability of the state at book value. Were it true, it would undermine their thesis that the only budget constraint the government faces is inflation. If money is simply government debt, the constraint is default, not inflation. “Too many” liabilities results in default. “Too much” money creates inflation. In short, (1) is actually more convincing if (2) is false. When I read Randall Wray, who despite this is well worth reading, he also suffers from ‘money denial’, a widespread bias in the history of economic thinking which remains pervasive, based on refusing to recognise that money’s value resides in a network effect, and network effects are extraordinarily strong. To understand the value of money one must understand the economics of language, not taxation.

The problem with abandoning (2) is that it undermines an approach purely based on current accounting practice, and furthermore the assumption that accounting book values are ‘correct’. They’re not. Which is one reason why stock market values differ from accounting book values.

Simply analysing accounting entries makes the ‘economics’ of public finance very clear. And rhetorical simplification is a strength of MMT, pace Randall Wray who has a language of his own.

If you are an MMTer, you will know most of this. And one reaction to cognitive dissonance is varying degrees of irritation. That’s ok. The question you must ask is this: ‘Is MMT simply ANYTHING argued by four or five individual economists, or is it a distinct set of economic ideas?’ This confusion explains why when Simon Wren-Lewis and I state that MMT is institutionally contingent, MMT advocates often reply ‘no it’s not, because look at what so-and-so has said’. That serious MMT economists recognise that (1) is institutionally contingent is clear. But many adherents do not. And even the serious advocates rarely explain how the institutional contingencies affect the accounting.

In discussion, this distinction between MMT as a distinct theory of public finance, and MMT as a set of individual economists, repeatedly gets blurred. For example, when I point out that (1) does not hold in Greece, supporters of MMT say, ‘That’s wrong because Stephanie Kelton predicted the Eurocrisis’. Now, Stephanie Kelton is nothing less than a brilliant economist and communicator, in my opinion. Her diagnosis of the Eurocrisis is very insightful (similar in spirit to Charles Goodhart’s and my own), and I was unaware of this work prior to Nathan Tankus drawing my attention to it. But her diagnosis has little to do with MMT, unless it becomes very broadly defined as simply analysis of the institutional structure of monetary and fiscal policy. Being aware of the institutional contingency of (1) helps her diagnose the problem, as did her emphasis on market panic. But these are not the defining ideas of MMT, unless you believe that MMT is simply any economic view held by Stephanie. I would also add that the narrow analytical focus on deficit financing biases one from recognising that in the Eurozone there is backing of the sovereign by the central bank, but it is contingent on the outlook for inflation. That is why I argued that deflation in Europe would end the Eurocrisis. In other words, we need a framework that explains the crisis, and its end. In fact, the institutional separation of power is far more complex than the phrase “monetarily sovereign” suggests.

Finally, I am not a fan of the football team approach to economics. I prefer to derive utility from team adherence in sports. Why not in economics? To declare oneself a ‘keynesian’, ‘monetarist’ ‘Austrian’ ‘MMTer’ etc., is to declare oneself biased. This is John Cochrane’s obvious weakness. Anyone who has a prior adherence to a ‘school of thought’ in considering evidence, or advocating policy, is simply declaring a lack of objectivity.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

28 Responses

  1. Carolina Alves

    Here we are….essentially back to the debate of whether or not science/theory is free of biases or even ideology.

  2. Gary Anderson

    Well, do not know much about MMT but most money is backed by some sort of collateral. Broad money and central bank money are both backed by collateral, by bonds or a house, etc. There has never been much real unbacked fiat money issued. Unfortunately, the need for collateral is great, and most collateral is debt, ie, bonds. How that impacts MMT I would leave to economists.

    • Danny

      Ultimately fiat money is backed by force. i.e. you will be locked up if you don’t pay your taxes to the state which demands them paid in their particular currency.

      • Eric Lonergan

        “ultimately” – what does that mean in this context. You will be locked up for breaking any law. People use money voluntarily, and tax is one of many things they use it for. Nothing special about tax payment.

      • Danny

        We might agree that a successful currency issuer has significant power to command resources. There are obvious practical reasons for using a particular type of money (acceptability at the top of the list) that may give the appearance of being voluntary. Look at China closing down crypto-currency exchanges, they are enforcing choice of currency. Indeed the US secret service was conceived to enforce use of (real) dollars.

    • Clinton

      Wrong, Gary, wrong. Modern Money is backed by the issuer’s ability to enforce its value through taxation.

      • Gary Anderson

        According to Fed rule it is backed by collateral. Don’t know about other central banks. Eric, you are saying the Fed does not follow it’s own rules. Interesting.

      • Adrian Tistan

        I remember clearly from 2 years ago when the Greek criss was at its peak that ECB was in charge of assessing the quality of collateral Greek banks were obliged to provide in retorn for Emergency Liqiudity Assistance (ELA) from the national central bank. So at least there the base money (central bank reserves/liquidity) was backed by collateral.

  3. Steven Hummel

    My impression of MMT is mixed. I think they have the mechanics of money and its fiscal creation and destruction correct, but the stench of liberal orthodoxy still hangs around it IMO, and I am largely of liberal pedigree. What liberal and conservative orthodoxies need to cognite on is that wisdom in any area of life is the process of the thorough integration of the truths and only the truths of apparently opposing perspectives.

    I think the major conclusion to be drawn from MMT is that a directly distributive money system is possible….you just have to look closer at the workings of commerce and how they reflect the Start, Change and Stop process nature of the temporal universe itself. Finding the stopping/ending/summing points of costs and prices throughout the entire economic process and implementing monetary policy specifically at those times and places cuts through all of the complexity and myriad activities of modern economies.

    I am an innovator and extender of C. H. Douglas’s monetarily distributive theory Social Credit that I refer to as Wisdomics-Gracenomics and am compiling two books explaining those policy extensions and philosophical exegesis of its basic concept.

  4. EC

    It would be useful if MMTers and critics/partial sympathisers would discuss actual scenarios on day 1 and day 365 of a MMT government and anticipated outcomes, using historical precedents (hard, I know, given monetary policy has been used for so long)
    Philosophical talk about nature of money doesn’t help much.

    • Eric Lonergan

      I disagree. A key point myself, Simon Wren-Lewis and MMT agree on is that when there is a risk of inflation being too low, austerity is inconsistent and dangerous. A failure to understand this almost destroyed Europe.

      • EC

        I’m talking beyond a European stimulus to a generic, permanent MMT regime and the subsequent reactions and conditions of stimulus – be they bond markets, the institutional structures, checks and balances needed to introduce a ‘MMT government’ etc….
        All I’m suggesting is discussion of what the ideal scenario would look like and what happens. LIke your work btw!

  5. Danny

    Eric, I’m not quite sue what you mean when you say “too many liabilities results in default” can you explain how this would play out for one of our ‘monetary sovereigns’ e.g. US, UK, Japan. Would this not just be a political decision to default?

    • Eric Lonergan

      “Too many liabilities result in default” – A financial liability is an obligation to make a payment. If a individual or entity has “too many” liabilities is at risk of default. That is equally true of sovereigns. A treasury which directly controls the creation of base money – which is not the case in the US, UK, or Japan, which would all require legislation to put the Treasury in charge of base money creation – could choose to meet financial liabilities by printing money, that is true. The financial liabilities do not have to be those of the state. The money printing treasury could bailout private sector entities too. My point is that money and debt are very different phenomena, this is not changed by the fact that an issuer of money can in theory use this money to honour any nominal liability in that currency, buy any good or service in that currency, and transfer any sum of money to create nominal demand. This is a unique feature of money. Perhaps the opposite is even clearer: too little money results in deflation, too little debt …

      • Chris Cook

        There are liabilities…and then there are liabilities. I define a ‘credit instrument’ as a promise which is issued in exchange for value received from an acceptor and which the promissor will accept in payment for value which he provides in the future.

        Promises are the dark energy of the financial universe, since they rely upon trust. They are not a debt instrument, since there is no obligation on the promissor to deliver money/currency on demand or at a fixed date; it is not a forward (derivative) contract, since there is no obligation to deliver ‘money’s worth’ on demand or at a fixed date; and it is not an ownership ‘equity’ instrument conferring ownership of a productive asset.

        If you go back prior to the Bank of England you see that UK sovereigns became accustomed to funding their expenditure through issuing promises (recorded by the ‘stock’ portion of a split tally accounting record) which were returnable in payment for a tax or rental obligation.

        Naturally, such pre-payment of tax or rent required a discount, and the reality of sovereign funding through the issuance of ‘stock’ remains in the language to this day through the expressions ‘tax return’ (the accounting event at which the stock was returned to the Exchequer and matched against the counter-stock) and of course ‘rate of return’ (the rate over time at which promises could be returned – by the acceptor or an assignee cf real bills – against value supplied by the promissor and the discount could be realised).

        The most intriguing aspect of this original form of ‘stock’ was that the rate of return was not fixed (as in loan-stock or debt) or discretionary (as in joint stock) but constituted what is essentially a ‘swap’ of value (money’s worth) over time, since there is no compound interest involved. The surplus from the discount is simply divided by time to give the rate of return of capital and surplus.

        I believe that a complete and complementary political economy can be built upon the instruments (promises) and institutions (protocols) for risk and surplus sharing which will be familiar to anyone who understands Islamic finance but in fact pre-date Islam by millennia.

  6. MMTcraycray

    MMT people are cray cray. An MMT troll invaded a hard money blog a year ago and won’t go away.

  7. Effem

    MMT: far too much time spent debating the nature of money. Far too little time spent debating the nature of politics. Could the government ever be trusted to enforce an inflation target?

  8. Brad Culkin

    I think you’re on to something with that throw away line about network effects. Even when gold was money the gold houses storing same realized they could lend out more gold than they had by issuing paper receipts for gold payment on demand. As long as there was no run on this deposit aspect of the payment system life was good for these prototypical banks. It was the dual function of this lending of money into existence by banks superimposed on the same banks overseeing the payment system (a network of great power) that causes confusion over what money is then and now.

  9. Wayne J McMillan Sydney Australia

    Hi Eric, An interesting article. I honestly believe MMT is a cogent, coherent theory that deserves greater attention and serious consideration. When you say that MMT as a theory of public finance, with advocacy for dominant fiscal policy is institutionally contingent, could you elaborate more succinctly what you mean by this term?

    • Eric Lonergan

      Thanks Wayne – I agree. I really mean that the separation of power between the treasury and the central bank varies by jurisdiction. Governments can very rarely simply finance themselves by printing money, because central banks have varying degrees of independence, often protected by law.

      • Wayne McMillan

        Yes I agree. However any government that seriously wanted to have control over its economy would never agree to a separation of power between its Central bank and Treasury.

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