Modern Monetary Theory: Neither modern, nor monetary, nor (mainly) theoretical ?

by John Q on June 1, 2020

I’ve been working for some time on a review of the first full-length text based on Modern Monetary Policy, Macroeconomics by William Mitchell, Randall Wray and Martin Watts. A near-final draft is over the fold

Macroeconomics – Review

Voltaire once said of the Holy Roman Empire that it was “Neither Holy, nor Roman, nor an Empire”. Something similar might be said of Modern Monetary Theory, which has shot to prominence in policy debates recently. It is neither modern, nor genuinely monetary, and it is at least as much a set of policy proposals as a theory.
It might be thought that “modern” refers to the fiat money world in which we have lived since major currencies broke with gold convertibility in the 1930s (the final vestiges of the gold standard disappeared with the end of the Bretton Woods system in 1971). In fact, however, it is a kind of inside joke, motivated by this observation of Keynes

The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least. (Keynes 1930, p. 4, emphasis added).

As regards “monetary”, MMT is notable for its rejection of concerns about the money supply, and monetary measures of budget balance and public debt. On the contrary, its focus is on the employment of the real resources available to the economy. As Mitchell, Wray and Watts put it (p256, bold in original) “The real cost of any program is the extra real resources that the program requires for implementation”.

Finally, in theoretical terms, MMT offers little in the way of radical innovation. Rather it is a variant of traditional Keynesianism, drawing heavily on the functional finance approach of Abba Lerner (1943), and rejecting both the Hicks-Samuelson neoclassical synthesis and (even more strongly) the ‘New Keynesian’. The central point of functional finance is that, since the budget balance is a policy instrument, it is incorrect to think of taxes as ‘financing’ public expenditure. Rather, for any given level of public spending, taxes ensure that the budget balance is at a level (which may be a surplus or deficit in conventional accounting terms) sufficient to keep the economy in a stable equilibrium with full employment and low inflation.MMT incorporates some post-Keynesian ideas, such as Minsky’s (1982) model of financial instability, but makes little use of other post-Keynesian ideas, such as that of fundamental uncertainty.

MMT is also prominently associated with particular policy proposals, such as that for a Jobs Guarantee. This is a variant of the traditional Keynesian case for full employment based on aggregate demand management, but is not unique to MMT. Indeed, the first version of the Mitchell-Watts jobs guarantee (Mitchell and Watts 1997) proposal predated MMT and coincided closely with that of Langmore and Quiggin (1994), based on mainstream Keynesianism.

To complicate things even further, there are two versions of MMT circulating in popular discussion. The one we’ve been discussing so far, which might be called ‘academic’ MMT, is the macroeconomic theoretical analysis and policy program derived from a synthesis of Keynesian aggregate demand analysis, functional finance and support for public job creation to maintain full employment.

The second, which might be called ‘popular MMT’, or, more pejoratively, ‘vulgar MMT’, is a movement in which the statement ‘taxes don’t finance public expenditure’ is interpreted to mean that governments can increase spending as much as they like, with no need for an offsetting increase in tax revenue. This view was presented by pastor Delman Coates, speaking at the Third Modern Monetary Theory conference at Stony Brook University

I don’t want my community to have to wait until we tax Jeff Bezos and Amazon in order for us to have dignified jobs, Medicare for All, and a Green New Deal, or to have our roads and infrastructure rebuilt in America.

The relationship between academic and popular MMT is complex. On the one hand, economists who espouse MMT understand that the ‘free money’ view is incorrect. On the other hand, they favour a more expansionary fiscal policy, which implies at least some increase in expenditure relative to taxation. Moreover, like most people who find themselves leading a popular movement, they find it more appealing to criticise the errors of their opponents than those of their supporters.

The result in many cases is a ‘motte and bailey’ rhetorical strategy in which MMT advocates make strong statements which sound as if they match the popular view, but retreat to a less interesting but more defensible position (the ‘motte’ in the medieval castle that gives rise to the analogy) when challenged.

With all these complexities in mind, the publication of Macroeconomics by Mitchell, Wray and Watts is a welcome development. At more than 500 pages in length, it is both an introductory textbook and an exposition of the central ideas of MMT. The task of reviewing the book raises many questions, of which this review will address three?

First, how well does the book perform the role of an introductory textbook? Second, how does it illuminate the differences between MMT and the standard version of Keynesianism ? Third, what position does it take on the gap between academic MMT and the popular ‘money for nothing’ view.

Considered as a textbook, Macroeconomics does a good job on the basics: explaining what the subject is about, introducing the concepts behind macroeconomic statistics and setting out the Keynesian aggregate demand framework which is the basis of the distinction between macroeconomics and microeconomics. Index numbers, labour market statistics and the national accounts are all covered well.

There is also plenty of historical context, including discussion of the development of capitalism and of economic theory. The presentation is far from neutral, with a sympathetic treatment of a variety of heterodox schools of thought, and consistent criticism of neoclassical orthodoxy. But this is still preferable to the ahistorical treatment common in many introductory textbooks, where the relatively short-lived consensus that prevailed from the early 1990s to the GFC (Keynesian short run, classical long run, monetary policy as the primary tool of macroeconomic management) is presented as if it were scientifically established truth, with no intellectual history.

The theoretical presentation here is, in most respects, a standard presentation of Keynesianism, as it was generally understood before the emergence of the Phillips curve, which generated a long and ultimately futile debate about the existence of otherwise of a long-run trade-off between unemployment and inflation. Having argued elsewhere that macroeconomics has been on the wrong track since 1958 I sympathise with this approach, at least in an introductory text.

The emphasis throughout is on the case where, in the absence of government action, the economy is substantially below full employment. This is evident, for example, in the presentation of the macroeconomic demand for labour (p212) with a graph in which there is no money wage consistent with full employment (the graph line is cut off just above the zero wage line, still far from full employment).

This focus is consistent with the primary criticism of the Hicksian IS-LM framework, based on the claim that the money supply is endogenous and not controllable by policy. This leads to the view that ‘the LM curve will be horizontal at the policy interest rate’, that is, that the economy is always in a liquidity trap.

Keynesians have long been dubious about the capacity of monetary policy to stimulate the economy out of a low-employment equilibrium – the phrase ‘pushing on a string’ expresses the traditional view on this. The continued appeal of the IS-LM approach rests largely on the observation that, over a wide range of conditions monetary policy can be effective.

Most obviously, contractionary monetary policy is highly effective in reducing what is seen to be an excessive, and potentially inflationary, level of economic active. Often, indeed, it is too effective – excessively contractionary monetary policy was the primary cause of the early 1990s recession in Australia. It isn’t made really clear how this experience fits with the model presented here.

Finally, how do MWW respond to the idea that, given functional finance, governments can spend as much as they want without increasing taxation. Their answer (p323) is entirely in line with mainstream Keynesianism.

Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.

Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.

Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.

MWW go on to suggest (p 325) that the government’s fiscal balance should be set equal to the value of the current account deficit at full employment. This formulation takes the income-expenditure identity used by advocates of the ‘twin deficits hypothesis’ (correctly criticised by MWW) and inverts it.

Overall, then, the position advanced by MWW is that of traditional Keynesian economics, with some distinctive presentational features and policy proposals. Anyone looking for a defence of the claim that we can have a Green New Deal, or some other large-scale expansion of public spending, without any increase in taxation, will be disappointed.

On the other hand, the authors miss the opportunity to set their own followers straight on this point. While the errors of orthodox economists are pointed out in the sharpest terms, the criticism of the idea that taxation is unnecessary is brief and anodyne. The result is that we are likely to see a continuation of ‘motte and bailey’ rhetoric for some time to come.

Overall, this text would work well for a course taught from the MMT perspective, and would provide a useful counterpoint to the standard text for a mainstream course. A more advanced book, giving a comprehensive treatment of the relationship between the various flavours of MMT and of Keynesianism would be a valuable followup.



Chris Chappell 06.01.20 at 12:46 am

You mention ‘MWW’ towards the end — is this a typo????


otpup 06.01.20 at 1:05 am

In terms of US politics, saying there is no budget constraint on spending (even if there is a real-resources/inflation which may require taxation and other policy responses) is pretty radical stuff (even if supremely fact based).
One implication of this (again of fairly radical impact) is that policy which promises ultimate rationalization and efficiency (such as single payer health system) are not as inherently risky, in their short term effects, as even the Warren wing of the Democratic party would like us to believe.
As for the GND, even if inflationary to a disruptive degree, it may also preserve the human species and so considered on appropriate time, all the macroeconomics categories may have little relevance. What is the opportunity cost of survival and its opposite?


Chris Mealy 06.01.20 at 1:32 am

As an original research project MMT hasn’t added much, but as an antidote to Pete Peterson deficit scaremongering conventional wisdom it’s been incredibly successful, and I am grateful for that.


John Quiggin 06.01.20 at 1:32 am

MWW = Mitchell, Wray and Watts


John Quiggin 06.01.20 at 1:36 am

I should mention, for CT readers, that “motte and bailey” has become the accepted term for what John H more memorably called “the two-step of terrific triviality”.


J-D 06.01.20 at 1:53 am

The result in many cases is a ‘motte and bailey’ rhetorical strategy in which MMT advocates make strong statements which sound as if they match the popular view, but retreat to a less interesting but more defensible position (the ‘bailey’ in the medieval castle that gives rise to the analogy) when challenged.

I think you’ll find, if you check, that you’ve got that the wrong way round. The highly defensible medieval castle of the analogy is located on the motte; the less defensible bailey surrounds the more defensible motte.


John Quiggin 06.01.20 at 2:07 am

@6 Fixed now, thanks! This is one of the reasons I love blogging.


Brad Delong 06.01.20 at 5:21 am

One thing I wouldn’t stress: MMT has a… strange & naive trust in the efficiency of markets. In MMT, if you shift to an unsustainable fiscal policy there is an immediate reaction in the price level in the price level & the inflation rate, as investors frantically try to move their wealth out of government bonds and into currently produced goods and services.

This is problematic unless you are a truly efficient market fundamentalist…


Larry Hamelin 06.01.20 at 7:03 am

Excellent review. I’m thinking of using MWW for my principles class.

However, I’m not sure how you get to what you call “vulgar MMT”. I don’t read Coates’ statement, “I don’t want my community to have to wait until we tax Jeff Bezos,” as implying that “governments can increase spending as much as they like, with no need for an offsetting increase in tax revenue.”

Instead, I read that statement as emphasizing the standard MMT doctrine that spending logically and operationally precedes taxation: we don’t need to wait for tax revenue to spend on socially useful projects. I checked the New Republic article you linked to, and nothing additional there seems to support your interpretation.

All of the presentations of what you call “vulgar MMT” that I personally have read (and I’ve been reading about MMT from nearly the beginning of my undergraduate education) have come from MMT’s detractors, not proponents.


Kromhout 06.01.20 at 7:43 am

Hi John,
Thanks for this, the fights over MMT have often been confusing, perhaps at least in part to this medieval two-step…

I haven’t been following these debates that closely, but to me MMT (perhaps I’ve only encountered the vulgar versions) also appeared to be characterized by an ‘optimistic’ view of the constraints imposed by government debt, and by support for an activist role for central banks, arguing in favor or the monetisation of government debt and the use of various kinds of ‘helicopter money’. Are these prominent features of MMT in this textbook?

Hailing for a small Eurozone economy, I’ve also had the feeling that MMT’s theoretical/policy ideas are highly US-specific, and I wonder to what extent the textbook pays any attention to countries that do not trade and borrow (mostly) in their own currency, that are very open (capital & trade), and/or which are constrained in their (direct) control over monetary policy?


afinetheorem 06.01.20 at 7:46 am

I still don’t follow. Recall the famous Krugman v. Kelton debates on what exactly MMT means. If MMT just means “government spending that employs real resources which are otherwise idle, for aggregate demand or other reasons, is noninflationary and hence beneficial” – I mean, is there literally any macroeconomic theory that does not contain this idea? Have we solved the problem that even in recession, certain types of real resources will nonetheless be constrained, hence there is still inflationary pressure? Do we have a proper theory of why these resources are idle, beyond “lack of aggregate demand”? There is a reason we moved to microfoundations!

More broadly, is there literally anything novel here beyond “if real resources are idle, in the long run, and if government demand is assumed to be able to hire them productively, we should do so by printing money and it won’t be inflationary”? I mean, I agree with that, but so does anyone. The problem are the “ifs”.

Even more of an issue are the strange conflation of monetary and fiscal policy. Printing money is expansionary, whether done by the monetary authority “in order to” move rates, or on the order of the exchequer, to monetize debt. In practice, what is the difference? Basically, the time horizon. If the Fed cuts checks, it creates reserves which pay variable short-term interest. If the government cuts checks, it incurs debt which pays fixed long-term interest. At current rates, who really cares. Both are expansionary, even if one is “monetary” and one is “fiscal”. Pretending that it matters whether the debt is monetized or not is first-order – well, it makes no sense.

Finally, the whole “mainstream economists” versus “MMT” framing which these folks use. It’s so off-putting. Write a damn model, and explain how what you’re doing maps into well-understood concepts, and publish. This is how science proceeds. Because of its political valence, and inexplicable popularity among the blog/twitter/media set, many economists have spent far too much time trying to figure out what the heck these people mean. Paul Krugman, neither an idiot nor a right-winger, called it “Calvinball” last year when he was trying to get straight answers to trivial questions. If, in fact, the theory is just old-school Lerner-type Keynesian economics, we have many critiques, theoretical and empirical, at the ready. But, suffice to say, this review does not at all convince me there is enough actual content here to be worth the trouble…


MisterMr 06.01.20 at 8:23 am

So what is the difference between MMT and Reagan’s “deficits don’t matter”?
Or MMT and various top marginal income tax cuts performed by right leaning governments?

There is this idea that “keynesianism” is a leftish thing, but if by keynesianism we mean government deficits the evidence is quite dubious, right leaning governments often run large deficits because they want to cut taxes.

So in order to explain this difference, one has to pose the question in terms of different effects on demand between spending increases and tax cuts, which presumably depends on different ex ante saving preferences between different income groups.

But if this is the case, one could also reach full employment by taxing a lot and spending a lot, without structural government deficits.


J-D 06.01.20 at 8:39 am

… The task of reviewing the book raises many questions, of which this review will address three?

First, how well does the book perform the role of an introductory textbook? Second, how does it illuminate the differences between MMT and the standard version of Keynesianism ? Third, what position does it take on the gap between academic MMT and the popular ‘money for nothing’ view.

I think the question mark after ‘three’ should be a full stop while the full stop after ‘view’ should be a question mark.

More substantively, when you begin by indicating that the review will consider three questions, I’m all set up for the body of the review to take up each of those in turn. The paragraph beginning ‘First’ indicates where you’re taking up the first of the three, and the paragraph beginning ‘Finally’ indicates where you’re taking up the last of the three, but there isn’t an equally clear indicator of where you’re taking up the second question.


John Quiggin 06.01.20 at 8:57 am

Larry @9 That helps me to clarify the point I was trying to make. In the MMT framework, expenditure logically precedes taxation. But for practical purposes, the two need to be close together in time.

I don’t think the speaker I quoted meant something like “Let’s do the Green New Deal now, and tax Bezos next week”. If you’d ever dealt with vulgar MMT advocates you’d know that, as with Reagan fans, the right time for a tax increase is “never”.


Peter T 06.01.20 at 10:13 am

If you want to talk about the link between money and resources, you have to have some firm understanding first of what resources might be mobilised. Censuses, production stats and similar provide this. Then you need an understanding of the various linkages (eg that in the 40s coal enabled power, steel, transport and domestic heat, and protein provided coal, and corn provided protein, and coal provided the transport to move the corn to the protein and the protein to the coal production). Then you need some translation into money as the mobilising and accounting factor. It’s not enough to talk about money in itself. It’s even more fatal to talk about money as if it were an etheric fluid.

Money in its origins and instantiation is a transferable debt. The value of a debt depends in the level of confidence in the debtor. Where the debt is – as is mostly the case – redeemed in another debt, one has a chain of confidences, which need an anchor – a final point of reference. The state and its ability to tax provide this. To illustrate: Barney’s beer tab figures on Moe’s accounts as a receivable (heavily discounted); Moe’s credit is stronger; the mighty Duff Corporation’s credit better yet and, if one has doubts about Duff then US Treasuries are one’s final resort. Hence the flight to US currency in times of crisis – it is the ultimate anchor of the debt-system as a whole. Hyper-inflation is a signal of loss of confidence in the state.

Provided a state can command the confidence of its creditors its credit can be very elastic. Britain ran up a debt of around 300% of gdp in the Napoleonic Wars with no inflation. Japan is in a similar case at the moment (it helps that the creditors are largely Japanese). A reliable and consistent flow of taxation underpins confidence – if you want a Green New Deal then it helps to demonstrate that you have the power to extract money from Bezos and Zuckerberg.


Brad DeLong 06.01.20 at 11:44 am

One thing I would stress, would stress…


Tim Worstall 06.01.20 at 12:06 pm

Even this isn’t right:

“As Mitchell, Wray and Watts put it (p256, bold in original) “The real cost of any program is the extra real resources that the program requires for implementation”.”

The cost is whatever you can’t have because you’ve employed those resources in this manner. There is always opportunity cost….


William Meyer 06.01.20 at 1:14 pm

In response to afinetheorem @11:

Is there any economic theory that does not contain the idea that government purchase via printed fiat money of idle but valuable resources is not inflationary? Yes, the vulgar economics of most American voters and politicians who absorbed their vulgar economics from Milton Freedman. Have you really not noticed the political and practical impact of deficit-phobia on our economy during the past 15 years or are you being coy? Are you acquainted with the name Mitch McConnell?
A question: you ask MMT theorists to write up models that map to “well understood concepts.” Do you include “inflation” in this category? If so, what empirical case do you rest that on?


Tom 06.01.20 at 2:03 pm

I agree with what afinetheorem said at @11 but I think that is only half the picture.

Modern macro (post-Lucas) really downplays the importance of demand for growth and the use of fiscal policy in downturns. Even the new-keynesians give, by design, a role to constrained demand only in the short-run and still remain fairly cautious about fiscal policy. There is no interest in, say, improving automatic stabilizers or have a set of fiscal policies ready to go when the downturn hits (how many bridges we could have fixed at a negative real interest rate during the Great Recession…). The fact that the natural unemployment rate (assuming it exists) could be much lower than the usual 5% is usually dismissed as a whimsical thought.

Plus, the FED has a dual mandate but it is obsessed about inflation, and so it has been undershooting inflation expectations for some time and god forbids it obsesses for a bit about employment too and errs sometimes on the other side. Then the real cost of debt grows, recent graduates are under-employed, they get pissed and MMT gains hold in the public imagination. The economic practices we have followed (whether micro-founded or not) are not w/o fault here.


Barry 06.01.20 at 2:56 pm

Tim, if those resources are sitting idle, the opportunity cost might be very low.


Andres 06.01.20 at 4:28 pm

@17: Er, no. Whenever a mainstream economist starts in on opportunity costs or starts to give you the broken window fallacy monologue, you need to stop him and ask why he is assuming that the economy’s resources are fully employed. If you can get an admission that there is no opportunity cost to employing an unemployed resource, and that therefore opportunity costs/broken window logic only applies if the economy is at full capacity, you have already won a victory against Econ 101ism.


Andres 06.01.20 at 4:32 pm

As a corollary to the above, it is not just MMT and Marxism that get vulgarized. What we would normally call “vulgar mainstream economics” is what is currently being called Econ 101ism, and the mounting criticism is long overdue. It does not mean of course, that unvulgarized mainstream economics is immune from criticism.


Peter Dorman 06.01.20 at 4:59 pm

This discussion is operating on two levels, evaluation of MMT and evaluation of MWW.

I agree with your overall take on MMT, to which I’d add one further reaction, that’s it’s way too macro-centered. If you will, they are trying to replace microfoundations of macro with macrofoundations of micro. For almost any given economic problem, the answer is provided by a change in macro policy which should filter down to the micro level. From what I’ve seen, there is rather little engagement with the changing role of finance in enterprise governance, the problem of fissuring in labor markets and similar issues. I would be much more comfortable with an economics that addressed macro and micro dimensions in relation to one another.

As for the textbook, there are textbook concerns that apply to all such beasts and not just a new one espousing MMT. I would emphasize two. (1) The books are written implicitly to support a talk-and-chalk teaching model, not active learning. Is MWW different in that respect? An active learning text in macro would frontload the information students need in order to follow current events or do mini research projects (stuff that takes less than a week). (2) Nearly all economics texts are written from a prescriptive standpoint, i.e. “this is the correct way to think about economics, so just clear your head of everything else and apply these principles”. Well yes, there are better and worse arguments, but no, there isn’t a single framework that dominates all others. And students need to develop the faculty of critical thinking, which is about reasoning through what makes an argument better or worse. Econ texts are pretty dreadful in that respect. Ideally, they should model the process in an open-ended context that reflects the situations we actually have to deal with in real life.

However….. I tried to do these things in my macro text and it turned out there was essentially no demand for them. It wasn’t even like subsequent textbook writers tried to do them better, which I’m sure they could have done. Basically, as far as I can tell, there is no discernible interest among teaching economists for shifting to an active learning pedagogy or replacing doctrine with critical thinking skill-building. But I’m still interested in whether MWW have taken any steps in those directions.


Andres 06.01.20 at 5:01 pm

Brad @8: “One thing I wouldn’t stress: MMT has a… strange & naive trust in the efficiency of markets. In MMT, if you shift to an unsustainable fiscal policy there is an immediate reaction in the price level in the price level & the inflation rate, as investors frantically try to move their wealth out of government bonds and into currently produced goods and services. This is problematic unless you are a truly efficient market fundamentalist…”

This is a valid point; in the real world (and provided the fiscal policy shift was done by a “respectable” government) there would be a delayed effect, possibly even of the J-curve type, as the shift to an unsustainable fiscal policy leads initially leads to either (a) an increase in output that takes the economy much closer to full employment, or (b) an increase in savings as beneficiaries of the fiscal expansion start to deleverage, or some combination of the two.

Once most participants have all transitioned from (b) to (a) and full capacity is on hand, inventory shortages follow and markets make the transition from cost-pricing to clear-pricing, leading to inflation. However, this delay doesn’t fundamentally alter the MMT logic: sooner or later the government must return to fiscal sustainability by cutting spending or increasing taxes, or else sit back and watch the central bank do the job by increasing the cost of lending, which will only reduce inflation after unemployment has become more prevalent.

Of course, such a delay effect takes place only if the belief in immediate inflation is not prevalent. A left-wing popular unity government trying the same act would find that shortages are much quicker to develop and that anticipated inflation leads to an almost reflex response to hoard physical assets and foreign currency.


SamChevre 06.01.20 at 7:16 pm

Another important difference I see frequently between more-popular and more-academic descriptions of MMT is clear specification of “idle resources” in a sufficiently narrow fashion. A lot of popular MMT seems particularly to think of “labor” as one thing, and so expansionary fiscal policy won’t lead to inflation if there is high unemployment. However, high unemployment in Flint among people without high school diplomas doesn’t mean increasing employment of people with Masters degrees in Boston will be non-inflationary.


John Quiggin 06.02.20 at 1:17 am

“If you will, they are trying to replace microfoundations of macro with macrofoundations of micro.”

I’m sympathetic to this

though it can be taken too far. Full employment is a necessary condition for reliable application of most micro theory, but it doesn’t provide answers to micro questions.


nastywoman 06.02.20 at 5:24 am

I just wish that these rating agencies – who decide who is MMT worthy – would accept that Italy is MMT worthy – as it would make life so much easier in Europe if there wouldn’t be anymore ”richer” or ”poorer” nations?

As thinking about it – isn’t that the same with ”richer” and ”poorer” US States too?
And so in reality – as long as poor Americans can’t print the additional Dollars they need at home – is that whole MMT theory… worthless?


eg 06.02.20 at 8:46 am

Kromhout @10

The “US-centric” nature of MMT will come as a surprise to Mitchell (one of the authors of MWW) who is Australian. Many of the examples and lots of the data in the textbook under review here are Australian. MMT obtains for any monetary sovereign; which is to say NOT the Euro Zone countries. It also counsels against currency pegs or borrowing in foreign currencies.

afinetheorum @11

You are advised to exercise extreme caution where equating economics with science — philosophers and actual scientists will have a field day. You might familiarize yourself with Pilkington’s “The Reformation in Economics” — it could save you some howlers.


MisterMr 06.02.20 at 1:33 pm

So, I reached the enlightenment about the MMT, and I’m here to give it to the world!

The reason that MMTers and other keynesian disagree about wheter the MMT is really a new theory or just old standard keynesianism is that the real differences lie in:

a) Different microeconomic foundations (but only to a certain degree), and
b) Different model on how inflation works.

However because of the way MMTers package their model, and also because actual problems in the orthodox keynesian model, it is difficult for other keynesian to understand the point.

The main point is about inflation. Everybody agrees that government spending can cause inflation, however there are (at least) 4 possible explanations about how this works; since the explanation all agree on the fact that government deficits can cause inflation, often people don’t realize they are using different models. The models are:

1) The orthodox model: the official model about inflation is this: there is a well defined state that we call “full employment” derived from marshallian marginalist theory, and in this state, among other things, wages reach their “correct” level, which means that wages correspond to the marginal productivity of labor. When the government tries to increase employment above that level, this causes inflation because wages cannot really stay above that level for long, thus a wage-price spiral ensues. Note that in this model there is nothing about a quantity of money, there is a maximum level of employment derived from marginalist theory. This model is wrong because marginalist equilibrium theory is wrong, however keynesian economics implies this theory in the definition of full employment.

2) “classical” (neo-ricardian) theory: this is an extremely minority theory however I’ll cite it here because it is relevant. In neo-ricardian models, the wage share is free floating, and there fore there isn’t a clearly defined “full employment” level (because it’s impossible to define a certain level of the wage share as the “marginal productivity”). In this model, therefore, there is no full employment, but there are only booms and busts, and what we call full employment is only a temporary peak of a boom. Inflation and deflation are caused again by wage-price spiral, but there isn’t a stable “full employment” place to rest in. Many post-keynesian economists, in their writings, imply a model like this, but they rarely go the whole road and say they reject marshallian marginalist theory, which causes a lot of confusion.

3) In addition to these two models, a lot of people think in terms of “quantity of money” theory. This is because keynesian coincide historically with the adoption of fiat currency, so many people (mostly on the right) believe that inflation is caused by “money printing”. However, this is a different model from 1 and 2; this has nothing to do with wage-price spirals and employment level, and all to do with a (quantity of money/quantity of stuff) proportion. This is also stupid because the quantity of money is a quantity of savings and so can’t directly influence the price level; however many people think in these terms when they think in terms of inflation.

4) Finally there is a variant of (3) that I’ll call the “flow theory of money”, that is the one the MMTers actually use: they are not concerned about the “quantity of money” in the sense of the stock of money (savings), but they conceive money as a sort of flow: when the government increases demand, it increases this flow of money, and the real economy will try to catch up, but if you increase it too fast or above material limits of the economy (now defined as “full employment”) the real economy can’t catch up and therefore, as the flow of money increases faster that the flow of production, this causes inflation (again as a mechanical inrease in the price of stuff, not in the form of a wage-price spiral).

— conclusion —
So there is an “original sin” of keynesians, that they are still implying the marshallian concept of full employment (model 1) in their theories, even if they don’t think a lot about it. If (1) was correct, then there is no sense in the idea that “there is no money wage consistent with full employment” as per the OP, however many keynesians accept this as a small change of the model, they don’t realize that this involves a fundamental change in their model and that they should therefore accept (2).
MMTers reject (1) by rejecting the marshallian theory of unemployment, but at this point they switch to a “flow of money” theory of inflation (4), that is completely different from what other keynesians mean with the concept of inflation.
The MMTers then debate their position on inflation as if it was a problem between (3) and (4), and other keynesians just don’t understand what the MMTers are about because keynesians mostly imply (1) in their theories, not (3), so the MMTers’ anwers sound pointless.
But then the keynesians don’t understand that (1) is a stupid proposition that is invalidated by the idea that a capitalist system doesn’t reach normally full employment: this is because “full employment” as described by marshallian theory and “full employment” the way MMTers, politicians and actually most keynesians too use the term are two different states, so the theory changes a lot.


Tim Worstall 06.02.20 at 2:28 pm

@20. Sure. @25 makes the point for me, it does depend upon exactly what we mean by idle.

To give an actual example, it’s currently fashionable to say that the Green New Deal can and should be funded by MMT. Retrofitting all housing (in the UK version at least) with insulation etc.

One objection is that most of the housing stock that can usefully use it already has it. But beyond that how much skilled building labour is there out there currently unused? Not how much labour is there undermployed but how much usefully able to do this sort of work? Given the (pre-Covid at least) unemployment rates not a lot. Thus there’s a possibly substantial opportunity cost regardless of how it’s financed.

Although I’ll admit that my fundamental objection to MMT is nothing at all about the details of the economics. I’m deeply uncertain that telling politicians there’s no financial limit to their spending is going to make for a better world. Because that is what they’re going to hear even if it’s not what they’re told.


Person XYZ 06.02.20 at 6:39 pm

I’ve never understood what the substantive differences are between a Keynesian economist (like Krugman or Simon Wren-Lewis) and an MMT economist. Neither deny that the economy can be stopped from overheating by raising taxes, but for some reason the MMT people think interest rates can’t be used to control the economy.

#28, I think MMT, much as with running aggressive deficits, can only be for wealthy monetarily sovereignty nations. A poor nation would rapidly encounter inflation if it attempted to print money simply because there are fewer idle real resources. And if a poor nation wants to import goods, they either borrow dollars or pay an extortionate interest rate in local currency. In addition, a job guarantee in a poor nation would likely become something akin to slave labour or at least would pay garbage wages.


Rapier 06.02.20 at 9:51 pm

MMT does not talk about how money is created. In it’s defense nobody talks about how money is created, even the Fed. Thus all discussions of monetary policy having dismissed how money is created can go on it merry way.

Here is how money is created. A bank makes a loan and the money appears in the form of a deposit in a bank account, and money is created. Loans create deposits. That is the only way money is created today. Governments don’t “issue” currency and other such nonsense that is hawked by MMT. Banks create money. (It should be noted the Fed is a bank and when it buys securities it does so by creating a deposit in the sellers account. Money is created.

If you don’t believe me that loans create deposits, and money maybe you will believe the Bank of England.

Watch this 10 times a day for a month until the brain cells start to connect. I mean everyone knows money is credit but very few know it down to their bones.

MMT is the modern equivalent of the Philosophers Stone.

By the way the ever popular trillion dollar coin could not be used to create a bank deposit so the Treasury could pay bills with it, If the Treasury took the coin to the Fed the Fed would say, get that thing out of here. Only we the banks create money you fool.


J-D 06.02.20 at 10:42 pm

MMT does not talk about how money is created.

When people don’t talk about something, sometimes the reason is that they don’t think it’s important. Is it possible that MMT theorists don’t talk about how money is created is because they don’t think it’s important? Whether or not that’s what they think, is is possible that it is true, that it is not important how money is created?

You’ve taken the trouble to draw attention to the topic of how money is created, so it seems reasonable to suppose that you think the topic is important. Why do you think it’s important?

Here is how money is created. A bank makes a loan and the money appears in the form of a deposit in a bank account, and money is created. Loans create deposits. That is the only way money is created today. Governments don’t “issue” currency and other such nonsense that is hawked by MMT. Banks create money. (It should be noted the Fed is a bank and when it buys securities it does so by creating a deposit in the sellers account. Money is created.

If you don’t believe me that loans create deposits, and money maybe you will believe the Bank of England.

The man in the clip says that it’s the main way money is created today; you say that it’s the only way it’s created today. These two statements are not synonymous. Of course the difference is only important if it’s important how money is created.

It’s important for some purposes. For a metallurgist working in a mint it’s important to know how coins are created, but for a lot of other purposes it’s not important; for an accountant working in a bank it’s important to know how loans create money, but for what other purposes is it important?

If there were people who wanted to promote fear, hate, and/or distrust directed towards banks it would be important to draw lots of attention towards how banks create money, but why would they want to do that?


Alan White 06.03.20 at 4:21 am

This post and thread reinforces my love of Vonnegut’s Galapagos, where future simple-minded survivors of a financially-rooted world apocalypse declare that it was their ancestors’ big brains that led to it–by simply valuing enough monetary ideas to lead to the means of actual mutual military self-destruction. I guess he was saying the first conceptualization of something beyond physical barter sewed those seeds of eventual mass self-annihilation, just given even a slight penchant for universal self-interest in human nature. He’d likely smile to hear me say I give him credit for that, with his big brain and all.


eg 06.03.20 at 4:23 am

@ Rapier #32

It will came as some surprise to one of the founders of MMT, one Warren Mosler, that “MMT does not talk about how money is created,” since he was — wait for it — a banker. Sure, banks create deposits when they approve loans, but they are themselves creatures of government — that’s why they have government charters. Think you can start a bank without one? Think again.

Next I suppose you’ll be telling us that overt monetary finance is impossible for monetary sovereigns because they aren’t banks?


John A Imani 06.03.20 at 4:59 am


All of this concern about inflation and taxes can be dispensed with a method that boils down to this: the responses to the 2007 Great Recession (Bush $750 mill, Obama $750 mill given to the banks, insurers and major industries) and today’s economic problems demonstrate that money (bout $4 trill so far now, more to come) is really ‘created out of thin air’, and that is a good thing for good things can be created with its creation. Fed prints up the money that Treasury exchanges for its bonds and prest-o/change-o, you got money. Well, the government has money.

Creating additional purchasing power in this manner lessens the purchasing power of that previously extant. But this artificially created inflation (assuming an increase in the money supply facing the same amount of goods and services) need not hurt the working classes’ (sic) purchasing power if wages, salaries, pensions, social stipends, bank accounts, etc, are indexed to that rate of inflation (sums up to a certain socially determined level, say half a million dollars).

How might this work: Pensions, social security, etc are already disbursed through government entities. Small business payrolls could be paid directly to the IRS (or any other government receipts and disbursement facility). The worker’s salary or wage, his check, would be cut and forwarded to her from the government. The recompense of the workers of both of these categories (along with petty rea and financial assets would be indexed to inflation with the adjustment added to the workers’ base pay. Where would the money come from? By now we should know or a skim-through reading of Keynes’ “General Theory”, Chap 10 would quickly get us up to snuff.

Time for a non-Paulson ‘bazooka’…The Big Bazooka.

The worth of the wealthy would not be indexed and hence would be subject to a depreciation in line with the increase in inflation. Back door expropriation by inflation. Death of a ‘thousand cuts’.

Now, of course, we could dispense with all of this monetary sleight of hand and fiscal legerdemain with a simple real expropriation and that will surely come. But first we might take a first step as we adjust to the idea that it will be society and not the private party that will pay us and, more important, adjusting to the fat that t is society that will hire us all at minimum, that is a socially determined ‘living wage’ into work for the social good and not for private profit.



Barry Cotter 06.03.20 at 10:45 am

ultimately futile debate about the existence of otherwise of a long

Existence OR otherwise


Lee A. Arnold 06.03.20 at 11:49 am

It might help some readers here to simplify that, historically, there are two very different inlets for money into the economy: 1. the sovereign (i.e. royal king or queen) who minted coins for administration and adventure, and 2. the private bankers who extended credits to business firms, those credits being based on a lesser amount of deposits. These two inlets were different currencies, and both had occasional problems: 1. coin metal debasement and inflation by the king, and 2. sudden runs on overextended private banks, into bankruptcy. These problems were “solved” (i.e. somewhat mitigated) by inventing the central bank to combine and control both inlets, eventually allowing the private banks to create money (meaning, once again, to extend credit) that was backed by the sovereign’s power to enforce it, in exchange for funding the king’s debts and allowing his greater access into the business world. This is called “the great monetary settlement” in a wonderful little history up to the present day that deserves much wider readership titled Money: the Unauthorized Biography, by Felix Martin (2013).


Lee A. Arnold 06.03.20 at 12:30 pm

I am thinking of writing a textbook which notes that 1. we are running out of basic things to be employed at, while tenured economists strangely insist that there are still plenty of necessary things to do; that 2. money is now scarcer than most resources in the main cycle of real goods and services; while 3. the financial system is increasing its internal profits beyond correlation to investment in real goods and services, thus continually expanding a plutocracy that is beyond national jurisdictions yet controls national policies; because 4. money is not a natural object but we are trapped into the psychology of thinking it is so; leading to 5. destitution, hatred and the resurgence of authoritarian nationalism to protect one’s own pitiful belongings; partly because 6. as I think it was Buckminister Fuller who pointed out, clearly we are all evolving, but not necesarily in the same direction. My text will be titled Postmodern Nonmonetary Exotheory and will be jacked into all receiving brains by neurolink in 2035. Weirdly enough, it is more or less Keynesian.


Rapier 06.03.20 at 12:46 pm

In general everything in that video is simplistic.
RE 33
The other way money is created is not via bank loans but by central bank purchases of debt securities. These are not direct loans. For the most part they are the purchase of loans already made but this middle man dynamic should not hide that central banks are loaning money. Money they ‘print’. Print meaning creating a bank deposit out of nothing and remember the Fed is a bank.
The US mint does produce commemorative coins that are legal tender. Today for $64.50 you can own a coin with $1, so that too is another way.

RE 35 OK I overstated with the nobody talks thing. MMT talks about ‘the soverign’ usually with something about ‘issuing currency’ etc. No government in the world issues currency, as a way to pay its bills.

In the case of the US, the Treasury manufactures currency but does not “issue” it. Banks distribute it, or issue it if you will, when customers ask for it, to be withdrawn, from a bank account. No bank account balance, no currency. Currency is a derivative of bank accounts. Printed currency does not precede bank accounts, sent out by the Treasury to later be deposited in accounts. No Treasury in the world produces currency and then uses that currency to pay its bills. It is perfectly possible that they could. The US Treasury could, if directed to by legislation, print up billions or trillions of currency and mail it to SS recipients or pallets full of it to Lockheed Martin. I can see it now, mail men walking around with tens of thousands of dollars walking around or mailboxes full of it. Not.

So how is this currency ‘issued’ by the Treasury going to be put into the Treasury’s bank account? With truckloads of currency delivered to the Eccles building every day for deposit? In theory, sure. In practice it would be absurd. Besides which the Fed would say FU.

If someone has proposals about the formal mechanisms by which governments could produce money have at it. Theory has its place in all things but let’s get down to reality. The reality now is that the Fed has ‘printed’ almost $3TN dollars over the last 3 months to buy the bonds, notes and bills the Treasury has sold to pay its bills because its tax receipts doesn’t cover it. Now truth be told this is MMT as since the Bank of England was founded the first rule has been that central banks should not monetize huge portions of government debt. After the GFC they did just that to the tune of perhaps $20TN. Soon to be $30TN and then $50TN and then $100TN, because the alternative is too terrible to comprehend. And all those musings about governments ‘issuing currency’ or the trillion dollar coin are forays to the Big Rock Candy Mountain.


Zamfir 06.04.20 at 7:28 am

I have much the same question as Kromthout ( Based on the name, I suspect we might be from the same country). How well does this framework apply to small countries with open economies?

I share their feeling, that MMT or other aggressive keynesian approaches assume soemthing like the US, which has a lot more sovereignity than other countries. Perhaps they argue that Australia (for example) is large enough already to fall in the same category, but I do not find that a priori obvious.

eg gives some examples: “It also counsels against currency pegs or borrowing in foreign currencies.”

That’s good as councel, but much easier for large countries than for smaller countries. Countries do not implement a currency peg for the lolz, but because their trading industries get buffetted by currency swings. Their customers or suppliers demand prices in a different currency, and they have to eat the exchange uncertainty.

In the same way, it is difficult for a government to stop its citizens from borrowing in a foreign currency, or to stop them from holding foreign currency bank accounts. Or even from doing internal business in a foreign currency, if that is what its citizens really want. Dollarization realy happens, after all. In milder froms, there are plenty of countries where citizens take out low-rate mortages in a foreign, more trusted currency.

There are plenty more of such examples: a small country cannot implement projects that rely purely on domestic resources (whether they are idle or not). It might have idle resources in exporting industries, whose excess output cannot possibly be absorbed usefully at home. Its citizens may find it easier to evade taxes abroad, and such countries have to tax their Bezoses before spending, because they do not know in advance whether they can levy the tax later when they have to.

There is also the international politics angle: European countries used to accuse each other, with good reason, of strategic devaluations, and similar “beggar thy neighbour” policies. Those are hard to separate from domestic demand management policies. For the all the talk about sovereignity, most countries cannot easily ignore international pressure.

These issues are gradual of course. But for, say, Luxembourg, it doesn’t leave much space for “sovereignity” regardless whether you notionally issue your own currency or not. I really like to see discussion how they play out at intermediate levels, for countries with more leverage than Luxembourg but less than the US.


J-D 06.04.20 at 7:49 am

In general everything in that video is simplistic.

It was your choice to cite it.

RE 33

Did you notice that I asked some questions? I notice that you didn’t answer them.


eg 06.04.20 at 10:27 am

If you really want to know how the US Fed operates — and I mean REALLY want to know, right down into the very deepest of weeds, start following the writing of Nathan Tankus. It will inoculate you against specious claims and speculations you’ll otherwise encounter from certain posters hereabouts and elsewhere.


Tim Worstall 06.04.20 at 11:04 am


“Here is how money is created. A bank makes a loan and the money appears in the form of a deposit in a bank account, and money is created. Loans create deposits. ”

Wayull. There’s a useful distinction to be made between credit – which that banking system does create – and money which the central bank and or mint does. Or between wide money and narrow money. Or between – roughly enough – M4 and M0.

Failing to make the distinction will lead to all sorts of problems. Like trying to insist that an extra $100 billion of wide money/M4/credit is going to have the same inflationary effects as an extra $100 billion of narrow money/M0/cash. That insistence ain’t so. Thus the distinction is useful.


MisterMr 06.04.20 at 3:57 pm

@Tim Worstall 44

“Failing to make the distinction will lead to all sorts of problems. Like trying to insist that an extra $100 billion of wide money/M4/credit is going to have the same inflationary effects as an extra $100 billion of narrow money/M0/cash. ”

Why would an increase in M0 have a more inflationary effect of an increase in M[whatever]?

For example why would one assume that the government printing cash is more inflationary than the government getting into debt for the same value?

IMHO this is a fallacy due to the quantity theory of money (point 3 in my comment at 29).

Inflation an increase of the price level, but the price level is due to the flow of money, not to the quantity of it (in this I think the MMTers are correct). An increase in the “quantity” of money is an increse of savings, not of transactions.

So either you assume that the economy has something like a fixed savings/GDP ratio, or a fixed “velocity of money” (that is the same thing said in a different way), or the “quantity of money”, M0, M1, M56 or whatever doesn’t have a direct effect on inflation.

But we know empirically that this fixed savings/GDP ratio, this fixed velocity of money, doesn’t exist.

What happens is that when some entity goes into debt, or prints money and spends it, this increases the flow of money, and thus in some way creates inflation AND an increase in the quantity of money, but the increase in the quantity of money isn’t the direct cause of inflation, more like bith inflation and the increase in the quantity of money are two consequences of the increased spending.


John Quiggin 06.04.20 at 11:26 pm

@41 In theoretical terms, it works in much the same way in open economies. In this case, excess demand produces inflation both domestically and via depreciation of the exchange rate. In both cases, MMT advocates tend to play down the dangers most of the time, while conceding them as theoretical possibilities (part of the “motte and bailey” problem)>


bruce wilder 06.05.20 at 2:20 am

The motte and bailey rhetoric begins with the titillating insight that money (or credit) is “created” out of nothing. Most of us in our private lives are money-constrained. We wish we could magically have more money to do as we please. So, being told that monetarily sovereign governments are in that enviable position but cannot take advantage on behalf of their suffering constituents because of bad-thinking is kind of fun, even if your attention lags before you get to the gory details of the bad-thinking part.

Bill Mitchell just blogged a two-part polemic on why monetary sovereigns do not need to borrow. It is a bravado display of ignorance that astonished me. Apparently, the significance of the invention of the central bank as manager of a marketed national debt financed by taxes on economic rents — the story referenced by Lee A. Arnold above — is completely lost on him.

When it was Wynne Godley and Hyman Minsky, it seemed attractive to me. Anything would be better than mainstream loanable funds or Phillips Curves. But, what is the point of not-modern, not-monetary, and not-a-theory?

I was pretty impressed by MisterMr’s comment, giving a categorization of different ideas of money. Money is the metaphysics of economics, I suppose and ontology counts double.


nastywoman 06.05.20 at 4:30 am

@41 and before Kromthout point to the real ”practical” problem with the idea of ”sovereigns” supposedly being able to to produce as much money as they want –
in order to solve their money problems.

Like remember Greece – when silly US economists thought that all what Greece had to do was going back to it’s own Mickey Mouse currency?

And then this Greek Hotel owner – I love – started to yell: But, but, but I don’t want to go back to a time where I got payed with Mickey Mouse money – because who know what the Mickey Mouse money will be worth?
I want to get payed in ”real currencies” like Euros or Dollars – now that made me wealthy – and these real currencies are respected by the credit raters – who otherwise play with every little sovereign – in a way that it doesn’t help you AT ALL to believe in MMT.


Hidari 06.05.20 at 10:35 am


At the risk of committing the worst of all possible sins in the company of economists, who cares about inflation? Even hyperinflation? So what?

I am aware that the mainly white, middle class economics profession (almost all of whom have savings which would depreciate in value if inflation/hyperinflation were to become a problem) has this hysterical panic whenever the word ‘inflation’ is mentioned but why should anyone else care? Even hyper-inflation: it’s bad for a bit (not as bad as a recession though!) but these episodes tend to be pretty short and the problem is pretty easily solvable (you just start a new currency, which is a pain, but such is life. Or you peg your currency to the dollar).

Economies grow, therefore people have more money, therefore prices go up. Inflation is a good thing, generally speaking. So, why the hysteria?


Lee A. Arnold 06.05.20 at 11:27 am

At the risk of imposing a tax, specifically upon John Quiggin’s patience, here is an automatic playlist which will introduce beginners to the stuff of macro. It is not about the mathematical theories. It animates the hydraulic flows in the conceptual categories used by economics textbooks.


Mike 06.05.20 at 3:58 pm

I wrote a book on the history of money in the US that notes the similarity between the language of value and the language of race. The persistent essentialism of economics is a vast and largely unexamined problem. The most important contribution of MMT is moving away from the idea of money is a naturally scarce commodity. The whole impulse behind bitcoin is to replicate the gold standard, by enforcing an artificial scarcity. This is a major part of why people like it.

MMT is useful precisely because it starts from the point that money is an unlimited thing, and always was, rather than starting from the illusion of scarcity


John Quiggin 06.06.20 at 1:15 am

Hidari @49 Under hyperinflation, workers wages depreciate in value between the time they are paid, and the time (later on the same day) when they are spent. So it’s not just the middle class (whoever that means to you) who suffer.

Unsurprisingly, no hyperinflation has ever lasted more than about a year, after which the currency is scrapped and a new stable one introduced to replace it. The replacement process, similar to other deflations, is usually painful.

I agree, though, that the inflation of the 1970s, which was a terrible shock after decades of stable growth in the advanced economies, looks a lot less terrible by comparison witht he GFC and the austerity decade that followed it. The rates of unemployment which accompanied the 1970s inflation and gave rise to the term “stagflation”, turned out to be the new normal under neoliberalism.


oldster 06.06.20 at 2:03 am

The central bank of Jamaica agrees with Hidari about inflation: inflation is not the enemy.

But only provided that it is predictable, stable and low.

When it’s properly controlled and targeted, inflation is the bass-line of the economy!


Hidari 06.06.20 at 10:39 am

‘Under hyperinflation, workers wages depreciate in value between the time they are paid, and the time (later on the same day) when they are spent. So it’s not just the middle class (whoever that means to you) who suffer.’

Yes I know that, and I’m obviously not claiming that hyperinflation is much fun. Pictures of real live workers having to carry their wages home in a wheelbarrow (from Germany, in 1921) show that it must have been really irritating and also must have hit them in the pocket, although, OTOH, it’s a helluva incentive to get out there and spend spend spend: ‘spend it while you got it’ has rarely been so apt. Which obviously benefits the economy.

OTOH again, hyperinflation has a large number of positives. For example, if you are hugely in debt (and this applies to countries too) your debt simply depreciates away. If you are super rich and have your money offshore (in dollars or pounds) you can scoop up huge amounts of capital goods for next to nothing, and then reinvest them when the (inevitable) currency change happens.

I don’t know quite what you mean by the idea of introducing a new currency necessarily leading to austerity. Perhaps proponents of the Euro might have made this a bit clearer when they introduced that particular new currency.

Certainly, the worst hyperinflation in history, in Hungary before 1946, the introduction of the new currency seems to have been pretty painless.

Again, I am not saying that life in hyperinflation is ‘fun’. Lots of things aren’t fun. Root canal work, slaving away at your shitty job day after day, changing a tyre if you don’t know what you are doing, lockdown during an epidemic. Life, generally speaking, is not much fun if you are over the age of 10.

What I am saying is that compared to a recession or a depression it pales into insignificance.

Krugman comments somewhere on the heroic attempts by the Right to blame the rise of Hitler on the Weimar hyperinflation, as opposed to the objective fact that it was caused by the austerity of 1931/1932.

Anti-inflationary economic policy has a huge amount of benefits for the political Right, and few, if any, for the Left. Deliberately raising unemployment (to deliberately create Marx’s ‘reserve army’ of the unemployed) , using this as a weapon to intimidate the unions, dampening down demand to ‘force’ companies to amalgamate into larger and large monopolies with huge amounts of financial and economic power, as well as ‘forcing’ them to invest more money into machinery (automation) and therefore cutting wages and/or the workforce: this is all highly beneficial to the Right, and the left should be very careful of assuming that anti-inflationary rhetoric can ever have any progressive ‘downside’ (or ‘upside’).


MisterMr 06.06.20 at 12:59 pm

@Bruce Wilder 47
” was pretty impressed by MisterMr’s comment”
Yay thanks!

@John Quiggin 52

“Under hyperinflation, workers wages depreciate in value between the time they are paid, and the time (later on the same day) when they are spent. So it’s not just the middle class (whoever that means to you) who suffer.”

Yeah, but if such hyperinflation is wage-led, then this isn’t really a problem for workers, is it? Because it’s actually the price of stuff that goes up to keep wages and not the othwer way around.
So the question is more like what are the causes of inflation, for example Weimar inflation was due to the necessity to repay an international debt in “gold”, and the necessity for the government to devalue the currency to keep german workers cheaper and stay hypercompetitive, just in order to stay on top of the debt: it’s not the same of the normal “Keynesian” inflation.

@ Hidari 54
“as well as ‘forcing’ them to invest more money into machinery (automation) and therefore cutting wages”
While I agree with most that you say, this specific sentence IMHO is wrong: investing in machinery in reality increases the demand of labor, and pushes up wages.
The problem of austerity is that it decreases investiment in machinery, and therefore also keeps wages low both because of higer unemployment (lower wage share) and because it keep people in underproductive jobs.


bruce wilder 06.06.20 at 10:37 pm

People experience inflation, as they do recessions and other so-called macro-economic phenomena, as something external and vaguely mysterious and arbitrary, like the weather: “it was hot and muggy today” or “it rained”. They do not experience them as something done collectively, a joint outcome of policy chosen with dubious concern or awareness of consequences and carried out by central institutions on the one hand and the decentralized, semi-strategic responses by many other actors on the other. The infamous Weimar hyperinflation was an outcome of an attempt by the German authorities to pay reparations due the Allies with paper currency without bearing the burden of an exchange for goods or commodities. Somewhere hidden behind many far more mild inflations is also a struggle between opposing forces over income distribution. Ditto for recessions induced by central banks to forestall wage increases attendant on a prolonged period of expanding business activity.

The economy — not the silly abstraction Hidari imagines benefiting from spending but the actual economy — is not like the weather at all. It is not some massive ball of natural chaos heated by the sun. The economy is almost entirely artifactual, composed of what peoples loosely cooperating in systems of production and distribution, do. Those people benefit, or not, from the results of their bargaining over the terms of their cooperation; money is the barely trustworthy language they use to construct the fictions of their treaties with one another.

The point of view from which someone can “choose” inflation over recession is not freely open to just anyone and in any circumstance. It is assigned with authority in a contingent institutional order, as part of an apparatus to arbitrate to some extent the never-ending political struggle over the distribution of income and power.

The chorus of “prestigious” economists who ritually wring their hands over the “dangers” of deficits and the imminent risk of inflation are hired to purpose. Duh.

It is interesting to think about talking about money as a public good without all the religious mumbo-jumbo, but it is pretty rare to see any speak for long without sounding like some species of moron. The smart private interests subvert the conversation or the stupid idealists blow it up.


Allan 06.07.20 at 2:42 am

“Here is how money is created. A bank makes a loan and the money appears in the form of a deposit in a bank account, and money is created. Loans create deposits. “


You will find reference to the Bank of England paper and “loans create deposits” statement in this article on Bill Mitchell’s site. One of probably hundreds on that subject.


Hidari 06.07.20 at 9:58 am

Another point, which I don’t have time or space to go into, or else it would badly derail the thread is that when you look at how inflation figures are constructed (‘constructed’ being the apposite word, not ‘calculated’) you really realise what a pile of shit the whole concept is.

Che sera sera the future’s not…etc. etc. etc.

But despite that, it does seem so far that inflation was a specific problem faced by ‘agrarian’ and/or pre-capitalist societies in their transition to modern industrial capitalism in the 19th and 20th centuries and that now that almost all countries have made this transition, the problem of inflation is simply over. Certainly the US and the UK have not had episodes of inflation for going on 50 years now and nor has it looked remotely plausible that such a problem will arise (let alone hyperinflation).

DEflation on the other hand. That’s a different story.

So I must confess that critiques of MMT that are predicated on the idea that ‘inflation’ is a problem that we face today or, even if it is a problem, that it is a problem the Left should care about deeply, leave me cold.


MisterMr 06.07.20 at 6:55 pm

@Hidari 58

“Another point, which I don’t have time or space to go into, or else it would badly derail the thread is that when you look at how inflation figures are constructed (‘constructed’ being the apposite word, not ‘calculated’) you really realise what a pile of shit the whole concept is.”

I do agree, but I think the main problem comes from the fact that we can’t really define “productivity” (the quantity of stuff) very well.

“But despite that, it does seem so far that inflation was a specific problem faced by ‘agrarian’ and/or pre-capitalist societies in their transition to modern industrial capitalism in the 19th and 20th centuries and that now that almost all countries have made this transition, the problem of inflation is simply over.”


So that you know, Italy had 25% inflation yearly in 1975:
and anyway continuous inflation (as opposed to cycles of inflation and deflation) is a “problem” only since the end of WW2 (although obviously it’s not really a problem and is much better this way than cycles of inflation/deflation).


john halasz 06.08.20 at 6:53 am

There is something missing from this discussion of MMT. Their operational description of the entwinement between treasuries and central banks is largely correct under a regime of floating fiat currencies, but is also nothing really new, going back to Lerner’s functional finance, Godley’s intersectoral balances account of gdp, Minskey’s financial (in)stability hypothesis. And the reason that there is so much discussion of MMT nowadays is because debt monetization in the current pandemic induced crisis is happening willy-nilly. And I share some of the reservations about MMT expressed here. Especially their rather cavalier attitude to current account imbalances. which is, in fact, very un-Keynes-ian. That we have de facto floating exchange rats with “free” flows of financial capital wasn’t an outcome that Keynes sought with his ICU/Bancor proposal, but rather fixed, but adjustable exchange rates with capital controls to prevent the whiplash of unfettered financial flows, both limiting current account imbalances and allowing each national economy some degree of autonomous control over their fiscal and monetary policies to suit their own specific conditions and developmental needs.

But what Randal Wray et alia always insist upon as unique to MMT is the use of a government job guarantee as employer-of-last-resort as a buffer stock for maintaining full employment with price stability, as if that would be the only and self-evident objective of any economic policy regime. Not only is that abstract macro idea without any institutional specification as to how and to what purposes it would work, but it sits oddly with any GND to deal with the global environmental/climate crisis, which MMT is often invoked as a solution to. It strikes me as an effort to construct a perpetual motion machine out of an overly financialized monetary economy without regard to real natural resource constraints. What’s more, models of international trade that assume full employment equilibrium as optimal and existing, fly in the face of the fact that for much of the time and much of the world, especially the “developing” economies, where rates of unemployment are huge, such equilibria are not to be found or attained. So while it might to nice to abolish the sketchy NAIRU doctrine by fiat, it doesn’t thereby solve the real imbalances, nor the power relations that hold them in place.


Hidari 06.08.20 at 7:34 am

In an attempt to derail my own derailments:

Here’s my understand of the situation (which could of course, be completely wrong).

Keynes was a genius. But his theories weren’t compatible with the emerging orthodoxy of the 1960s, 1970s and 1980s. However, rather than just ignoring Keynes, neo-classicists engaged in a process termed, rather crudely, ‘cutting Keynes’ balls off’ whereby Keynesian economics was not conceived as a challenge and an alternative to neo-classicism, but instead, as a special case of neo-classicism. In other words, neo-classicism (which is an equilibrium theory) functions ‘as normal’ (in this viewpoint). And if the state stops interfering, this process continues. However, if for some reason there is an endogenous shock then the economy can ‘go out of kilter’ and in these highly specific situations, a moderate Keynesianism might be appropriate. This was the view of Krugman, Reich and the Clintonites/Blairites.

Keynes, of course, didn’t believe that at all. He believed that capitalist economies might frequently end up in crisis, and Keynesian demand management was an essential tool in the States’ ‘economic armoury’. He also certainly didn’t see ‘state interference’ as a bad thing, as neo-classicists tended to do.

However, be that as it may, Keynes also believed that you should run deficits when ‘times are bad’ you should engage in austerity when times are good. In other words, at the end of the day Keynes believed in a balanced budget, although ‘the end of the day’ might be a long time coming.

MMT people are opposed to Keynes in that they argue that you don’t actually have to balance the budget ever, and that in fact, capitalist economies in the 21st century can run budget deficits essentially permanently, with no real threat of inflation (ceteris paribus). And for this they provide empirical evidence e.g. Japan.

You can of course raise taxes, and maybe you should, but for political reasons (‘Tax the rich till the pips squeak’ as Healey said….not to raise money specifically but to decrease inequality) not economic ones or at least not just economic ones.

Is this correct? Have I got this right?


Shane Donohoe 06.09.20 at 6:52 am

Hi JQ,

Are typo notes wanted? I didn’t see anyone else point out the last word of:

“Most obviously, contractionary monetary policy is highly effective in reducing what is seen to be an excessive, and potentially inflationary, level of economic active.”


Curt Kastens 06.09.20 at 12:43 pm

My understanding is yes…..except for a bit of fine tunning. The reason for taxes are not just political (to reduce inequality) with out taxes you are leaving the money that the government created to get something done in private hands. That money which the government created to get something that the government leaders thought was important done can now be used to compete with or interfer with what the government wants to get done next. Of course if the government gives the money to some people to get something done and then takes it all away a fraud has clearly been committed. Those who did the work in the end did not get paid they were enslaved. But what if only 10 or 20 or 40 or 80% was taken away? Well of course the libertarain or neo liberal answer is that those who filled a government contract were partially enslaved.
But the MMT answer is no we have not partially enslaved anyone we are just charging them a kickback for getting that contract in the first place. If it was a very lucrative contract you have to pay a very lucrative kickback. If they read their tax tables then they will know exactly what the kickback rate will be.
The reason why these kickbacks are charged is that the collective fate of all those living in the society that the government officials have to manage is more important than the fate of some subset of the society. The survival of all is more important that the pleasure of some. To acheive the survival of all an economy needs to be SYCRONIZED. If a few people or if some people have to much money to dispose of they can wreck havoc upon that sychronization.


Hidari 06.09.20 at 4:29 pm

I don’t know if anyone cares but ‘However, if for some reason there is an endogenous shock then the economy can ‘go out of kilter’ and in these highly specific situations, a moderate Keynesianism might be appropriate’

should have read

‘However, if for some reason there is an endogenous or, much more likely, exogenous shock then the economy can ‘go out of kilter’ and in these highly specific situations, a moderate Keynesianism might be appropriate. ‘

Neo-liberals have historically speaking been suspicious of the ideas that free markets, left to their own devices, can ‘crash’. Insofar as they do acknowledge such events they bend over backwards to work out reasons why the State was ‘really’ to blame, or else blame exogenous factors (e.g. a global pandemic). Keynes (and, of course, Marx) were much more sympathetic to the idea that ‘free markets’ might be inherently unstable.

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