Modern Monetary Theory

8 Key excerpts on "Modern Monetary Theory"

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  Democratizing Money?

  Debating Legitimacy in Monetary Reform Proposals

  • Beat Weber(Author)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  With respect to political economy, MMT assumes that the state is powerful enough to terminate or ignore the implicit bargain underlying the present monetary system. Instead, the state is advised to reorient money creation towards its own financing needs. 7.1 Against Constraints Fiscal policy usually takes centre stage in public debate on economic policy. Recently, the question of government debt has become an increasingly important issue in view of rising debt levels and deficits which are perceived as having become structural (Reinhart and Rogoff, 2009, 21). During the global financial crisis, the issue of budgetary room of manoeuvre for anticyclical policy became particularly contested. In this context, proponents of Modern Monetary Theory take a stance against what they perceive as ‘deficit hysteria’ (Washington Post, 2012; Wray, 2011c). By referring to macroeconomic accounting and dividing the economy in three sectors (government, private sector, foreign sector), MMT claims that if one of three sectors is to run a surplus, at least one of the others must run a deficit. One sector’s deficit equals another’s surplus. Budgetary deficits are therefore merely the mirror effect of the private sector’s surplus (provided the foreign 194 Modern Monetary Theory (MMT) sector is in balanced position towards the domestic economy), if the level of output is to be maintained. According to MMT, to perceive deficits as unsound budgeting behaviour by reckless economic policy- makers is to underestimate their functional role in the macroeconomy. MMT stresses the underdeveloped potential of monetary financing to support this function. 7.2 What the State Can Do: Predecessors The roots of MMT can be found in ‘Chartalism’, a version of credit theories of money stressing the key role of the state in monetary affairs.

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  What's Wrong with Modern Money Theory?

  A Policy Critique

  • Gerald A. Epstein(Author)
  • 2019(Publication Date)
  • Palgrave Pivot

    (Publisher)

  2019 )

  The ‘Tax the Rich’ call bestows unwarranted importance on them. (Bill Mitchell, February 21, 2019)

  Deficit spending…would cause the Fed Funds rate to fall. (Mosler 2009 , 12)

  Many people find these statements empowering; others intriguing; and others find at least some of them simply stupefying.

  What do MMT advocates mean by statements like these? What is the basis for them? How valid are they?

  First, let’s start with the basics.

  2.1 What Is Modern Money Theory?

  Modern Money Theory (MMT) is a brand of Post-Keynesian economic theory that, like other varieties of post-Keynesian thought, has received inspiration from John Maynard Keynes (of course), Joan Robinson, Hyman Minsky , and others.2 Along with most other Post-Keynesians (and Keynes and Minsky), MMT advocates emphasize the key role of aggregate demand in determining output and employment in both the short and long run, the central role of money and finance in the workings of the economy, and the importance of endogenous money .3 These tenets contrast starkly with the mainstream view that supply-side factors alone determine employment in the long run, and, that long-run unemployment itself cannot exist; that money is a “veil” hiding the workings of the “real” economy while not impacting its long-run trajectory (apart from the level of prices and, perhaps, inflation ); and that the central bank controls key components of the money supply, effectively making the money supply “exogenous” (see Taylor 2011 and Crotty 2019

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  Masculinity and the Ruling of the World

  • Denise Thompson(Author)
  • 2020(Publication Date)
  • Denise Thompson

    (Publisher)

  125 not only promises to fill in the peculiar lacuna around money within orthodox economic theory, it makes more sense than mainstream economics’ ‘rational economic man’ construct, its obsession with ever more sophisticated statistical models, its reliance on the beneficence of ‘markets’, and its insistence that governments must make ‘savings’ if they spend beyond their ‘budgets’. It doesn’t have anything to say about the role money plays in domination (of course), and I extrapolate from it in ways that those with more knowledge than I might not agree with. However, there are aspects of MMT that depict the ways in which an economy could be used for the common good. It accords with Francis Bacon’s advice: ‘Money is like muck: not good unless it be spread’. The way it suggests the money should be spread is primarily through full employment, backed by a governmental Job Guarantee whereby the government provides employment for all those who want to work but who are not provided for by the private sector. It also argues for adequate income-support systems for those unable to work, either temporarily or permanently. In answer to the neo-liberal question, ‘Who’s going to pay for it?’ MMT says that a government can afford to pay for anything that can be bought in its own currency. If this kind of policy were ever to be put into practice, money could be used in the interests of all, not just for the wealthy few.

  For the orthodox, there is no possibility of putting it into practice because, in their view, this is not the way an economy works. Modern Money Theory says, however, that it is not a theory but a depiction of the way an economy does actually work, and that the neo-liberal policies and practices that refuse to operate in this way are economically damaging. And certainly, the evidence is all on the MMT side, given that it is the orthodox agenda that produces boom and bust ‘business cycles’, depressions, recessions and global financial crises, desperate worldwide poverty, a never-ending stream of money poured into weapons of mass destruction, a refugee crisis worse than that caused by WWII, and historically unprecedented levels of wealth inequality.

  Modern Money Theory is largely an extension and renewal of the work of John Maynard Keynes (among others). It is a heterodox economic framework (as opposed to the orthodoxy of mainstream economics), and a counterweight to the neo-liberal hegemony of the last several decades (Pierce, 2013). It has had little influence on government policy or public opinion, although one proponent, Stephanie Kelton, was an advisor to presidential candidate, Bernie Sanders (Wade, 2016); and it is starting to be favourably reported in the mainstream media as an alternative to the neo-classical economic theory that currently dominates government policy (Jamrisko, 2016; Mosler, 2010b; Wade, 2016). Although the mainstream view is that Keynesianism was shown to be irrelevant during the 1970s and subsequently, I have not been able to find any satisfactory reason why that might be so (notwithstanding oil price shocks, falling rates of profit, inflation and the need for surplus capital to find new markets). Rather, the repudiation of Keynesian economics would appear to be an ideological ploy justifying the resurgence of the unfettered capitalism (so-called ‘inequality’) we have been witnessing since the 1970s. Keynesianism fell into disrepute (in certain powerful circles), not because it had been found to be irrelevant or false, but because powerful men decided (for whatever reason) that they no longer needed to share the wealth. If that is the case, then Keynesianism, as it is developed within Modern Money Theory, might still be relevant as an account of the way an economy works. Whether that economy would still be capitalist is debatable, given the link between orthodoxy and capitalism, and given too the lack of success of Keynesian attempts to retain capitalism while ameliorating its worst effects.

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  The Money Masters

  The Progress and Power of Central Banks

  • Onno de Beaufort Wijnholds(Author)
  • 2020(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  expectation was that such a drastic measure would turn the tide.

  Modern Monetary Theory

  Calling it Modern Monetary Theory, a few academics supported by a fringe of politicians, promote the view that monetary financing of large scale government spending, for instance on the environment, is an appropriate way to avoid having to raise taxes. The gist of this unorthodox ‘modern’ theory is described by The Economist as follows:

  A government that prints money and can borrow in its own currency cannot be forced to default, since it can always create money to pay creditors. New money can also pay for government spending; tax revenues are unnecessary. Governments, furthermore, should use their budgets to manage demand and maintain full employment (tasks now assigned to monetary policy, set by central banks.’ (The Economist , 16 March, 2019 , 67)

  The notion that government need not raise taxes to pay for increased spending and can engage in monetary financing of budget deficits has been repudiated by leading mainstream economists such as Larry Summers who has termed the novel theory ‘voodoo economics’ (Summers 2018 ). And it is hard to imagine the world’s independent money masters signing off on a piece of magical thinking.

  Integrating the Financial Sector

  Hyman Minsky , a professor at Washington University in St. Louis, argued in the 1980s, at a time when financial crises were largely absent, that in a capitalist society there was a strong likelihood of that at some point major financial crises would materialize (Minsky 1982 ). His theory, which was also seen as an ideological screed, received little attention at the time. It got another look at the time of the Global Financial Crisis, demonstrating the need for increased insight into the systemic side of the international financial system. And after the elevation of financial stability as a major policy goal in the mid-2000s, there were attempts to successfully integrate the financial sector into contemporary macroeconomic models. However, the domestic and global financial interconnections and their relevance to monetary and economic conditions are so complex that those efforts so far have produced little of note. As a consequence the role of officials with a significant understanding of markets (market ‘feeling’) has—once again—become more prominent. So far, therefore, as regards financial markets, the art

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  Economics for Sustainable Prosperity

  • Steven Hail(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1930 , 4). By this definition, money has been ‘modern’ throughout monetary history.

  As for Keynes and the school of thought we now know as MMT, it would be wrong to say that Modern Monetary Theory can be found fully developed in Keynes’ works, although there are statements in both the Treatise and

  The General Theory

  which anticipate Modern Monetary Theory . Moreover, in a letter to James Meade, written in 1943, Keynes said of Abba Lerner , the father of functional finance , and so for some, if not the grandfather of Modern Monetary Theory, at least a favourite uncle, ‘His argument is impeccable. But heaven help anyone who tries to put it across’.

  6

  Modern Monetary Theory is an updated, fuller and more sophisticated, development out of Abba Lerner’s laws of functional finance , and Hyman Minsky’s call for an effective instability thwarting mechanism, based on fiscal policy . The difficulties of putting it across are no less severe today than they were in 1943, when that letter was written. If we are to have a second Keynesian revolution, which is more faithful to the economics of Keynes (as opposed to what became known as Keynesian economics), more resilient to attack and a basis for genuinely sustainable prosperity , they are difficulties which we must overcome.

  Axioms of Modern Monetary Theory

  There are three core statements, or axioms, at the heart of Modern Monetary Theory . Once learned, they can never be forgotten, and once understood, they are self-evident. Economic analysis which ignores them, or which denies their validity, is in defiance of either the laws of accounting or the laws of science, is incompetent and is therefore liable to be misleading. The first axiom is the statement that monetary sovereign governments face no purely financial budget constraints. This is widely misunderstood and is of vital importance. A monetary sovereign government is one with its own currency and central bank, a floating exchange rate and no significant foreign currency-denominated debt. The USA has a monetary sovereign government, and this monetary sovereignty is by no means dependent on the status of the dollar as a global reserve currency. Japan, Australia and the UK are other examples of countries with monetary sovereign, currency-issuing governments. Monetary sovereignty

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  Debating Modern Monetary Theory

  • Costas Lapavitsas, Robert Rowthorn, Costas Lapavitsas, Robert Rowthorn(Authors)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  Modern Monetary Theory on money, sovereignty, and policy: A marxist critique with reference to the Eurozone and Greece

  Costas Lapavitsas and Nicolás Aguila

  ABSTRACT

  This article compares and contrasts Modern Monetary Theory and Marxist monetary theory focusing on the relationship of money to commodities, the role of state power in monetary processes, and the significance of global hierarchy for world money. Money is a social relation, as MMT claims, but for Marxist theory capitalist money is specifically a relation of class, both domestically and internationally. The room for state policy is correspondingly constrained, not least because the international monetary system is hierarchical. These issues are placed in historical context by analyzing a politically important plan for Eurozone exit during the Greek crisis of the 2010s. It is shown that regaining monetary sovereignty was a demanding technical problem but also, and more fundamentally, a class issue embedded in relations of international subordination.

  Introduction

  During the last two decades, Modern Monetary Theory (henceforth MMT) has won wide academic recognition and public influence. MMT has updated the Chartalist theory of money, originally proposed by Knapp, Innes, and Keynes, putting forth a notion of monetary sovereignty (Tcherneva, 2016 ; Tymoigne, 2020 ; Wray, 2019 ). On this basis, it has advanced powerful criticisms of mainstream economics regarding monetary and fiscal policy (Tcherneva, 2007a ; Wray, 2014 ).

  There are considerable areas of agreement between Marxist political economy and MMT but also profound differences. The critical discussion of MMT in this article aims to be constructive and in the spirit of common opposition to mainstream economics and economic policies. It focuses on the relationship of money to commodities, the role of state power in monetary processes, and the significance of global hierarchy for world money, all of which have consequences for monetary sovereignty. These seemingly abstruse issues are integral to state economic policy but are often side-lined by vocal critics of MMT keen to debate monetary and fiscal policy, particularly within the institutional context of the USA. Yet, the policy proposals of MMT are of a piece with its underlying theoretical understanding of money. A coherent critique must depart from first principles.

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  Maximum Government, Maximum Governance

  Reframing India’s Macroeconomic Discourse

  • Sashi Sivramkrishna(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  7 It is a naïve, simplistic and flawed notion of modern money. It is these shallow foundations on the notion of money that mainstream macroeconomic theory is built upon with disastrous policy implications that dominates macroeconomics discourse.

  Taxes Drive Money

  MMT instead adopts a ‘chartalist’ position on money where money is seen as a creature of the state, which through its sovereign power appropriates the right to define the unit of account as well as the money form or money thing that answers this definition.8 From this perspective, money is a pre-market phenomenon; it arose from the state’s desire to control production and only later did it gain widespread acceptance as a medium of exchange or a means of settling obligations between parties in the private sector. When the state makes it mandatory that taxes and other obligations to it have to be settled in a particular money form/thing, which it has defined and of which it is a monopoly issuer of, there will automatically be widespread demand for its currency. This demand for its money in turn enables the state to capture a share of resources and output produced in the private sector. The latter ‘voluntarily’ forego goods and services in exchange for state currency, the currency in which they must settle their dues to the state. The tax-driven money approach—also called the neochartalist or MMT approach—provides a (or the ) logical raison d’être for the state to intervene in the monetary realm.

  Warren Mosler, owner of a hedge fund and founder of MMT, explains the idea of ‘taxes drive money’ using a simple example. He pulls out his visiting card in a classroom and asks students whether they would be willing to buy them from him at a price of, say, one card for one hour’s work that would be used to clean up the classroom. When no one accepts his offer, he tells them that to leave the classroom they would have to give a card to his henchman at the door who has a weapon on him and which he wouldn’t mind using if they fail to surrender a card. He then asks the same question. Everyone now raises their hand; they are willing to work the necessary hours in exchange for his visiting card. He then goes on to explain that people become willing to hold his card because of the tax and the punishment imposed for non-compliance. Furthermore, unless Mosler distributes his cards first, he cannot ask students to submit cards at the door. In the same way, the state must first issue money (tokens) for them to be able to collect them back as taxes. This brings us to one of the most important tenets of MMT:

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  The Economic Thought of Henry Calvert Simons

  • G.R. Steele(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Monetarism and Fiscal Monetarism 113 market operations conducted by a central bank. By those adjustments, the magnitude of sovereign debt (i.e., the aggregate value of base money and treasury bonds) remains unchanged. That outcome is in line with Keynes’s somewhat theatrical recommendation: If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled to the surface with town rubbish, and leave it to private enterprise on the well tried principle of laissez-faire , to dig the notes up (the right to do so being ob-tained, of course, by tendering for leases of the note-bearing territory) there need be no more unemployment. (Keynes, 1936, p. 129) The awkward phrase that Keynes sets in parenthesis ensures that, by the pay-ments collected from those who obtain the ‘leases of the note-bearing terri-tory’, there is no net addition to sovereign debt. Where Milton Friedman points to policy of that same ilk, it is to argue that Keynes’s remedy would not be effective. Friedman first draws attention to ‘the continued widespread acceptance… that fiscal policy is the key to control the level of money income’, which he counters as follows: The quantity theory implies that the effect of government deficits or sur-pluses depends critically on how they are financed. If a deficit is financed by borrowing from the public without an increase in the quantity of money, the direct expansion effect of the excess of government spending over receipts will be offset to some extent and possibly to a very great extent, by the indirect contractionary effect of the transfer of funds to the government through borrowing. (Friedman, Encyclopedia Britannica entry cited from Werner, 2007) In Friedman’s presentation, when government borrowing is financed by a transfer of funds from other parts of the economy, the net effect is, at best, neg-ligible.

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