Note: PP on twitter asked for a post on MMT, and asked me to try to avoid making it technical. I attempted to do that at much as I could – however, I was forced to use words like endogenous, as it was the cleanest way of trying to get across the point that by using supply and demand savings and investment are jointly determined … and the interest rate is set as the price. The very idea that economists only think the causal chain goes only one way or the other is patently ridiculous – and does not represent economists, no matter how much people keep saying it does. So try to keep that point in the back of your head until at least the end of the post if you read it
I have nothing inherently against modern monetary theory, its proponents, or the value judgments involved. But my impression is that MMT theorist view central bank independence and the framing of government policy as an ideological device to “shrink government” and so have decided to create a “strawman” mainstream economics to attack, rather than directly admitting they want a larger state (and the trade-offs involved in that). For me this simply lacks transparency!
So how does MMT differ from mainstream economics. Well in the words of Bill Mitchell (who I choose because he is clear, both here and on his blog – which is a good thing!) it comes from economists accepting three false premises:
- A government has to borrow to spend
- There is a fixed supply of savings at a point in time
- Governments crowd out investment for that fixed supply of savings, pushing up interest rates
Supposedly all three of these are in the core of economics, and they are all wrong. Huzzah.
Ok, so if that is MMT then I’m not sure who in the world they are actually arguing with. The government can print money, and this is in any graduate macro book, so that doesn’t hold as a premise. Savings and investment are determined by supply and demand, they aren’t a “fixed thing”, so that isn’t a premise in mainstream economics (Sidenote: Why do people keep saying “savings determines investment” or “investment determines savings” – I’ve never heard economists talk like this … remember the money multiplier is a ceteris paribus example, not a description of the causal device). Crowding out is actually a premise – but it comes from government demand pushing up demand for underlying goods and services … because government demand for things is just like the demand of any institution.
Let me restate these premises in terms of what the mainstream actually has:
- A government can finance spending through taxation, selling bonds, or issuing money. In the end, prices and expectations adjust such that someone pays for government consumption and investment. More specifically the government has to match spending to taxes over time for a certain inflation target!
- Savings and investment are determined endogenously by demand and supply factors in the economy, where the “price” is the REAL interest rate (perhaps I should use the world natural/fundamental here) – as savings and investment are factors that are involved with transferring consumption (the thing we really want) over time due to technology, the rate of return on investment, our time preference, etc etc
- Additional government demand for goods and services will push up the price of those goods and services and push up the REAL interest rate in the economy … remember the real interest rate is a price, when the government is trying to push up investment of consumption this increases the demand for these given an underlying PRODUCTION FUNCTION, crowding out private investment and consumption … the real interest rate rises as investment/consumption demand has been pushed up and the lift in relative prices has to occur in a way that makes private agents defer consumption/investment in terms of the quantity of goods and services. No amount of hammering the S=I identity in the face of fiat currency changes this
These premises actually sound pretty good to me!
I remember my dad used to say “it isn’t money that matters when we think about people, it is the actual good and services that are made and consumed”. He didn’t take the same point out of it I did, but I think on this statement he was right – we need to actually think about goods and services, capital, and labour here.
Now there are MMT people who claim they do (back to Bill again) – that they have a production function (which seemed to be a bit missing earlier) and they have a Phillips curve (tells us how this production function and prices pressures relate through time). This is good, these two things are necessary!
But if that is what they are doing, then their inherent model IS the mainstream model. The three “fallacies” that they mention don’t actually exist – and that third point they list down is WRONG … there is crowding out. Instead their argument is that the “optimal size of government” is larger than they hear other people saying … which is both an empirical and subjective question that people have already written (and should continue writing) countless books on.
Yes, people should discuss this, and discuss trade-offs. But misinterpreting mainstream economics and pretending to offer an alternative in order to sell your view as not being “subjective” (which all policy conclusions are) is both misleading and irritating for people who view themselves as part of the mainstream. Personally I like the idea of “changing the frame” to think about issues – but to me that is just a good way of researching, rather than a sign of a militant revolution inside economics
A much better critique of MMT (albeit more technical) can be found here.