Posted by: Dirk | February 19, 2014

A not-so-friendly critical look at MMT?

Academic discussions are good. Since no (sub-)school of economics can claim to have the final truth – except DSGE modellers, of course, but they are not a school of economics but rather a church of mathematics – it is helpful to discuss issues in order to stress where the theoretical and practical differences are, and to advance insights into how the economy works. The rise of MMT in blogs and other new media has attracted attention from the Post-Keynesian camp, to which MMT ultimately belongs. Marc Lavoie started with a friendly critical look, then Thomas Palley added a critical look, to which Randall Wray and Èric Tymoigne responded here, to which some days ago Thomas Palley responded by a perhaps not-so-friendly paper here.

The discussion centers on Palley claiming that MMT says nothing new and is not different from Post-Keynesian economics. I am not aware that MMTers claimed otherwise. Here is a paragraph from an introductory blog post of what later became Randall Wray’s MMT primer:

In recent years an approach to macroeconomics has been developed that is called “modern money theory”. The components of the theory are not new, but the integration toward a coherent analysis is. My first attempt at a synthesis was in my 1998 book, Understanding Modern Money. That book traced the history of money as well as the history of thought undergirding the approach. It also presented the theory and examined both fiscal and monetary policy from the “modern money” point of view. Since that time, great strides have been made in applications of the theory to developing an understanding of the operational details involved. To put it simply, we have uncovered how money “works” in the modern economy. The findings have been reported in a large number of academic publications. In addition, the growth of the “blogosphere” has spread the ideas around the world. “Modern money theory” is now widely recognized as a more-or-less coherent alternative to conventional views. However, academic articles and short blogs do not provide the proper venue for a comprehensive introduction to the approach.

I think that Randall Wray is right. MMT’s ‘components are not new’, but the coherent analysis is. A case in point is Scott Fullwiler’s paper on modern central banking operations. I have not read anything else (Post-Keynesian or not) that is so good at explaining how these operations work in such a limited space of (digital) paper. However, when I talked to Post-Keynesians they apparently knew everything that was in the paper. So, to some extent I think this debate is superfluous. MMT differs from Post-Keynesian economics by method. While the latter has taken over the idea of modelling, MMT has not. I find this difference in methodology rather helpful. It means that you have different approaches to the same problem, and there is some use in that. Not all problems are best explained by a model, not all problems are best explained by balance sheets. Another part in Thomas Palley’s new paper that I find not helpful is that on counter-cyclical policy. He (2014) writes:

I confess I was stunned by the claim (T&W, 2013, p.44) that MMT rejects counter-cyclical fiscal policy – what T&W call “fine-tuning”. I had thought counter-cyclical fiscal policy was an essential element of the MMT argument, and that the recent recession and current stagnation called for large-scale money financed fiscal expenditures. Apparently, that is not the case.

That is a stark misrepresentation of what Wray and Tymoigne (2013) had written here:

MMT draws specific policy conclusions about fiscal, monetary and financial policy. In line with Keynes and Minsky, MMT recognizes that unemployment, arbitrary distribution of income, price instability and financial instability are central problems of market economies that require some government involvement for resolution. The nature of this involvement is, however, very different from the Bastard/IS-LM Keynesian approach that focuses on fine-tuning. That fine tuning takes the form of discretionary, temporary, and limited fiscal and monetary policies to deal with slumps and booms through proactive change in government spending, tax rate, and interest rate. This approach of government intervention aims at avoiding direct intervention to achieve the goal (e.g. hiring to achieve full employment, or price controls to achieve low inflation), but rather using indirect “tools” while letting market participants push the economy toward desired goals by tweaking their incentives.

MMT does not agree with this approach. The government should be directly involved–  continuously–over the cycle, by putting in place structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects, and constantly monitoring financial developments. Because those programs would be permanent and structural, rather than discretionary and specific to one Administration, they would be isolated from the political cycle and political deliberations.

So, MMT does call for Thomas Palley’s ‘large-scale money financed fiscal expenditures’. Apart from these two issues there are some good discussions and clarifications on both sides, and it is interesting to see that Randall Wray and Èric Tymoigne have moved from recommending a flexible exchange rate regime at least partly to fixed.

Happy reading to those interested in modern monetary theory!



  1. “and it is interesting to see that Randall Wray and Èric Tymoigne have moved from recommending a flexible exchange rate regime at least partly to fixed.”

    Not sure where you see that. Nothing in that paper says anything different to what MMT has always said on the external sector.

    I see nothing that shows any shift in position. Flexible exchange gives maximum policy space.

    • @NeilW: Wray and Tymoigne write: “Open economies are more sensitive to fluctuations in exchange rates and may desire to curb exchange-rate fluctuations by pegging a currency.MMT notes that there are different degrees in this type of policy that influence the policy space available to a government. A crawling peg provides some policy space that varies according to the exchange rate band. A currency board, the last step before completely giving up monetary sovereignty (“dollarization”), provides almost no policy space
      and so makes it difficult for a government to set its own policy agenda.” (p. 43)

      I see a tolerance there that I have not noticed/seen before.

  2. Look Dirk, one of the things imposed by the rules of the game, free trade in particular is that a nation’s growth is quite tied to the performance of producers in the international markets – both abroad and at home. So international competitiveness matters. The answer is not just deficit spending which is what MMT comes down to. The idea that floating your exchange rate removes this constraint is the result of one of the most ancient prejudices – ie prices do the job. And this is related to money, debt, etc. One way of achieving objectives is to modify the rules of the game and for nations to agree to keep external imbalances in check. That at present is far from achievable and economic growth is haphazard. A nation such as India which provided stimulus is not forced to go slow because of the balance of payments problem which comes with it. So please, MMT is a far from being theory of money and credit. Childish actually.

    • “which provided stimulus is not forced”

      should read:

      “which provided stimulus is noW forced”

  3. I think what you say is a verbal description of Thirlwall’s Law, with which I agree. In my writings on China you can see that I do not argue for a flexible exchange rate, and I am not aware that I argued for it elsewhere. Please note the difference between my own opinion and that of others. I have presented here Wray/Tymoiogne and Palley. I did not take sides.

    • About exchange rate, there’s more to dichotomy analysis between fixed and floating.

      But anyway, I guess my comment was in response to your phrase “coherent analysis” below a T&W claim of some coherent analysis. Anyway all the best.

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