Posted by: Dirk | July 10, 2014

Modern Money Theory and Post-Keynesian economics – time for reunification?

Three authors from Newcastle, Australia, namely James Juniper, Timothy Sharpe and Martin Watts, have just published a paper asking why Post-Keynesians (PKs) do not integrate Modern Monetary Theory (MMT) into their school. They write:

In this paper we argue that the incorporation of MMT principles enhances the post-Keynesian framework, principally with respect to understanding the distinction between sovereign and non-sovereign economies and the role of the payments system. These have major consequences for the conduct of macroeconomic policy which has assumed increased importance since the advent of the crisis.

Having just taught a course using balance sheets to explain money and credit, I tend to agree with that statement. The methodological framework of MMT – discussing balance sheet (mechanics) – is sound and not trivial. It helps to provide the ‘microeconomic foundations’ to any macroeconomic approach.

A nice framework to write a textbook on international economics would be the following methodological structure:

  1. discuss balance sheets of entities like central bank, banks, government, private sector (MMT)
  2. discuss national income and product accounts, flow of funds and balance of payments (identities)
  3. discuss macroeconomic models based on the sectoral – private, public and external sector – approach (PK/SFC)

I personally think that there should not be a dividing line between MMT and PK. They do not disagree over the major issues when it comes to the description of the economic system. Differing policy recommendations are not a reason for a split between the two. In a world with uncertainty, policy prescriptions will never coincide. The discussions between MMT and PK are fruitful, and I have learned a lot from both sides. So much so that I would find it incredibly hard to align myself to either camp. I like the balance sheet approach of MMT, SFC models and Minsky’s discussion of debt, but also the circuitist approach, the PK work on inequality and financialization and the compensation thesis.


  1. The dividing line is in the approach to the exchange rates. PK takes a classical approach which tends towards fixed exchange rates. MMT understands the nature of floating exchange rates and shows how that gives more policy space.

    The classical view on exchange rates is just wrong – because the analysis viewpoint taken is wrong. The ‘my economy and the others floating around as an amorphous mass called external sector’ leads to mistakes in analysis.

    To analyse the exchange system correctly and understand what a central bank can, can’t and importantly *shouldn’t* do requires a closed economy view of the entire world and analysing the interacting economies as peers within that view.

    I’ve seen nothing taking that approach as yet.

    • “The dividing line is in the approach to the exchange rates. PK takes a classical approach which tends towards fixed exchange rates. MMT understands the nature of floating exchange rates and shows how that gives more policy space.”

      Why should that be a dividing line? Neoclassical economists do not agree on the exchange rate regime, why should heterodox economists? Discussions of exchange rate regimes will be with us for the next hundreds of years, without a ‘final result’. Why make that issue a dividing line?

  2. Are all interacting economies peers? Or is there a status structure to the relationship?

  3. This 1984 article by David Colander articulates why there has to be a rapprochement between Post-Keynesians and MMTer’s to simply enable all the “balance wheels” to be identified and assembled to form a functioning steering mechanism:-

    Click to access was_keynes_keynesian.pdf

  4. Nice piece, Dirk (and hello!)

    Just a quick point–MMT has long incorporated both the circuit and financialization. Randy’s written about the circuit since late 80s/early 90s, and it’s prominent in both his 1990 and 1998 books. Also, Minsky coined the term “money manager capitalism” in the 1980s to describe essentially what later PKers used the term “financialization” to mean. Randy’s written on this since the 1990s, too.

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