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Yves here. We were comparatively early to discuss Modern Monetary Theory, back in the days when a small group of scholars and economic writers like Randy Wray Stephanie Kelton, Scott Fulweiler and Warren Mosler were trying to get it out of an academic backwater into the mainstream. The fact that some libertarians mention it with a lot of choler and not much understanding says that this group of advocates has raised its profile.
But why the intense reactions? The response are often visceral, as if Modern Monetary Theory, which says that a sovereign currency issuer is not constrained by its ability to tax but the productive capacity of its economy (and the government can spend to marshal that to the extent the private sector is failing) is fiscal immoral. In fact, as Richard Murphy explains below. a more basic reason is Modern Monetary Theory upsets power dynamics via showing how currency issuing governments don’t rely on bond investors to spend. That means financial markets and banks wield much less power that the press and officials lead us to believe.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
Modern Monetary Theory (MMT) significantly alters the economic power dynamics by shifting control from banks to democratic governments, emphasising people and full employment. Critics misunderstand its implications, but MMT asserts that governments with sovereign currencies aren’t dependent on financial markets because they can create currency to fund spending. Taxation plays a crucial role in controlling inflation, reshaping the focus of economic policy towards full employment and addressing inequality, ultimately empowering citizens over finance.
Some people argue that modern monetary theory is irrelevant or that it changes nothing. They’re wrong. MMT fundamentally reframes the power relationships within our economy, moving power away from banking and the City and towards democratic government control whilst prioritising people and full employment instead. No wonder so many people don’t like it: MMT challenges all the privileges they enjoy at cost to the rest of us.
The audio file is here:
The transcript is:
Why is modern monetary theory so important?
I made a video on MMT recently and explained what it is. But knowing what it is isn’t sufficient to explain why I think it is so important.
Critics of MMT say that it doesn’t really change anything because, as they point out, and as I agree, MMT says that a government must tax a sum broadly equal to the amount of its spending if it is to control inflation.
If so, they say, so what? Does it matter whether we think that tax comes before spend or spend comes before tax? What’s the consequence, they say, when, as a matter of fact, the books will be broadly balanced inside any macroeconomic system, whether it’s using the principles of MMT or not? And my point is that, oh yes, it really does matter.
Their question is naïve; it’s rather like a physicist saying, “We don’t need Einstein and all that nonsense about the theory of relativity and everything else. What we can do is use Newtonian physics, which is an approximation to the truth in 97 per cent of situations, and that will do well enough for us.”
Except, of course, it isn’t. The three per cent of situations when Newtonian physics might well not provide a good approximation are where most of the important decisions need to be made.
And the same is true with regard to economics. It may be that MMT does really say that taxation is fundamentally important and that we must raise a great deal of it if we want to spend a large part of the national income through the government. But, understanding what MMT says makes an enormous difference to the way in which we interpret that spending and the relationships that exist within the economy.
Let me explain. First of all, understanding that the government is not beholden to financial markets, which is one of the core messages of MMT, is fundamental.
Modern monetary theory says that any government with its own sovereign currency that is internationally accepted and its own central bank can never be dependent upon the financial markets for money because it can always ask its own central bank to create the new currency that is required to enable government spending to take place.
As a matter of fact, we know this is true. It happened in the UK and in many other countries after the 2008 financial crisis, and it happened again during COVID. Quantitative easing tried to disguise that fact, but it failed in the real sense that we know that the amount of money in circulation created by the Bank of England or other central banks rose enormously.
So, that dependency on financial markets is not true. in existence, and MMT acknowledges that fact, which other theories of macroeconomics do not.
Being aware, as a consequence, that the government doesn’t borrow from financial markets but does instead provide financial markets with the opportunity to save fundamentally changes the power relationship between the City of London and the government in the UK and similar relationships elsewhere.
The bankers don’t rule. That is one of the messages of MMT. And it’s got to be understood. But no one else is saying it but MMT and, therefore, that makes modern monetary theory really important.
Secondly, tax is fundamentally important in MMT. Anybody who says it isn’t is wrong. Tax is, inside modern monetary theory, the principal tool used to control inflation. There is no other tool that can do it as well as taxation. Let’s be clear about it.
And what MMT says, as a consequence, is that the whole of this myth of central bank independence and the whole role of interest rates in controlling inflation, which has imposed so much pain on so many people as a consequence of unnecessary increases in interest rate over the last couple of years, is not true. Instead, tax has that role. So, this again shifts the balance of power.
The balance of power now lies with the Treasury and its decisions over taxation, including short-term changes that it can make if necessary to control inflation, like changing the basic rate of VAT, which is entirely possible at any time within any economy the central bank suddenly becomes just a regulator of banks and not a controller of the whole of economic policy, which is the status we’ve given it for the last 25 odd years, wholly mistakenly.
And then the role of tax is also different. Instead of tax being just about revenue raising, with the obsession being whether a particular tax is good at raising money or not, tax is seen as something much bigger in terms of the delivery of government policy.
It’s about the delivery of policy to tackle inequality.
It’s about the delivery of policy to change the way in which the economy runs, by providing subsidies, for example, to those things that the government wants to happen, and by charging tax on those things that it doesn’t want to happen. It’s about, therefore, charging tax on those things which are bad, let’s call them gambling, alcohol, carbon, whatever you wish, and it’s about not charging tax on things that are good, like education books and so on.
It’s also about building a relationship between citizens and government because it’s vital that people understand how tax works because they pay it, and that is one of the ways in which they can decide how to hold government accountable. In other words, tax is a fundamental driver of democracy.
MMT makes all these things clear.
And it also makes clear that the government need not obsess about inflation, because inflation always goes away of its own accord. That’s what history tells us, since 1210, when we’ve got data for that period in the UK. And, instead, the focus of government economic policy should be on things that are much more important.
Things like full employment, which MMT prioritises. Or investment, or inequality, or climate change.
All of those things could become the focus of attention rather than inflation, which has become so destructive as a goal, much more destructive, in fact, than inflation itself.
So, what MMT does is fundamentally change the description of how the economy works – the government spends and its taxes. Others would argue that the government taxes and it spends. And the sums of money will not necessarily alter greatly as a consequence of MMT. But what it does do is change our understanding of the power relationships around that.
This, then, is a political economic theory, because political economy is all about power relationships. And MMT puts the power back with democratic government, the Treasury, and the choices that it has to make about how to meet the needs of people, in particular by delivering full employment.
This makes MMT powerful, radical, different, and fundamentally important because it puts people, and not money, and not bankers, and not finance, at the centre of its economic policy. And that, I believe, is what has to happen now.
Thanks. I still have moments of uncertainty when trying to explain MMT to friends who are thoroughly indoctrinated with the traditional model. However, perhaps the biggest issue is its name. I *think* I get that there are some value judgments (perhaps pertaining to the job guarantee though am happy to be corrected) but the core of MMT is not a theory at all.
MMT is a description of how things work. It is more akin to the identity relationship in mathematics. At least, that was how it was described using national income equations in its early days. If I understand it correctly, you cannot disprove MMT (if your economy satisfies the core features like monetary sovereignty etc). Again, happy to be corrected, but my more educated friends always latch on to the “theory” moniker. I personally feel that if the “theory” idea had been shot down at the get go then the true political nature of much of the discourse might have become more apparent.
It is a description of how things work, but it has policy implications when set against policies that are based on an incorrect understanding of how things work. For example, the household budget analogy would suggest that the government needs to tighten its belt during a recession and balance the budget. This has generally been counterproductive any time it’s been tried and has made things worse, to the point where it became well established empirically that governments need to deficit spend in a crisis or recession to mitigate the impact. The austerity/household budget view of government spending has never been able to satisfactorily account for this, but it’s completely explained (and predicted) by MMT.
As the whole Covid debacle shows, theories have implications in terms of what should or shouldn’t be done, and that can very quickly get into political territory, or become politicized even if it’s a purely scientific matter.
Thanks. Your last paragraph (to me anyway) sums up my point. A theory can and likely will get into political territory. I think the core tenets of MMT should never be able to be politicised and should be no more in the discourse than flat earth stuff. I take your point that certain add-ons might be political but the MMT crowd should have separated those out.
I came from economics and I can count on one hand the number of “Nobel” prize winners who deserved recognition of the kind given to winners of proper Nobels. Pointing out an identity relationship should never be “open to discourse” any more than allowing people to have their own facts. I’m probably in old man shouting at clouds territory but once we give an inch they’ll take a mile.
The other problem is the name “modern”. As the article says, the data for it goes back to 1210.
I also think that Covid was a massive double edged sword for MMT.
On one hand it demonstrated that governments do have freedom to achieve outcomes that are generally considered “impossible” (like halving child poverty overnight) but on the other hand there was massive inflation and that is the takeaway that everyone has, across the spectrum.
Trying to counteract that with pointing to a combination of supply chain disruption due to overoptimized globalization, profit gouging, fraud and not using taxes effectively to soak up liquidity among the rich — plus a widespread spend like there is no tomorrow attitude – is an exceedingly difficult task.
I am keen to understand MMT because it seems obvious that the current economic models are illiterate and do not work. Although that may be because they do not prioritise things like full employment and reduced inequality. But then, the current models don’t seem to work even on their own terms.
What I am keen to learn is, if the limit to money printing is “the productive capacity of the economy” as Yves says, how does the Govt. know what that limit or capacity actually is?
I imagine I am like a lot of readers here who like the sound of MMT but are struggling to understand it. Basically because economics is, for me, hard to understand anyway. I did like that video and I read a lot of Richard Murphy’s stuff. He has enlightened me quite a bit but on this subject I think we need a better, more basic explanation so we can get our heads around this.
I am currently reading “Bill and Warren”s Excellent Adventure” by William Mitchell and Warren Mosler which is not bad although occasionally strays into the more esoteric economic realms.
I don’t just want to ask for something complicated to be explained in a simple way for an idiot like me but if more people understood this idea I’m sure it would be a lot more popular. It certainly has radical and positive potential.
For example, I have learnt from Michael Hudson the radical importance of debt and the uselessness of traditional Ways to measure GDP. So, complicated things that overturn years of conditioning can be explained, even to economic illiterates like I am. Maybe we just need a better teacher? (No insult intended to Richard Murphy).
It’s certainly important because if we’ve been living under MMT, then the accelerating destruction of the natural world and habitat will also need to be similarly laid at the feet of MMT. You have to own both the pros and the cons. Please don’t tell me that the only side effect of MMT is a bit of inflation.
On the other hand, I also think it’s not important, because human beings will find a way to destroy the world using whatever tool that’s available including economic and political ones. Also the second law of thermodynamics certainly does not give a hoot to what monetary policy that is currently in season.
One question I have about MMT that I never see being explored in depth is with regards to the core requirement (for its applicability) of sovereignty.
The nominal definition is clear enough, but looking through real world examples and how currencies actually work, one can find plausible arguments that no existing currency is in fact sovereign – not even the USD. To me, it looks like the classification of “sovereign currency” is not as straightforward as it is made out to be.
Can anyone recommend a more detailed exploration of the question of sovereignty? I have searched now and again for years, but never found one.