Modern Monetary Theory

The Right’s attempts to fetishise the level of the deficit both in the UK and the US has led to one interesting response. While discussing this with friends, I was pointed at the group of economic theories called Modern Monetarist Theory. So I decided to a bit of reading.

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They argue that in fiat currency economy, governments do not need to tax or borrow to fund government expenditure. They argue that in an economy functioning at under full employment, printing money will increase demand, and thus spur growth, and that otherwise inflation will erode the value of the debt. They further argue that debt and deficit management should not be the goal of public policy. The man most associated with the label of MMT, Bill Mitchell, is interviewed at the Harvard International Review and has a blog called billy blog, with a sub domain of bilbo, wonder if the Tolkien estate will hunt him down; the blog sub title is “Modern Monetary Theory … macroeconomic reality”. I also found this article, “Modern Monetary Theory – An Overview” by someone signing themselves as Bolo, a useful simplification, although on reading more, I find that my difficulties in following Professor Mitchell are based on problems I have with the model’s assumptions and boundaries. Bolo points us at Mitchell’s article called “A simple business card economy” which to me, while explaining the model, illustrates the weakness of modelling a two player economy, in which there are thus no intra private sector transactions, and one with no international trade, where other actors require the use of alternative currencies. Another of the problems, I have in the explanations, it maybe that MMT has answers, lies in the centre of post classical monetarism. The value of the economy, equals the amount of Money multiplied by the number of times money is used, otherwise expressed as the velocity of money. While governments can impact the amount of money in the economy, although it’s not as easy as that, there is allegedly no government policy instrument to impact velocity. Actually, there is, it’s about income distribution. By taking money from the rich and giving it to the poor, we will increase the velocity of money because the poor save less than the rich; they have pent up demand, which due to lack of cash, is not effective.

I found some parts of MMT hard to get. It wasn’t that I found it hard to to understand, but it didn’t seem to tell the whole story. So with help from Google, I found “A critique of Modern Monetary Theory” by Thomas Palley. In the abstract, he says,

“MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT’s polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT’s oversimplifications of macroeconomic theory and policy”

This is a detailed critique of the model and policy prescriptions of the Modern Monetarist Theory; some elements of the essay criticise the theory and some the policy prescription. In my words, what this means is that,

  1. they have no macro economic theory so they find it hard to describe fiscal policy implications i.e. they cannot describe the impact of government expenditure nor of taxation. Taxation and expenditure both have multiplier effects.
  2. they have a simplistic inflation model based on a two player economy i.e. public and private sectors and an on/off inflation model.
  3. they have no international trade dimension which has a growth and inflation impact and crucially from an MMT perspective allows actors i.e. the private sector to avoid the currency monopoly and thus the fiat! International Trade also creates constraints on macro-economic policy, importers can’t pay with the fiat currency, they need to buy or borrow the foreign exchange. (It can’t be printed by the importers’ government, and in some weaker and smaller economies, the private sector will accept foreign exchange as a legal tender. )
  4. MMT-ers argue for money financed deficits, while the UK is a long way from so, the idea that UK or US Gilts will cease to exist is a bit far fetched; Gilts have other purposes than to act as government debt instruments. Banks need them as safe assets, Government’s can and should schedule payments over time for public capital assets, and bonds are an important tool to allow governments to influence the cost of capital.
  5. In addition, MMT has nothing to say on income distribution and its effect on growth.
  6. For good measure, Palley also attacks them for proposing that the Public Scetor act as the employer of last resort, quoting the Tories Workfare shambles as an example of how and why not to do it.

I suppose, it’s as I say on my bookmark/micro-blog. MMT ain’t the General Theory, but as Palley says, it’s a useful polemic tool for winding up the US Tea Party. Probaly Less helpful over here.


Ratholes I have avoided, or things you might like to read discovered while writing and reading for this article.


  1. The link to the Palley paper on manager’s pay had broken, I posted a mirror copy to my document cache and fixed it.

  2. Bolo’s paper has now also gone, but I attended a lecture by Bill Mitchell in 2017 and should probably re-visit this.