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Sunday, March 19, 2017

Book Review: Modern Monetary Theory And European Macroeconomics

Dirk H. Ehnts, a lecturer in economics at Bard College, Berlin, has written Modern Monetary Theory and European Macroeconomics. The book acts an introduction to Modern Monetary Theory (MMT), aimed specifically at the situation in the euro area. This is distinctive, as a great deal of the MMT literature discusses the situation of floating currency sovereigns (which is the preferred position in MMT, as distinct from the rest of the post-Keynesian literature, where some economists are in favour of currency pegs). The later chapters of the book give a historical explanation of the euro crisis, and offers an outline of how the euro area can be reformed. The book is aimed at non-specialist readers.

Book Description

Modern Monetary Theory and European Macroeconomics was published in late 2016 by Routledge. The hardback edition is 222 pages, and there is an ebook edition as well. (I read the KIndle edition, so I will not be quoting page numbers.)

The book is divided into four parts (excluding front/end matter).
  1. Part I - Theoretical Foundations. (What is economic activity, anyway?)
  2. Part II - Money and Credit.  (Introduction to MMT-style balance sheet analysis.)
  3. Part III - Analysis. (Theoretical model; the situation in the euro area.)
  4. Part IV - Reform.
The ISBN is 978-1138654778.

The following sections will discuss these parts in turn.

Part I - Theoretical Foundations

This part has one chapter -- "Substance and purposes of economic activity." It is a philosophical discussion of the purposes of economic activity. I generally stick to a narrowly defined part of economics (which I call "bond market economics"), and I will duck discussing this chapter.

Part II - Money and Credit

This part of the book returns to the relatively familiar terrain of MMT-style balance sheet analysis of the economy. It describes how debts become money, and the operations of the banking system, etc.

This tutorial covers chapters 2-6.
  • Chapter 2: Debts and balance sheets.
  • Chapter 3: The creation of bank deposits.
  • Chapter 4: The creation of central bank deposits.
  • Chapter 5: The instruments of a central bank.
  • Chapter 6: The creation of sovereign securities.
The material is divided into bite-sized sections, and Ehnts covers a lot of background material. For example, what is the TARGET2 system in the euro area? Even if the reader is familiar with the popular MMT literature, there are probably many topic areas that showed up in the euro crisis that are explained here.

This part of the book ends with two chapters on more advanced topics: financial system sustainability, and inflation. 

The chapter on financial stability discusses the MMT argument that the government acts as the "'deleverager' of the private sector." It also gives a background on bank regulation (reserves, capital requirements).

I will admit that I have SFC modelling on my brain right now; I am highly focused on the mathematical side of post-Keynesian economics. (Anyone who thinks post-Keynesians have an aversion to equations needs to meet my sfc_models package.) As a result, when reading the book, I tended to focus on the more advanced topics. The chapter on inflation and deflation was of obvious interest.

For a reader new to economics, the discussion is quite good. Ehnts offers a good summary:
While most people almost instinctively believe that an increase in the monetary supply -- however that is defined -- leads to inflation, the reality is more complicated. 
The post-Keynesian discussion of inflation is complicated; Ehnts offers a reasonable summary for non-specialist readers. However, someone with a background in economics, but who is unfamiliar with post-Keynesian theories, would probably want more detail. For such readers, they would need to go to more advanced texts.

(However, if the reader of this review is unsatisfied with the "it's complicated" answer, I want to underline that the alternatives are worse. For example, the central bank can somehow move inflation expectations. How does it achieve this -- orbital mind control lasers? Alternatively, inflation may be caused by deviations of the unemployment rate/real GDP from NAIRU/potential GDP. When those model predictions inevitably prove to be wrong, whoops, NAIRU/potential GDP moved!)

Part III: Analysis 

Chapter 9 has the title "A macroeconomic model." The chapter discusses national accounting constraints on saving, including the accounting identity that often shows up in MMT discussion:

(S_p -I ) + (T - G) + (IM - EX) = 0.

(This says that domestic private sector net saving (S_p - I), plus government sector net saving (T-G), plus external sector net saving (IM - EX) must sum up to zero: by definition.)

This chapter would likely be very interesting for readers who are not familiar with these concepts. At the same time, the more advanced critics of MMT are most likely going to complain about this chapter. The argument is that accounting identities are not enough to describe outcomes; we need to take into account behavioural patterns. Ehnt's description of these identities is based upon assumed behavioural patterns; I happen to agree with those assumptions. However, we would need a more advanced technical discussion to deal with some of the criticisms of this MMT-style analysis.

The rest of this part is a discussion of the situation in the euro zone. Ehnts outlines the economic history of the euro from a MMT perspective. His description is done at a relatively high level, as would be expected to having to fit the history within two chapters. He does a fairly good job of skewering some of the myths associated with the origins of the crisis by looking at the data.

Part IV: Reform

Part IV consists of two chapters.
  • Chapter 12: How do we restore demand?
  • Chapter 13: The future: with or without the euro?
The first of these discusses the problem of demand deficiency. As is somewhat predictable, he argues that the government sector needs to step up demand in order to allow the private sector to undergo balance sheet repair.

For the euro area, the design of the euro itself is the main reason not to expect such an outcome. Ehnts discusses how the euro could be reformed, and possible scenarios for the euro area to be broken up (a peripheral country leaves; alternatively Germany leaves).

Once again, the discussion is at a high level. Unfortunately, the book does not offer a recipe for easily quitting the euro area.

Concluding Remarks

For non-specialist readers, the book offers a good introduction to Modern Monetary Theory, particularly as applied to the thorny problems of a currency peg system like the euro. However, the focus on being accessible to general readers means that this book may offer limited help for trained economists who want to get into the gritty details of how MMT differs from other approaches.

 (c) Brian Romanchuk 2017


  1. Brian,

    I know you've said that it's a good introductory book (and the contents page is very enticing), but is there anything in the book that one wouldn't find in, say, Tymoigne's superb money and banking series over at New Economic Perspectives (recently made downloadable as a pdf book)? Or Tymoigne's book and Wray's primer?

    Ehnts's book is rather pricey and if there's nothing in it that's fundamentally new, it'd be nice to know before blowing £60 on such a slim book. In your estimation, what would be a more advanced version of Ehnts's book? I've found that many of the MMT books are too specialised, and don't really cover the general macroeconomy at a more detailed level. No doubt Bill and Randy's Macroeconomics, due out later this year, will cover this oversight, but in the meantime do you have any thoughts?

    By the way, would you say that your new book "Abolish Money" would, in a sense, be "Volume 1" of your own intellectual approach, though it is published later than your others? I was thinking of making a list for the interested reader of MMT-style thinking from introductory to advanced. I suppose the only way to find out is to read it! Until then, any comments by you would be most helpful.

    1. The question of cost was an obvious issue; since I have a conflict of interest. (My primers are not pure MMT, but rather sections of MMT along with fairly standard financial theory, explained using terminology that would be more familiar to those who read market research. So if someone wants a pure MMT primer, my books may not be exactly what they want.)

      The introduction to MMT chapters are certainly similar to other MMT primers. What would be novel are the sections on the euro area. Even if other primers discuss the euro, I think Ehnt's discussion is interesting. The problem is that the more advanced chapters are only a small part of the book (as based on the chapter count (since I am Kindle-based, no idea about page counts). As a result, if you have read Wray's book (for example), it's effectively for a few of the chapters. But for someone new to MMT, the emphasis on the euro area helps eliminate some of the arguments that "MMT only applies to the US."

      I certainly would have preferred a more advanced text, being closer the academic literature. Having SFC models to implement would be amazing...

      Turning to "Abolish Money", it could have been titled "Rants about money in economics". There is a small amount of theory buried amongst the rants, but it's not laid out systematically, It was supposed to be a cut and paste of blog articles, but it ended up with far more original content than planned. (Planned word count: 17,000; actual was 45,000+ (?).The advantage of the bigger book is that I can safely put the title on the spine.)

    2. As far as "Abolish Money" is concerned- did I get the extra 28,000+ unplanned words at no additional cost? If so, Thanks! :)

    3. The paperback is more expensive; print costs are higher. But the ebooks are the same price...

  2. I'm a bit late to this post but hopefully not too late to ask a question. You talk about the usefulness (or lack of) for this book in communicating MMT to mainstream trained economists. That's a problem I've seen in an number of different contexts. Things like plain english, accounting, institutional descriptions, and central bank literature tend to get utterly lost in translation as gibberish to the trained economist.

    So my question is do you recommend a source that can function as an effective rosetta stone? Nothing so ambitious as persuasion, just something to bridge the communication gap to map MMT insights into language the average trained economist will understand?

    1. One answer is "Post-Keynesian Economics: New Foundations" by Marc Lavoie. Yes, he was involved in a lot of academic debates with the MMT crowd. However, it does give a big picture view of the philosophical divergence between post-Keynesians generally, and explains how MMT fits in. It covers a lot of the issues that mainstream economists focus on.

      If we confine ourselves to MMT authors only, the bulk of the books are essentially aimed at non-experts, and people in the mainstream end up getting into pointless arguments over the terminology used. Conversely, other books and the academic literature ends up too specialised, and a mainstream economist will focus on technical details of that specialised topic area, and not grasp why things are done they way that they are. The advanced version of the Wray and Mitchell textbook (suppoosed to be out soon) may provide a "pure MMT" general text that acts like Lavoie's in this context.

      To beat my own drum, I generally try to contrast and compare approaches to the same topic, and so "market economists" can perhaps see where the differences lie. However, I doubt that my writing will ever appeal to the academic mainstream...

    2. Thanks for the reply! I'll try and lay my hands on a copy of Lavoie's book.

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