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Wednesday, September 27, 2017

The State Of MMT Theory Is Good

I have returned from the first Modern Monetary Theory Conference, and I am feeling complacent about the state of theory within Modern Monetary Theory (MMT). I am looking at this from a particular perspective, which I will explain in this article. Other aspects of Modern Monetary Theory are obviously a work in progress, which I hope to discuss in a later article.

Background: Theory For Outsiders

My perspective is straightforward, although it may appear novel to some academic economists. I am interested in getting a handle on economic theory, taking into account that I am numerate and have a background in some other areas of study. In other words, I am not looking for a primer on "What is money?" in comic book form; feel free to throw whatever equations you want at me, so long as they are written in standard mathematical notation.

I can give an analogy from the area of academics that I worked in: robust control theory. A great many engineers from different fields (mechanical, chemical, aerospace) discover the hard way that it is difficult to get the systems they have built to behave, and they are forced into learning about robust control theory. I would send such a person to a textbook in the area, unless they were interested in a very specific topic that had not yet made it into a textbook. (In which case, they would need to consult a textbook and some journal articles, ideally a literature survey.)

Although it may be surprising to outsiders, even control systems engineering has different schools of thought (although they are not politically based like economics, so they are less persistent). Optimal control theory was popular in the 1960s, but I would only teach it to graduate students as an exercise in mathematics for the sake of mathematics (and history of thought), but absolutely not as a way to design actual engineering systems. Even within robust control, there were some debates that could only be described as philosophical, but you could probably cover the competing sides within the same coherent textbook. (Of course, there will be disputes over who gets cited for what, but these are only interesting to connoisseurs of academic politics.)

Economics is somewhat different. If you assemble twelve economists in a room, you are going to end up with twelve (or more!) coherent theories of economics that differ on some key points somewhere. It is a major effort to end up with a single textbook that covers the major views of a number of economists. For a purist, you could argue that the best way to deal with this is to dive into the academic literature, and tease out strands of logic. However, that strategy is not an option for someone with time constraints, and who has to pay various pirates $20 (or more) per eight-page PDF file. Academic textbooks are not cheap, but they are supposed to be self-contained, and you can get quite a few of them for under $1000 (which is what you might have to pay just to chase down the citations of one journal article).

Circling back to MMT, the macroeconomics textbook by William Mitchell, Martin Watts, and Randall Wray is projected to be published in April 2018. Based solely on the table of contents and the quality of the authors' other work, I expect that this textbook will be the best starting point for learning macroeconomic theory for someone who wishes to learn from a textbook. (There is a preliminary version already available; I was given the suggestion to wait for the final version.) Obviously, I reserve the right to change my mind, once I read and review the book...

I am going to put aside whether the contents of the textbook are "the truth"; I leave the question of determining the Final Truth to a Higher Authority. Will I agree with everything in the text? That would probably be a surprising outcome. That said, we need to start somewhere.

But! But! But!

Many of my readers are post-Keynesians, and they may (legitimately) be unhappy with what I just wrote. For example, one could look at Post Keynesian Economics: New Foundations by Marc Lavoie, a textbook which I am impressed with. The problem with discussing "post-Keynesian economics" is the fragmentation of schools of thought. One could glance at Table 1.2 of the text, in which he lists twenty heterodox schools of thought (albeit including some like Neo-Austrians, that probably do not qualify as "post-Keynesian" under almost any definition of "post-Keynesian.")

Modern Monetary Theory can be viewed as an attempt to hack out a coherent single narrative out of the post-Keynesian jungle. It may be that there is a better way to do so; I am not the person to attempt such a task. In any event, it seems obvious to an outsider that post-Keynesians who object to MMT need to think carefully how to better package their views so that they are relevant to those outside academic economics.

Other readers may see a more obvious objection: what about mainstream macro? The mainstream has a lot of best-selling economics textbooks. I do not see mainstream dynamic stochastic general equilibrium (DSGE) macro as a serious competitor. The only adherents of DSGE macro that I am aware of are people whose credentials and/or job are based on DSGE macro modelling. Conversely, finance is filled with highly numerate analysts with a vested interest in getting macro calls correct, and I never met a single one who had anything positive to say about DSGE. This is not one would expect to see from a vibrant intellectual movement.

Of course, there are a lot of believers in mainstream "non-DSGE" macro. For example, most financial market economic macro analysis could be characterised as such. Additionally, central banks produce a slew of research that goes in any number of directions. However, this analysis seem to rely on randomly selected sections of pre-1990s textbooks, and no longer represents a coherent school of thought. (That is, although individuals may have a coherent world view, each one will differ in important respects from others.) One might be able to construct a coherent school of thought out of these analyses, but I do not see anyone trying to do so.

Finally, there are other bodies of thought (Marxism, Austrian economics) that are coherent, but largely tied to one's political views.

A Permanently High Plateau of Theory

Assuming that the textbook meets my expectations, it will provide an introduction to MMT that is accessible and not reliant upon what is available on the internet. I was involved in a discussion on Twitter on that topic yesterday, and I am not greatly enthusiastic about going back there.

The problem with the internet version of MMT is that for some people, it is defined by comments made by non-specialists on various websites. (I am not trained as an economist, but I have fifteen years experience analysing the effects of interest rates, so I can take care of myself in debates.) Obviously, some of those comments can be incorrect, and not reflective of the academic MMT view. Many other economic schools of thought do not face this problem, largely because they have few non-academic followers. (Austrian economics would be the notable exception; there's almost no academic representation any more, but a large internet following.) Why should we be surprised when someone with a doctorate in economics has better formed economic views than someone with no economics training? In any event, this textbook may help bury that issue.

With the textbook in place, MMT should be able to expand to fill its "market," and one can argue that the job of marketing MMT will have apparently succeeded. Unfortunately, that does not mean that everyone will be MMTers, and we should have no expectation that will ever be the case.

The first problem is that there is a reason why religious metaphors always pop up in the discussion of economics (for example, orthodox versus heterodox). (One other conference participant without training in economics noted the religious parallels when speaking to me.) It seems fairly clear that it would be difficult to get many economists to toe any theoretical line, particularly in the naturally contrarian heterodox community. Although it seems like the most prudent political strategy for most post-Keynesians, there is little sign that they will rally any further around the MMT flag.

Another problem is that political economy is not going to go away. The free market political movement is not going to evaporate any time soon. On paper, MMT is politically neutral; but it seems clear that it is rarely framed in a way that a devotee of Ayn Rand is going to be comfortable with. Very simply, a person who is convinced that only gold is money -- and anything else is fraudulent -- is unlikely to be a fan of Chartalism. That said, one could imagine that country club Republicans (do any still exist?) could come to terms with MMT.

Finally, it seems very unlikely that the mainstream community will commit professional suicide and embrace MMT. It is possible that inroads will be made into institutions, but that is likely to be the result of shifting political winds. 

One can see from these comments that even though MMT may have succeeded in developing theoretically, its position may look similar to what it is today.

Concluding Remarks

Under the assumption that the MMT textbook meets expectations, the raw theoretical tools are in place. This is extremely useful for people who are interested in understanding how the economy will act, such as financial market participants. However, for most people, the more important question is whether this theoretical improvement will lead to an improvement in policy outcomes?

That more important question is more complicated, and I hope to discuss it in a later article. I am much more cautious in that area, so I wanted to break out my triumphalism regarding theory into this stand alone article. 

(c) Brian Romanchuk 2017


  1. "I was involved in a discussion on Twitter on that topic yesterday, and I am not greatly enthusiastic about going back there."

    There doesn't seem to be much sensible discussion going on on the actual soft issues that need addressing.

    For example the application of control theory to the management of the capital account exchange is something we need to get on and discuss. Stock markets have trading brakes and the like. So should the FX system so that the system operates smoothly and does not gyrate wildly.

    We want it to work as a shock absorber, not an undamped spring.

    Have you any idea or suggestion where such discussion could take place?

    1. My comments were about "high theory," as a later article will discuss, there's a lot of more low level analysis to do. The thing about the low level analysis is that it can quite often fit into any number of theoretical traditions.

      Twitter, even with 280 characters, is not the place for serious discussions. It's great for sending links, and rapid conversations, but not where you could lay out a policy proposal.

      For a non-academic, the best place would be to put up articles on your own blog, or collaborate with someone with a website. Eventually, getting a paper out at a place like the Levy Institute (or the MMT Conference) would be a step in the right direction.

      Leaving comments elsewhere is not the way to go; they are unlikely to fit in with the original article, and people searching for something will be looking at the article, not the comments.

      As for capital controls in particular, my views are mixed. It should be noted that the greatest period of postwar prosperity coincided with capital controls, and that was probably not an accident. That said, unless there is an international consensus, any capital controls scheme would be bypassed very rapidly by the international banks. Do you want to expend political capital on trying to set up such scheme, or focus on higher priorities with a floating rate regime? I certainly would prioritise other reforms.

    2. If a currency is a public monopoly then you should be able to slow down the transactions during volatility as you can on a stock exchange by managing access to the clearing system. (Naughty boys lose access). So less about capital controls and more making the currency 'on exchange' like a stock market rather than 'off exchange'.

      Having said that Mosler style restrictions on what purposes are permitted for lending in the currency by the regulated banks may help.

      My thoughts are less about writing papers and more about writing programs and tools where we can test these ideas out in simulated form on the web. We need visualisations not more dry words.

      As you know the effect of the dynamics are often not obvious,.

    3. I'm looking at this from a Canadian perspective. We have massive cross-border trade flows with the US, and the USD-CAD exchange rate is hardly stable. However, this has been the case for a very long time, and nobody here really cares. (Once per decade, some right wing crank will suggest adopting the US dollar. This generates a burst of excitement in the business press, but the proposal is rapidly ignored by anyone with common sense.) Furthermore, there have been exactly zero crises associated with exchange rate movements, and they are nearly impossible to observe in the domestic data. (The closest you can come to observable effects was the support from exports when the CAD collapsed in the early 1990s.)

      This is not the attitude to places like in Europe, where there is this strange desire to stick to exchange rate pegs. Even the UK (I was living there when the ERM broke down) there is this strange political machismo regarding the level of the pound.

      In other words, I do not see currency volatility as a problem to begin with. The lack of stability is stabilising, to paraphrase Minky.

    4. That Canadian perspective is going to be useful to get a view on how the dynamics work.

      It agree entirely it is likely the case that the currency volatility isn't a problem. But we need something that allows us to show that is the case.

  2. "So should the FX system so that the system operates smoothly and does not gyrate wildly. "

    It already more or less has one you typically don't see the rates gyrating wildly...

    The deviation of the measured (process value) Leverage Ratio away from the regulatory target (set point) is resulting in a response similar to that of a Proportional Control system...

    And it works with asset levels in both systems if a bank has operations in both nations..

  3. "On paper, MMT is politically neutral"
    But they aren't fooling anybody. MMT does not challenge capitalism, it does not challenge a system that revolves around wage labor. Like Keynes, MMT merely proposes some tweaks to capitalism and to wage labor. In that sense MMT is a very conservative ideology.
    "Why should we be surprised when someone with a doctorate in economics has better formed economic views than someone with no economics training?"
    Did Keynes have a doctorate in economics? Huey Long? Marriner Eccles? Kalecki? Marx? Mosler? Didn't Keynes say that economists would do well to earn as much respect as dentists?
    I suppose it is a good thing for MMT to offer a textbook, but I don't think the lack of a textbook is the main thing holding MMT back. Rather it is political naivete, ego, its ties to capitalism, and MMT's lack of focus on the defining economic issue of our age -- inequality.

    1. Yes, I should have written "politically neutral within the current political paradigm." However, it is unclear to me how a theory can challenge capitalism; our own interpretations of the theory would challenge capitalism.

      To be clear, I do not have a doctorate in economics. And based on my other comments, it is clear that I do not see that as a requirement to discuss the field. However, my point is that when you have a huge experience mismatch, the less experienced person will get shot down in flames in debate.

      The bigger question of "what is holding MMT back" is what I will discuss later (probably not my next article). My point here is that it is not the raw theoretical component.

    2. I don't know Dan, it is true that MMT does not challenge the fact that our system still mostly "revolves around wage labor", but until we can (or if we can) get to a point where people are happy to do the things we need for people they don't even know without being paid for it, it seems to me that we will be in a wage system. So I don't see the point of complaining about that unless there is some other realistic system that you propose to substitute in.

      And even though Bill Mitchell or Warren Mosler might say that MMT is politically neutral, because it just describes how things operate with a sovereign, floating, fiat currency, I don't really agree with that either. Because the Job Guarantee is hardly politically neutral in that it specifies an obligation that government should assume, at least according to MMT. MMT with the JG is not a conservative proposition, and not a 'neutral' proposition, it is rather radical, at least for a country like the US. But it is not best described as an ideology either. In my opinion.

    3. Wage labour is how we fulfil the reciprocation function while at the same time ensuring that the magic of the pin factory continues to be applied.

      If you want carrots then you need to give up hours to the service of others for which you will receive carrots.

      And those carrots will then continue to be produced by a highly efficient mechanised system - because those running those machines know they can benefit from the output of the hours you are required to give up.

      And they wouldn't bother doing that unless they were secure in their expectations.

      It's that simple.

    4. Dan it's conservative, but is very progressive at the same time because it transfers a lot of bargaining power back to labor from capital.

      Even within capitalism there are a lot of "degrees of freedom" for the system to operate. I really refuse to qualify systems with single words too, because we never have had, and will never have a "pure" system, since civilization has existed it has been a mixed economy and will remain to be until (if) humans and/or technology fundamentally change due to our limitations or nature.

      I agree on the "politically naive" tho.

    5. The problem with challenging capitalism is that capitalism is not even an "ism." It has no underlying theoretical framework, other than that imposed ex post facto. Democratic socialism is just another adaptation of capitalism itself - it augments it, rather than confronts it. In the real world, capitalism's most salient feature (viral mutability), means you are constantly shooting at a moving target. If inequality is what you want to challenge, then make that your specific goal.

      I've come to the conclusion that capitalism can't be defeated externally. The era of armed proletarian revolution has passed. It can only evolve and mutate, like the complex adaptive system that it is. The purpose of any 'challenge', then, is to provide the disturbing stimulus that will force it to evolve in directions you desire.

  4. Some history of econ thought? Interesting read written by a guy who was doing his doctorate in economics at MIT during the time when the shift from Keynesian to micro-foundation type economics was occuring.

  5. I am very glad that you were able to attend the first MMT conference. For a while, I actively considered attending myself, mostly so that I could (hopefully) meet you. Ultimately, I decided my strength was not up to the task and gave up on the idea.

    Like several other commentators, I am looking forward to your thoughts on many of the issues raised in this post. Thanks for all your efforts.


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