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Sunday, October 6, 2019

The State Of MMT?

I have been catching up after travelling to the Modern Monetary Theory (MMT) Conference in Stony Brook, and see that there was a full issue on MMT in the Real-World Economic Review. Since I referred to the relationship between MMT and Post-Keynesian Economics in my talk, I might as well update my comments based on that RWER issue.

As an initial note, I write about a pretty narrow bit of macroeconomics, what I call "bond market economics." The sort of things that end up in the purview of fixed income analysts, even though they are of more general interest, for example, inflation, unemployment, fiscal and monetary policy.

Although the initial iterations of MMT outreach were pretty much exactly in that domain, the MMT academic community is embracing the concept of multi-disciplinarity: there were presentations by anthropologists, political activists, and even professors in the fine arts. This meant that much of the discussion was outside my narrow field of interest.

Relations With Post-Keynesians?

The relationship between MMT and Post-Keynesian thinking is currently the largest area of awkwardness I see with respect to MMT. The special issue of the RWER seems to provide evidence for that assessment.

(I have found that my browser was very unhappy with the website that was showing up in search results; issues with the security certificate. This is the link for the article, which is #89: The link will probably fail when new issues come out, as I believe that you need to a free membership to get back articles. The security alerts meant that I did not dig too deeply on the website.)

I am supposed to be editing my volume on recessions, so I did not read the entire issue. And from what I saw of excerpts on Twitter, I have absolutely no desire to read many of the contributions.

I think the contribution from Marc Lavoie gives a good overview of the relationship between MMT and other post-Keynesians, and I will focus on that piece.

In the second section of the article, Lavoie writes "MMT, to me, is just part of post-Keynesian economics. I would classify MMT advocates as Institutionalist post-Keynesians, because they are very much concerned with monetary and financial institutions, and in particular, the institutional links between the government and the central bank."

In a sensible world, that would be the end of the entire issue on MMT in the RWER. Guess what?

Professor Lavoie then raises some issues. One concern that Lavoie has is with the dreaded concept of the consolidation of the central bank and the government. He cites others' concerns, with Thomas Palley in particular. One needs to spend a lot of time in academia to care about the realism of the consolidation of the central bank. We no longer live in a world of the gold standard, with private banks acting as central banks. Central banks are de facto under the legal control of their governments, except in the euro area, where governments decided it was a good idea to hand over the control of the central bank to unaccountable bureaucrats.

From an analytic standpoint, consolidation is the most natural way to look at economic analysis, and in the real world, it makes no difference. Stock-flow consistent models painfully recreate intra-governmental accounting, but those intra-governmental transactions have no observable effect on the non-governmental sector. The only time they really matter is when the possibility of default is raised, or the government decides that it wants to peg its currency to another. In which case the central bank is acting as an agent to implement a policy that MMTers argue is misguided.

Sigh, Citations

One other complaint is that the MMTers do not cite post-Keynesians enough. Lavoie notes about the Mitchell-Wray-Watts MWM textbook that "I lacked time to give the book a really good look...," but then he jumped to see who and what was being cited. (Which is exactly what I believe most academics do.)

I cannot comment on who should be cited whom in journal articles; I luckily gave up worrying about that a couple decades ago. However, I do not see that as being an issue here. The MWM is definitely an undergraduate text, and citations are limited. There is no comparison to the massive bibliography in Lavoie's Post-Keynesian Economics: New Foundations. (To be clear, this makes Lavoie's text somewhat more useful to me, as I do not have access to an academic research library, and so my best method to dig up citations is from an advanced textbook.)

I grabbed a chapter at random (Chapter 23), and there are only 13 references in the printed text (one of which is Marc Lavoie!). Of those, around half are descriptive documents from central banks, and not really indicative of any school of thought (e.g., there are no MMT-associated authors in those 13 citations).

He notes the general lack of references to "post-Keynesian thought" in the index. If we accept that MMT is part of post-Keynesian economics, and the entire textbook is supposed to be MMT, then citing "post-Keynesian economics" in the index seems redundant. (MMT itself has 7 index entries.) There is a very short section on the history of heterodox thought, which quickly outlines how post-Keynesian economics came about. This is far less material than the 72 dense pages that Lavoie devotes the discussion of heterodox economic schools of thought that is Chapter 1 of Post-Keynesian Economics: New Foundations. That said, I certainly would not recommend that anyone new to economics read those 72 pages; I think they need to have a basic grasp of the field before they should spend time worrying about the sub-divisions of academic tribes.

The reason why MMT is a success is that it puts forth an internally consistent post-Keynesian story that has obvious policy implications. If I were to put my academic hat on, I would agree with Lavoie that academics ought to attempt to cover the squabbling divisions of post-Keynesian economics if we want to do a proper survey of the field. However, people in the real world do not care what each school of thought says about each academic point of disagreement: they want an internally-consistent story that tells us something useful. The only way for post-Keynesian economics to escape its self-imposed exile from the real world is to offer a consistent narrative. It would make no sense for the MWM textbook to distract readers with long discussions of arcane dissents.

The Other Contributors...

I saw some excerpts on Twitter of other contributions to that special issue. I don't think my cardiologist would want me to comment on what I think about some of them.

These "contributions" underline the structural problem with some post-Keynesians: they have habituated themselves to sniping at mainstream economists, and in doing so, they have lost the habit of focusing on constructive advances. The rise of MMT just gives some of them a new target, and one that will generate more interest on social media.

It is rare for economists to agree with each other. I understand that MMTers do not agree with other groups of post-Keynesians on a number of issues. However, people need to focus on things that actually matter, not theoretical will o' the wisps like consolidating the central bank. I have seen a lot of sniping at MMTers by self-declared Post-Keynesians over the years, but I have only seen a few concerns that matter. Furthermore, the actual points of dispute are policy view divergences that will never be amenable to being proved "correct."

Concluding Remarks

I write popularisations of economic theory. As an ex-academic, I feel slight tinge of duty to cover all bases when citing sources. That said, I need to come up with a story that is internally consistent, easily understood, and offers some insights to readers. Although I am a big fan of Marc Lavoie's approach, the reality is that some of the post-Keynesians sniping at MMT are not producing research that I see as worth my time to cover.

Meanwhile, things are going to get harder for Post-Keynesians going forward. The Financial Crisis has had the side effect of shattering whatever consensus there was among neoclassical economists. Right now, you can take pretty well any policy story, slap some optimisations in there, and boom, it's neoclassical economics. Although this incoherence might appear to be a weakness from the viewpoint of a purist theoretician, this flexibility also means that neoclassicals will not herd into mistaken policy views. It will be much harder for heterodox thought to make an impression amidst meaningful debates between highly-credentialled mainstream economists.

(c) Brian Romanchuk 2019


  1. Well stated, and note the absence of references to or criticism of anything I've written by authors who, for the last 25 years, have witnessed first hand that MMT is and for the most part continues to be entirely my creation... ;)

    1. Thanks. A bit awkward for me as a semi-outsider to give you credit for everything, so I will dodge that issue. ;-)

  2. The state of MMT? Stone-dead!
    Comment on Brian Romanchuk/Tom Hickey on ‘The State Of MMT?’*

    Tom Hickey maintains: “MMT is ‘winning’ because it cuts to the chase instead of wandering in the weeds. People wanting change are provided with direct answers in terms they can understand and relate too. Nor do MMT economists shy from debate about the weeds if it is seriously informed.”

    Brian Romanchuk maintains: “The relationship between MMT and Post-Keynesian thinking is currently the largest area of awkwardness I see with respect to MMT. The special issue of the RWER seems to provide evidence for that assessment.”

    The scientific fact of the matter is that Post-Keynesianism is proto-scientific garbage#1 and MMT is proto-scientific garbage.#2 The relationship between the two is NOT AT ALL awkward, though, because both approaches share the same foundational blunder. Together with Keynes’ faulty approach, both end up in the same wastebasket.#3

    The blunder that bring macroeconomics in general and Post-Keynesianism and MMT in particular, down is to be found in Randall Wray’s contribution Alternative paths to modern money theory, section The theoretical path to MMT.*

    Here it is: “Government spending, like private investment, is an injection that raises income. More specifically, as Kalecki showed, government spending creates profits because it is a source of business revenue but not a cost of production. Taxes are a leakage, reducing household net income and business net revenue. If government spends more than it taxes, this is a net spending surplus ― increasing profits dollar-for-dollar. A net spending surplus by government cannot ‘crowd-out’ private investment ― it creates profits that are likely to boost the desire to invest. A net spending surplus by the US government cannot absorb global savings ― instead it creates net income for the US private domestic sector as well as for the rest of the world.” and “Now, it is true that government spending is not the only injection. Private investment and exports (or, net exports) also create income that can be leaked. Wynne Godley’s sectoral balance approach ― long incorporated within MMT ― shows that the sum of the balances of the government, domestic private, and foreign sectors is identically zero.”

    Accordingly, MMT boils formally down to the sectoral balances equation (I−S)+(G−T)+(X−M)=0. This equation is provably false.#4, #5 The mistake lies in the sentence: “Government spending … is an injection that raises income.” No! Government spending … is an injection that raises profit. And profit is a balance, i.e. the difference of flows, and NOT a flow like wage income. So, profit is NOT income.

    In the elementary case, the monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q+S=0, that is, the balances of the household and business sector ad up to zero. Only when profit is distributed it becomes income Yd of the household sector. So total income is wage income Yw plus distributed profit Yd and NOT wages Yw plus profits Q. The difference between profit Q and distributed profit Yd is retained profit Qre.

    Neither profit Q, i.e. the balance of the business sector, nor distributed profit Yd appear in the MMT sectoral balances equation. Because it lacks the balance of the business sector the MMT balances equation is false.#6 By consequence the whole analytical superstructure of MMT is false. By the ultimate consequence MMT policy guidance is false.

    “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    So, all one needs to know about MMT is: MMT is NOT the true theory. Scientifically, it is stone-dead.

    Egmont Kakarot-Handtke


    1. Nah. MMT papers use SFC models, in which all flows are properly accounted for, consistent with the national accounts.

      Conversely, certain highly isolated individual(s_ use alternative accounting definitions, and those lead to obviously pathological outcomes. As a result, these individual(s) have been unable to convince anyone that there models are useful. Given that one of the defining characteristics of the scientific method is that theories need to be convincing to other people, said isolated individual(s) are operating outside scientific practice.

  3. I agree when Warren writes, "Well stated".

    Also, I enthusiastically agree when you write "However, people in the real world do not care what each school of thought says about each academic point of disagreement: they want an internally-consistent story that tells us something useful."

    To me, MMT remains incomplete. Our economist-view of money needs to change if we are to have an internally-consistent story. Along this line, my current thinking is that money should be considered as if it were a coupon issued by a product(s) owner. (Follow my identity link to see my blog posts.)

  4. "Government spending … is an injection that raises profit. And profit is a balance, i.e. the difference of flows, and NOT a flow like wage income. So, profit is NOT income."

    I would argue that the above is not correct. Generally speaking, profit is the result of income minus expenses yet, that profit remains a "flow" since payments such as "dividends", are derived from that profit....The resultant "stock" would be "retained earnings" other words, profit is an income statement "flow" and retained earnings is a balance sheet "stock"

    1. Well, it is unclear whether it is worth debating this point. If one makes up a new definition for profit, one can do as one wishes. The problem is getting other people people to use your definition, and nobody wants to use said individual’s definition of profit.

      This particular “discussion” has been going on for years at this point. I somewhat blank it out at this point.

  5. Brian Romanchuk

    You say: “Given that one of the defining characteristics of the scientific method is that theories need to be convincing to other people, said isolated individual(s) are operating outside scientific practice.”

    NO! To convince “other people” is the goal of political agenda pushing. Science is about true/false and nothing else: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

    The fact of the matter is that the MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is provably false.#1 Randall Wray argues: “Government spending … is an injection that raises income. More specifically, as Kalecki showed, government spending creates profits because it is a source of business revenue but not a cost of production.” However, profit ― the balance of the business sector and the pivotal magnitude of economics ― does NOT appear in the MMT balances equation.

    Either MMTers are too stupid for the elementary math that underlies macroeconomics or they are intentionally hiding macroeconomic profit. It is the latter as I have shown elsewhere.

    In his post, MMT: REPORT FROM THE FRONT Randall Wray reports “Fifth front: the blogs. I was skeptical of their usefulness ― but Bill and Stephanie recognized that they were the future. They were right. You’re reading this one, created by Stephanie and then taken over by Bill Black. Blogs spread MMT outside academia and official policy circles. And then came videos and tweets. There are tens of thousands of followers now. This helped to foam the runways to the seats of power. No one can afford to ignore MMT any longer. The viral movement, as well as a few fearless candidates ― Bernie and AOC ― brought MMT out of the shadows.”#2

    “Tens of thousands of followers” is a respectable propaganda success. So, the money of Wall Street funders was well-spent. This, however, does not change the fact that MMT is proto-scientific garbage. Science is NOT about “convincing other people”, i.e. brainwashing imbeciles.

    The macroeconomic Profit Law says Public Deficit = Private Profit. So MMT deficit-spending/money-creation is for the benefit of the Oligarchy and NOT of WeThePeople. Scientifically MMT is crap and politically it is a fraud.

    Egmont Kakarot-Handtke

    #1 The axiomatically correct sectoral balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0.

    #2 New Economic Perspectives


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