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Sunday, August 16, 2020

Primer: Broad MMT

The previous sections of this chapter (and earlier chapters) mainly revolved around what I term “narrow MMT.” This is the distinctive theoretical core of MMT, but it should be noted that the theory is fairly settled. Meanwhile, the academics associated with MMT continue to pursue research programmes, and hence the area covered by “MMT” continuously expands. This offends some critics, who insist that only some narrow set of principles constitutes MMT. Although it is entirely reasonable that someone would only be interested in the theoretical core of MMT, we need to accept that many MMT proponents view “MMT” as comprising the entire body of thought.

Note: This is an unedited draft from my manuscript on the subject of MMT and the cycle. It builds upon a distinction that I made earlier: describing MMT as either narrow MMT or broad MMT. Narrow MMT is the usual subject of online primers, and people often describe MMT as consisting solely of this. 

As one adds more theoretical content to MMT, the greater potential areas of controversy arise. If someone disagrees with the principles of “narrow MMT,” it seems hard to classify them as a “MMT proponent.” However, once we expand the range of theory, disagreements are likely to occur. There is no reason to insist on doctrinal purity, so the reality that economists disagree should not be troublesome. However, since this is a primer on "MMT," the premise is that we need to have at least some core principles that constitute “MMT.”

This text will only list a few references that I am familiar with; the reader can either use them to track down more, or use various online resources that list academic publications. The Gower Initiative of Modern Money Studies has created a large database of MMT academic articles:

History of Money

One of the stranger developments in economics was the invention of the myth of barter. In “the old days,” people allegedly used barter instead of money. (I will not expand upon this myth, since based on my experience, everyone is familiar with it.) Another set of myths about metallic coins are pushed by popular Austrian economists, who argue that anything other than gold-backed currencies are fraudulent (including fractional reserve banking).

Part of the Modern Monetary Theory research programme is an examination of these myths, putting an economic interpretation on earlier research by historians and anthropologists. The argument is that credit arrangements long pre-dated metallic coins. Chapters 2 and 3 of Understanding Modern Money: The Key to Full Employment and Price Stability by L. Randall Wray discuss the history of these debates, as well as how colonial powers introduced money via taxation.

Although historical wrangling is interesting, it has little to do with the analysis of macroeconomic dynamics in the twenty-first century. That said, this is one area of study that was undoubtedly advanced by MMT academics, and so it could be viewed as being part of the core of MMT.

Broad-Tent Post-Keynesian Economics

Marc Lavoie is a prolific author who has attempted to synthesise the various strands of post-Keynesian thinking into a coherent body of theory. In Section 1.4 of Post-Keynesian Economics: New Foundations, he outlined what he calls “broad-tent post-Keynesianism.”

He divides post-Keynesian groups into a few strands
  • Fundamentalist Keynesians: Keynes himself, followed by other economists like Hyman Minsky, Paul Davidson, Jan Kregel, and the later writings of Joan Robinson.
  • Kaleckians: those who are focussed on questions of income distribution, with Michal Kalecki being the notable example.
  • Sraffians: economists with an affinity to the topics pursued by Piero Sraffa. One of the key areas is the determination of relative prices within an economy.
  • Institutionalists: economists with an interest in the underlying institutions of the economy (firms, monetary operations). Lavoie locates MMT within this strand.
  • Kaldorians: economists with similar interests to Nicholas Kaldor. Emphasis on growth and productivity, and the implications of international trade and transactions.
Unfortunately, one of the dominant characteristics of post-Keynesian economics is that it is largely defined by where it disagrees with neoclassical economics. This seems to attract contrary-minded economists, and the various groups of post-Keynesians are also split by interminable abstract theoretical debates. And the rise of MMT in the popular imagination has had the result that some post-Keynesians spend considerable amount of time sniping at MMT. Since the post-Keynesians have read the scholarly output of MMT proponents, they unsurprisingly have stronger critiques than conventional economists, who have an amazing aversion to reading academic papers. Furthermore, left-leaning post-Keynesians quite often target MMT proponents from the left (which might surprise people who believe MMT is socialism).

Section 5.8 delves further into post-Keynesian squabbling. However, it should be emphasised that the gap between post-Keynesian economics and neoclassical economics is much larger than the gap between MMT and other post-Keynesian groupings.

Price Determination

The post-Keynesian theory of price determination is quite distinct from neoclassical thinking. There is a distinction between flexprice and administered prices. Flexprice markets feature rapid changes based up trader positioning, much like financial markets and commodity markets. These flexible prices will extend to some consumer markets, notably gasoline and things like fresh fruits and meat. The rapid prices changes of these markets are very distinct from administered prices, such as wages, most consumer goods, and even most restaurant prices.

Meanwhile, the inflation process is viewed as the result of the conflict between labour and capital – the ratio between wages and output prices determines the labour share of income. The stability of inflation since the early 1990s in the developed countries is seen as the result of the reduction of labour power.

This view is quite distinct from the neoclassical view in which prices are equal to the marginal productivity of labour and capital – a utopian world where the factors of production get their just desserts.

The MMT arguments about the government determining the price level (Section 4.3) need to be interpreted with this background in mind. The Monetary Monopoly model is highly simplified, and only offers a general principle. Price formation is a complex process, and the government has many levers to influence outcomes. The importance of this topic for the implications of the theory means that price determination cannot be ignored as being somehow peripheral.

Legal Analysis

As one might expect from Institutionalists, considerable care is taken in the analysis of the legal framework of governmental finance. This is contrast to “assume something is true” strategy preferred by many conventional economists. The Trillion-Dollar Coin (Section 3.5) is probably the best known implication of this research.

There has been some interest in MMT within student legal bodies. This has meant that there is some wider legal analysis that draws on the MMT paradigm. One example is the paper “Mobile Finance in Developing Countries: Macroeconomic Implications and Potential” by Rohan Grey. This paper looks at the implications of the rise of electronic money.


Modern Monetary Theory is often described as a macro theory, but the heterodox tradition also includes microeconomics. The late Frederic S. Lee was a prolific writer in microeconomics, and he taught at the University of Missouri at Kansas City (UMKC), alongside many prominent MMT academics.

I do not have much expertise in microeconomics, but after reading Microeconomic Theory: A Heterodox Approach (by Lee, edited by Tae-Hee Jo) I can offer the following comments relating Lee’s research programme and MMT macroeconomics.

The first observation is that Lee’s book offers an entire mathematical framework for modelling the economy, starting at the level of production of differentiated goods and services. Production is not some iron set of laws, rather the result of societal conventions. The question is how a society produces a surplus of goods and services that are used to meet needs and desires of people. This framework is compatible with “Chartalist” notions of the nature of money. That is, this is an economic system that is compatible with macro formulations of narrow (core) MMT.

The next observation that Lee and contrasts and compares his approach to that used by those who follow in the tradition of Piero Sraffa. Based on my experience with heterodox academics, it seems that it is a safe bet that there are plenty of arcane theoretical disputes within post-Keynesian microeconomics. Since microeconomics is not part of narrow (core) MMT, it seems entirely possible that self-identified MMT proponents might disagree with various aspects of the subject.

That said, there is also a clear dividing line between Lee’s exposition and neoclassical microeconomics. One issue is the argument that aggregation is misleading. This is not a trivial concern, since MMT proponents may refer to macro models that feature aggregated statistics. The explanation is straightforward: to what extent MMT proponents accept Lee’s version of microeconomics, they are aware that the aggregated macro models are going to be approximations of reality that are expected to break down. This implies a greater need for cynicism with respect to mathematical economic models than mainstream economists.

Given that neoclassical economics is currently based on micro-foundations (everything is the result of the aggregated optimising decisions of representative agents), it seems proper to argue that MMT needs its own micro-foundations.

Critiques of Neoclassical Economics

Neoclassical theory is normally developed in the form of mathematical models. The standard models are based on a variety of key behavioural assumptions. Within the body of post-Keynesian theory, every one of those assumptions is attacked as being unrealistic.

It should be noted that neoclassicals are churning out papers in which the various assumptions are relaxed and replaced with more sensible mechanics. However, the need for mathematical tractability means that only some assumptions can be worked with, and so the resulting model will still suffer from the other perceived defects.

This text concerns MMT, and not neoclassical theory. The question of whether the post-Keynesian critiques of neoclassical economics are correct are put aside. However, it should be noted that arguing that MMT proponents are incorrect because they are not taking into account some aspect of neoclassical theory is based on the assumption that neoclassical economics has something useful to say – an assumption that MMT proponents do not share. A good faith critique would require responding to the objections to neoclassical theory first.

Political Economy and Interdisciplinary Studies

The interest in MMT is not confined to people who have an interest in monetary economics, the political economy implications has generated a wide following. The result is that if one goes to MMT conferences, there are presentations that are on topics that are associated with other branches of the humanities. For example, at the 2019 International MMT Conference, there was a session on racism, and one of presentations that I found most memorable was one on food banks.

Such discussions appear quite removed from the Monetary Monopoly Model, but they reflect the preference for multidisciplinary thinking in academia – which is resisted by the insular economics profession. The existence of such presentations makes suggestions that MMT proponents express “MMT” with a single mathematical model faintly ridiculous.

Concluding Remarks

Life would perhaps be simpler if one used a more generic label such as “post-Keynesian” or “heterodox” rather than “broad MMT” for describing the body of thought in question. However, such labelling does not match how many MMT proponents would define MMT (some might be satisfied with a definition that matches my description of narrow MMT). It seems straightforward that critics of MMT should not be the ones who should be policing the borders of what constitutes "MMT."

The breadth of “broad MMT” implies that it cannot be easily summarised, as not everyone will agree with all points. This is different than narrow MMT, where if one disagrees, one would be classified as being a member of another school of thought. However, this broader set of knowledge is what will often come up in theoretical debates. For example, it is not enough to suggest that MMT proponents view inflation as the ultimate constraint on fiscal policy, one also needs to keep in mind that the have completely different views on the operation of the inflation process.

References and Further Reading

(c) Brian Romanchuk 2020

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