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Friday, October 1, 2021

"The Meaning Of MMT" (Yeah, Sure)

Fran├žoise Drumetz and Christian Pfister have enlivened us with a new Banque de France working paper “The Meaning of MMT.” I have read a lot of critiques of Modern Monetary Theory (MMT) over the years, and summarised what I saw as the reasonable critiques in a chapter in my latest book, “Modern Monetary Theory and the Recovery.” The Drumetz and Pfister article is somewhat novel in its approach when compared to the fairly dismal track record of earlier neoclassical critiques, but the conclusions were preordained (spoiler: MMT is bad).

The first immediate disclaimer to note that although this was a working paper published by the French central bank, the views in the paper are supposed to represent the authors, and not the institution. Although anyone familiar with the economics research scene grasps this, people less familiar with the research business might phrase this as “the French central bank says…,” which is an overstatement.

Very simply, I am annoyed by this paper. My problem with it is straightforward: the authors are simultaneously condescending and quite often totally out to lunch. As Texans (allegedly) say, they are “all hat and no cattle.” It is incorrect to say that everyone with a neoclassical education is simultaneously condescending and wrong, but my personal experience is that they are well over-represented in that demographic.

One of the reasons I left academia was that I was an old school hard ass when it came to rigour, and that did not fit our changing times. This paper has a thin veneer of scholarship but underneath it is filled with what can only be described as bullshit (using the technical term from the philosophy of science).

About 99% of the paper is a plodding survey of topics often tangentially related to MMT, and the remaining 1% consists of wild, undocumented assertions. This structure makes it impossible to deal with the paper in a sensible fashion — most of the “content” consists of worthless observations that nobody in their right mind cares about, filled in with some crazy statements that pop up out without any context. It is nearly impossible to respond to some unsupported sentence that pops up out of nowhere — what about the other unrelated text that preceded it?

A “Deficit Myth” Example

I will give an example of what I am referring to, using a reference to Stephanie Kelton’s The Deficit Myth. I choose this example since it appears in the conclusions, and many of my readers will already read The Deficit Myth, and can easily validate what I am saying here.

What do the authors state (I am interested in the italicised bit)?

Symptomatically, The Deficit Myth (Kelton, 2020) does not address non-MMT economists, whom it rarely quotes; it addresses the public to promise them a bright future at no cost, and policymakers, often aggressively, to give them a roadmap.

(As an aside, like most MMTers, I enjoy quoting neoclassical economists when they write nonsense like Drumetz and Pfister just did. Kelton’s decision to not spend too much time quoting neoclassical economists was presumably a form of politeness.)

Does The Deficit Myth promise people a bright future at no cost? Well, those of us who actually read the book will have come across Chapter 2, which starts off with:

Myth #2: Deficits are evidence of overspending.

Reality: For evidence of overspending, look to inflation.

One might summarise The Deficit Myth as a popular book (in both senses of the word “popular”) that is focused on explaining MMT’s approach to fiscal policy. Until Drumetz and Pfister write a best-selling book on economics, I am not interested in their views on how popular economics texts should be written. But returning to the point, the book jumps right to the MMT view on the “costs” of fiscal policy: “over-spending” shows up in the form of inflation.

So where did Drumetz and Pfister get their theory about “no cost”? I see a number of non-exclusive options (and since two authors are involved, multiple explanations might be in play).

  • English might be a second language to Drumetz and/or Pfister. They might have been unable to parse a best selling popular book on economics — even though a French translation is available. They might have also meant something else, but they used clunky wording. Although I have sympathies, one simple solution would have been to publish the work in French. Although the MMT-sphere is largely anglo, even someone like myself can read technical French. In any event, if one’s command of a language is uncertain, charging into the scholarly literature and making wild accusations is not good form.

  • They could try to argue that they were using some narrow definition of “cost” (like a “dollar cost”) that does not include the “cost” of inflation. In academia, this is technically known as “weaseling your way out of your position.” It also makes no sense to worry about nominal costs for a currency sovereign, since nominal spending values are arbitrary. Although this is perhaps not obvious, I believe I could explain the concept to even the “less-gifted” engineering undergraduates in five minutes or less.

  • Drumetz and Pfister do not believe that inflation has any costs. This is definitely a radical position for a continental European central banker, and does not appear to be borne out by other comments within the paper.

  • They did not in any sense read The Deficit Myth, they may have just skimmed the table of contents and relied on others’s summaries. This is definitely not what scholars are supposed to be doing, although it is perhaps common.

  • Drumetz and Pfister just made stuff up. I got my doctorate in a real academic field from a real university, and I can state as an authority that this is definitely not a feature of solid scholarly writing.

Look at the amount of text I made the reader go through to deal with one random “zinger” from Drumetz and Pfister. Furthermore, since it just a bizarre generalisation, I need to deal with every possible configuration of the generalisation. The parts of the paper that will catch the most attention are said “zingers.” How long would a full deconstruction of each one take? (I cover a few more below.)

What Do They Really Know About MMT?

Although the paper cites many MMT sources (breaking the trend of earlier neoclassical “reviews” of MMT), one might question how much they absorbed. For example, they make the following statements about MMT theories about inflation.

All MMT authors reject the QTM [Quantity Theory of Money - LOL] but they differ in their approach to the drivers of inflation. For some of them, excess demand and cost-push drive inflation (e.g. Carnevali and Deleidi, 2020). For others, inflation is “intrinsic to the power relations between workers and capital (class conflict), which are mediated by government within a capitalist system” (Mankiw, 2020). According to Ocampo (2020), this second, less orthodox view is reminiscent of the structuralist theory of inflation (i.e. structural bottlenecks and distributive pressures are the source of inflation), which was popular in Latin America during the 1960s and 1970s and inspired less than successful policies. A third, utterly unorthodox view (e.g., Tcherneva, 2002; Mosler and Silipo, 2017) considers that government policy and prices paid by the government are the ultimate source of the price level. The implementation of a public job creation program that would serve, according to MMT authors (Tcherneva being one of its major proponents), as a price and wage anchor, may be reminiscent of this third view (see below). [emphasis mine]

The final point made demonstrates that Drumetz and Pfister have no real grasp of what MMTers have been saying. The determination of the price level by the the currency monopolist via a programme like the Job Guarantee is the core theoretical principle that sets MMT apart from competing schools of thought within the post-Keynesian tradition. (The reader may ask how I know this? Well, I have had multiple conversations with the MMT founders over the years.) Drumetz and Pfister are obviously ignorant of this key point — so why should the reader trust any other assertion they make about MMT?

If we look at the two earlier alternatives floated by the authors, those are theories of inflation from within the post-Keynesian tradition that MMT inherited. One needs to dig into that tradition to get the context. There is no doubt that the details of MMT thinking on inflation dynamics (putting aside the price level determination part, which is clear, albeit somewhat abstract) are difficult for outsiders to follow. (From my perspective, I pushed writing about inflation theories to a later planned book, so I am not really offering much clarity either.)

(As a final point, one may note how they dealt with structuralist theories of inflation. “which was popular in Latin America during the 1960s and 1970s and inspired less than successful policies.” In real academic fields, this would be viewed as an attempt to tar a theory by tying it to something else, and not a serious discussion of the theoretical issues. Once again, sterling scholarship.)

OK, Let’s Ignore the Nonsense

Let us put aside all the wild unsupported generalisations about MMT within the paper, and see what is left. (This is not a statement that has to be applied to papers in any legitimate academic field that I dealt with, I may note.)

As I noted before, the first thing to note is that they did cite MMT sources, which is very different than earlier pieces like Mankiw’s “scholarly” survey that just cited the MMT textbook, but only grabbed a few out-of-context quotes then went off to discuss neoclassical theory on those topics.

The problem is that they cited all the previous hit jobs on MMT, and so anyone with any familiarity with this genre will find that they just dumped a survey of things that were discussed in post-Keynesian circles a long time ago, along with random observations coming from neoclassicals who generally made stuff up about MMT.

The authors also make various observations that “disprove” MMT by citing neoclassical papers — without even pondering the possibility that MMTers/post-Keynesians might have critiques of said papers.

To what extent there are legitimate critiques of MMT within that survey, most of them are variants of what I outlined in Chapter 5 of Modern Monetary Theory and the Recovery. There might have been something novel buried within the text, but I did not spot it. For example, they go on about the alleged need to continuously raise and lower taxes to control inflation within a MMT framework. That point has been made before, whether the authors do a better job than previous critics is going to be a judgement call by the reader.

This then leads into the author’s assertion that the MMT literature is “repetitive.” Based on the citations, they mainly read the standard critiques by people like Palley, and responses by MMT proponents, as well as various MMT primers. Since the critics are rehashing the same arguments, any reading of that strand of the literature is going to be repetitive. Meanwhile, after reading three or four MMT primers, you are not supposed to keep reading them. Maybe I am some kind of super-genius, but it seems to me that if a particular type of text is repetitive, you could just … stop reading that genre. Meanwhile, the fiscal sustainability paper by Scott Fullwiler — from my perspective, a very interesting and important paper — got a citation, but no serious discussion.

I will finish off with observations on other parts of the text that stood out.

Knapp. Really?

The article starts off with a lengthy discussion of Knapp’s State Theory of Money (STM). We are told that “Overall, the STM was received very mildly” and then they went into what reviewers wrote about it.

This entire discussion can be dealt with two simple facts.

  • Knapp’s book was published in 1905.

  • MMT has its genesis mainly in independent work from Bill Mitchell and Warren Mosler, which can be dated to the mid-1980s to early 1990s. (The moniker “MMT” came later.)

Sure, it’s great that MMTers tied their work to much earlier authors (unlike neoclassicals, where the citations are decidedly skewed towards living neoclassical economists), but MMT shares similarities with that work, but not identical).

Functional Finance

There is also section on Functional Finance. Spoiler: look at the dates (again).

Job Guarantee — Utterly Bewildering Analysis

They do a small discussion of the Job Guarantee, pointing out the obvious (it is a complex programme). However, the response is simple: K-12 public education is also complex, yet countries pull it off.

Warning: if you are drinking anything while reading this, please put down your cup before continuing.

Drumetz and Pfister:

When the economy approaches full employment, rising inflation may trigger a higher PSE [Public Service Employment program] wage, spreading inflation throughout the economy or inciting workers to drift to PSE jobs if their employer fails to match the PSE wage increase.

Ah yes. The Job Guarantee (or PSE) wage — which is a policy variable — will have an increased “triggered.” Yeah, that’s how policy variables work.


As expected, the usual “U.S.-centrism” complaint comes up, along with discussions of Latin America and open economy theory more generally. This is pretty standard, as covered in my book. As for U.S.-centrism, one might expect that in primers written where much of the audience is in the United States.

Monetary Operations

The authors have some complaints about MMT treatment of monetary operations. For example, they point out that governments could use private banks to handle their deposits.

This is definitely in the “so what?” category. For reasons that seem very obvious, MMT primers are not going to spend large amounts of time discussing all the possible permutations of governmental finances. There are more detailed discussions in the literature — but these are not cited. All we have are two out-of-context quotes — “the central bank [?] as ‘the government’s fiscal agent’” (Kelton) and central bank independence is a “myth” (Wray). The phrase “straw man” is the one that pops to mind.

The authors make the following puzzling statement, and I am bewildered where they got this from.

In fact, even within this very narrow approach to monetary policy, MMT economist neglect several factors:

- The Treasury does not just sell public bonds. It also spends, collects taxes, redeems previous issues and conducts one-off operations such as the sale and purchases of assets. All these factors contribute to changes in the balance of its account with the central bank and thus affect bank liquidity.

I really do not want to dig through MMT primers, but they “repetitively” make statements to the effect that “taxes destroy money.”

Currency Competition

In addition to pointless blathering about whatever Knapp was going on about, we run into the following nugget. Drumetz and Pfister state “MMT also ignores currency competition in domestic transactions.”

I certainly ignore “currency competition” in “domestic transactions” in most of my discussions — like pretty well every sensible person who is discussing developed economies. The reason is straightforward: there is no real currency competition in those countries.

However, if we look at a text like Understanding Modern Money: The Key to Full Employment and Price Stability by L. Randall Wray, there is a discussion of the real world imposition of new monies in European colonies. Competitive forms of exchange (including gift economies, etc.) are driven out by the imposition of taxes. That is a pretty big hint how to deal with “currency competition.” (Try switching to another currency in a country that has a value-added tax, or imposes income taxes at source, and see how far you get.)

Those Mean MMTers Not Citing Neoclassicals!

Warning: Put down any liquids again!

From the perspective of anyone who has been around economics for some time is the bizarre complaint that MMTers ignore neoclassical economics.

Such a stark contrast [in theoretical views] with mainstream economics analysis and recommendations would be understandable if MMT economists engaged into a debate with their colleagues to explain and justify their positions, from both a theoretical and empirical point of view.


Let’s start off with a narrow definition of “colleague” — someone you work with. Why can’t Drumetz and Pfister talk with MMT proponents at the Banque de France? I would wager that this is because the BdF personnel would blackball anyone who professed an interest in MMT. Being a MMT proponent in a central bank is a career-limiting move: ideological conformity is needed to advance.

Historically, MMT proponents could not “debate” with neoclassicals because neoclassicals refused to acknowledge their existence. Until the sudden “discovery” of MMT (for reasons to be discussed below), there was no “debate” because neoclassicals did not respond to anything MMTers wrote.

The converse was not true. Like other post-Keynesians, MMTers have written lots of critiques of neoclassical economics. If we pick up the “MMT textbook” (Macroeconomics, by Mitchell, Wray, and Watts) there is an entire section on mainstream vs. MMT (Section 8.6), plus other sections describe mainstream theories that are seen as incorrect (Quantity Theory of Money, etc.). For our purposes here, the fact that this is an undergraduate textbook does put a limit on what can be covered — but it certainly puts paid to the utterly deranged assertion that MMTers ignore neoclassicals.

Why did this complaint pop up? It started off with the rise of the economics blogosphere and social media, accentuated by the Financial Crisis. Modern Monetary Theory caught a lot of popular attention because it seems to offer useful information. Meanwhile, although some mainstream economists have extremely large reach, that is not because of DSGE macro. DSGE macro is a laughingstock outside of the echo chamber created by people whose qualifications are based on publishing DSGE macro papers.

This popularity then created the backdrop for The Deficit Myth, which finally forced mainstream economists to admit that MMT in fact exists. This in turn led to very impressive “scholarly” articles from neoclassicals outlining the faults of MMT.

Concluding Remark

Yes, I really was not happy with that paper.

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(c) Brian Romanchuk 2021


  1. I gave up reading through all their totally made up complaints when I saw what was the real game. this is a pseudo-academic work that has the patina of official imprimatur. Other con artists will refer to it as if it has merit, saying, "See? This MMT stuff is bogus. Just look at our reference to this academic paper!"
    In the end, all they have is pure hogwash holding their house of cards together.

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