Modern Monetary Theory (MMT)

In this paper we provide an in-depth analysis of Pakistan’s macroeconomic situation.
We argue that although the stabilisation program signed with the IMF in November 2008 could
restore some "macroeconomic stability", it will depress the investment and unemployment
outlook, and it will not create the conditions that Pakistan needs for sustainable long-term
development. We put forward the foundations for a sustainable macroeconomic program for
Pakistan. This contains policy advice that differs markedly from that of the IMF. The essence of
the proposal is the consideration that a government that issues its own currency faces no financial
constraints or solvency risk. This implies that the usual “government budget constraint” has no
economic content. Based on this, we examine the potential role that the country’s fiscal and
monetary policies could play in promoting growth and in generating full employment and price
stability.

Theoretically, we make use of a framework that combines Andrew Baker’s work on social purpose with a novel conception of professional legitimacy, which we divide into internal legitimacy and external legitimacy. Especially when they articulate a strong sense of social purpose and are open to co-constitution, such forms of knowledge can have widespread popular appeal while being vehemently rejected by the economics profession. This means that policymakers must examine not just the potential of alternative expertise per se but also weigh the appeal of the two forms of legitimacy against one another. As a result, this framing can help us understand the complex and sometimes non-linear trade-offs associated with upstart forms of expertise.

Yet, this framing also leaves open crucial questions, that should be addressed by future research on the rise of indie economics. Indeed, as a broader field of ‘lay experts’ emerges, potentially challenging and undermining the more centralised form of knowledge production that has been dominant over the course of the long twentieth century, we will need to grapple with new questions of quality control. Science has always had to contend with tensions between scientific rigour and creativity and has developed mechanisms such as peer review to deal with it. But the changes we now face are altering the nature of this trade-off: co-constitution and the enrolment of lay actors can open new intellectual frontiers and democratise science, but they can also open the floodgates for manipulation, pseudoscience, and misinformation of various forms. Future research should explore the mechanisms of quality control (or lack thereof) that are evolving to navigate this new reality.

To return to Daniela Gabor’s question from the introduction, the rise of MMT shows in no uncertain terms we are in a political climate in which trust in mainstream economic knowledge is desperately frayed and – given this lack of trust – anti-establishment credentials become a crucial source of appeal. The rise of alternative forms of economic expertise is menacing to mainstream macro not just to the extent that it competes with it for finite attention, but also in that it is a symptom of the deeper malaise of the discipline and its failure to prove itself fit for social purpose in the face of interlinking crises.

Today both researchers and policy-makers agree that refugees admitted to the European Union constitute a net cost and fiscal burden for the receiving societies. As is often claimed, there is a trade-off between refugee migration and the fiscal sustainability of the welfare state. In this lecture, Peo Hansen shows that this consensual cost-perspective on migration is built on a flawed economic conception of the orthodox “sound finance” doctrine. By shifting perspective to examine migration through the macroeconomic lens offered by Modern Monetary Theory, Hansen is able to demonstrate sound finance’s detrimental impact on migration policy and research. Most importantly, this undertaking offers the tools with which both migration research and migration policy could be modernized and put on a realistic footing. Empirically, the lecture brings these tools to bear on the case of Sweden, the country that, proportionally speaking, has received the most refugees in the EU over the years while also having one of the most comprehensive welfare states in the EU.

Any society must undertake economic activities, which are embedded within social systems, to generate the flow of goods and services to provide for the material means of life, including the provisioning of money. The economic ideology of money as a “neutral” medium of exchange obfuscates the sociopolitical nature of the monetary provisioning system. In contrast, we ground our analysis in the understanding of money as a social relation, and we apply the lens of social provisioning to the monetary system. This view makes clear that the monetary system is embedded within, and reinforces, existing hierarchies and power structures and evolves through processes of political contestation. First, our analysis traces how changes in the monetary system have shaped the institutional structures of early capitalism such that the monetary system was seemingly depoliticized. Second, we apply this historical analysis to generate a deeper understanding of current monetary contestations. We apply a discourse analysis of the European Union’s fiscal rules to reflect these debates. The monetary system as it has taken shape through the financial crisis of 2007–2008 and the COVID-19 pandemic has brought the political nature of money back into the public imaginary. Accordingly, we highlight the role and power of the state as guarantor of the functioning of the monetary system. A full acknowledgement of this governmental capacity could create renewed space for monetary contestations and democratization. Our analysis reveals that these are both necessary elements to ensure the financing and macroeconomic stability of a social-ecological transformation.

Credit guidance was used extensively in the post-war period. The policy helped states build up their industrial capacity, expand their welfare systems, and accelerate technological innovation in key sectors where rapid development was needed. It is a central pillar of any successful industrial policy framework. And with the ecological crisis, it is gaining renewed attention: A recent report produced by the University College London’s Institute for Innovation and Public Purpose shows how credit guidance can be used to accelerate an effective green transition.

This approach can also be used to offset inflationary pressure. In a scenario where we need to increase public investment in necessary social projects—such as health care, housing, and transit—credit controls can be used to reduce commercial investments elsewhere in the economy (again, specifically in damaging and unnecessary industries that we need to scale down), thus regulating aggregate demand. This is a much more rational strategy for inflation control than using broad-brush interest-rate policy, which can have a devastating impact on people’s livelihoods and on socially important sectors.

Wielding the power of credit, commercial banks get to determine the allocation of investment and therefore determine what gets produced.  They make these decisions based on whatever production is most profitable, regardless of whether it is beneficial or destructive. As a result, we get massive investment in things like fossil fuels, beef and SUVs, because these things are highly profitable to capital, and chronic underinvestment in necessary sectors like renewable energy, regenerative agriculture and public transit, because these are less profitable or not profitable at all.  

This dynamic is what explains the fact that high-income countries – like the United States and Britain – are characterized by extremely high levels of resource use and yet still fail to meet many basic human needs. It is because investment is controlled in an undemocratic way, and is totally unaccountable to society.

Credit guidance can help deal with this problem.  We need a democratically ratified framework to guide private investment in line with social and ecological objectives rather than just profit maximization. What are our main goals and values as a society? What do we need to accomplish? What forms of production should be increased in order to improve human well-being?  What forms of production are destructive and unnecessary and should be scaled down?  These questions should be democratically determined and a credit guidance framework should be established accordingly.

Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.

It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.

[…]

The report is called "Life After Debt". It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012.

This was seen in many ways as good thing. But it also posed risks. If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world.

"It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration.

This is the paper I will give at this year's System Dynamics conference in Bergen, Norway, on August 4-8 2024. It should be of use to anyone trying to argue sense with politicians.

Abstract

Modern Monetary Theory (MMT) is a non-mainstream economic theory that contradicts conventional economic analysis of government debt and deficits. We use the system dynamics program Minsky to develop a mathematical model of MMT. This model shows that the core tenets of MMT are correct, and Neoclassical arguments about government debt and deficits are wrong.

Sergeant Simon Wren-Lewis of the Status Quo Squad, saying "Move along! Nothing to see here!"

Is Labour’s fiscal policy rule neoliberal? That is the charge some on the left, particularly followers of the Modern Monetary Theory (MMT) movement, have laid against Labour’s fiscal credibility rule (FCR). MMT stands for nothing very informative, but it is a non-mainstream macroeconomic school of thought aligned to the left. Bill Mitchell, one of the leading lights of MMT, has run a relentless campaign against the FCR through his blog. As my own work with Jonathan Portes helped provide the intellectual foundation for the FCR, I will try and explain why I find the charge of neoliberalism nonsensical.

 The following searchable document is the complete White Paper as published as an Appendix to the paper by H.C. Coombs (1994) 'From Curtin to Keating: The 1945 and 1994 White Papers on Employment', Discussion Paper, North Australia Research Unit, Australian National University.

It is the only on-line archive of the full paper in its original format that I am aware of. I have corrected some formatting issues that were in the Coombs Appendix version.