MMT vs. Mainstream

The Civilized Money View (aka MMT, or Modern Monetary Theory) has historical precedents:

First, the notion—developed by Adam Smith—that the wealth of a nation is measured not by monetary values, but by its capacity to produce goods and services.

Second, the notion of money—developed by John Maynard Keynes—that any modern state claims the right to declare what money is.

While Smith’s concept hints to full employment as the primary policy objective, Keynes’s concept hints to the management of money as instrumental to reach such objective. Furthermore, MMT explicitly recognizes that the currency itself is a public monopoly.

This leads to an appreciation of the monetary system fundamentally different from the traditional Monetarist-Keynesian paradigm.

What follows is a summary of eight key differences between these two models: the Monetarist-Keynesian paradigm (MK) and the Civilized Money View (or MMT)

1.
MK – The central bank controls the money supply indirectly through its power to control the monetary base.

MMT – The private sector uses bank deposits as money, and bank deposits are not directly controlled by the central bank: they get created by government spending and bank loans.

2.
MK – Because the central bank controls the money supply, it also controls the nominal interest rate in the money market.

MMT – Because it is the monopolist of money, the central bank controls the interest rate.

3.
MK – The long-term nominal interest rate is determined by private preferences about real saving and investment, as well as by inflation expectations.

MMT – The central bank has the power to control the interest rate at any maturity: the interest rate is a purely monetary phenomenon.

4.
MK – A monetary expansion can expand output and employment temporarily and yet, at some point, it generates inflation.

MMT – Any operation by which the central bank buys or sells financial assets does not make the private sector any richer and has little or no consequence on private spending decisions.

5.
MK – Government decisions are largely driven by short-term personal goals of politicians, and thus the management of money should be the responsibility of an independent institution with a long-run horizon.

MMT – While monetary policy can only set interest rates, fiscal policy is much more powerful, since any deficit of the public sector generates an equivalent financial surplus of the private sector, and thus affects spending decisions.

6.
MK – Taxes serve the purpose of financing government spending.

MMT – Because government spending takes resources off the private sector and simultaneously generates income and wealth in the private sector, it will cause inflation from excess demand unless a sufficient amount of taxes is levied on the private sector.

7.
MK – If the government spends more than its tax revenue, it must borrow funds from the private sector, and this reduces funding to the private sector.

MMT – Unless it loses its power to define what money is, the government is the currency issuer: It faces no funding constraint, and it must spend or lend first, before the economy has the funds needed to pay taxes and buy government debt.

8.
MK – Price stability is a precondition for economic growth and job creation.

MMT – A government deficit of a size that matches the private sector’s desire to accumulate financial savings is a precondition for full employment.

This post is Creative Commons Attribution-Noncommercial-Share Alike 2.5 Switzerland License and I dare say any other country as well. It first appeared here via Franklin College’s Andrea Terzi.

I felt it was that important it had to be shared with a larger audience.  Of note is that the MK paradigm mentioned throughout is the traditional current orthodox neoclassical approach used in mainstream economics today.

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8 responses to “MMT vs. Mainstream

  1. I think point 5 is quite idealistic.

  2. An economic system in which public debt becomes private assets is nothing more than building an economic house of cards. If I have interpreted the first “difference” correctly, the public sector will inevitably justify evermore expansions under the guise that they are creating whealth for the private sector in the form of available bank issued currency (fiat in this system as well). The theory of money in this system is completely neglecting historical evidence that all forms of true money have come from actual valued exchangeable goods which then became mediums of exchange (gold,silver,salt,etc.). Not pieces of paper or illusionary balances at privileged banks.
    This system also perpetuates serfdom as it establishes a fiat currency, protected by legal tender laws, which is at the whim of bureaucratic forces and therefore VIOLATES VOLUNTARY ASSOCIATION.

    • If you are able get a copy of Understanding Modern Money (1998) by L. Randall Wray, your concerns are addressed in the first and maybe second chapters.

      The basis of this paradigm actually comes from historical evidence.

    • BD: “The theory of money in this system is completely neglecting historical evidence that all forms of true money have come from actual valued exchangeable goods which then became mediums of exchange (gold,silver,salt,etc.).”

      The commodity theory of money is incorrect historically. It is apriori, that is, invented. Please read David Graeber, Debt: The First 5000 Years, and the work of A Mitchell Innes, What is Money, and The Credit Theory of Money.

    • Remember, the listing of Modern Money Theory is backed by empirical evidence. The listing of how that evidence was gathered is in Wynne Godley’s book ” Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth.” While the theory is simply at it most fundamental formulation a hypothesis, it is backed up by statistics which show the theory, like any good scientific theory, to be sound.

  3. I know I’m somewhat late to the party, but something doesn’t make sense.

    From above: The central bank can control the interest rate “because it is the monopolist of money”.

    But we also know the following. Almost all money in circulation is credit created by commercial banks as loans. This money/credit which is simultaneously a loan and a deposit is not controlled or controllable by the central bank. Is this not in direct contradiction of the above: that central banks are the “monopolist of money”. I was under the impression that a key MMT insight was that commercial banks are the money supply!

    So how can a central bank control interest rates via a monopoly of money that is almost exclusively determined by commercial bank loans?

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