The dangers of pluralism in economics: the case of MMT

MMT (Modern Monetary Theory) is a ‘school of thought’ in economics, by which I mean that it deliberately sets itself apart from the mainstream. I like a lot about MMT as a set of ideas. On the key issue of whether monetary or fiscal policy should be used as the main stabilising tool, although I go with the mainstream in looking to monetary policy outwith the lower bound, I think that issue should always be kept open, and too many mainstream economists just presume that monetary policy must be better. I am also attracted to the idea of some version of a Job Guarantee type scheme, and the mainstream has often failed to recognise the amount of autonomy the banking system has to create demand. I could go on but you get the idea. As I result, I have tried probably more than most mainstream economists to engage with MMT ideas.

As far as I can see there is nothing in MMT that cannot be presented using standard mainstream tools. But I also know that the microfoundations hegemony in mainstream macro excludes many, like MMT economists, who would prefer to do macro in different ways. I dislike the microfoundations hegemony for reasons I have set out elsewhere. For that reason I cannot argue that MMT, or any other school of thought, should be part of the mainstream, because right now it would be impossible because of the microfoundations hegemony. [1]

Having said all that, I think MMT sometimes demonstrates many of the dangers of a school of thought. It tends to be antagonistic to the mainstream, and some (not all) of its leading lights give their followers the idea that the only truth is to be found within MMT, and everything the mainstream says has to be wrong. That proposition is so absurd but I can understand why it can be believed. It was a long time ago, but I was told as a student that neoclassical economics was fundamentally flawed, and would soon be replaced in some kind of Kuhnian revolution. I know how easy it is to follow your political instincts and thereby miss out on so much important and useful knowledge.

It is very difficult not to come across MMT followers (MMTers) if you write a blog on macroeconomics. Most recently this happened when I wrote this on Trump’s tax cuts. Now unusually this post examined how to discuss these tax cuts split into two parts: one which followed the mainstream view where monetary policy controlled inflation, and another that described an MMT view where fiscal policy controls inflation.

My post was criticised by some MMTers on twitter. Not because I had got the MMT part wrong, but because I had argued in the mainstream part that a deficit generated by a tax cut could alter the intergenerational distribution of income. Now this idea is standard, but it can confuse, because you cannot transfer real resources (output) through time in a closed economy. I show how it can be done in an overlapping generations framework here. It is much easier to see how it can happen in an individual open economy, because a generation can consume overseas goods as well as domestically produced goods.

If that all seems a bit abstract, it is also important. I have argued in the past that one of Margaret Thatcher’s failures was to give taxes from the North Sea back to consumers (who spent rather than saved them) instead of following Norway in creating a sovereign wealth fund. Subsequent generations have therefore been deprived of the benefits of North Sea oil. By giving tax cuts funded by borrowing, governments can do the opposite of creating a sovereign wealth fund: future generations inherit more government debt which they have to service.

Those MMTers criticising my blog said such intergenerational transfer was impossible. I tried the best I could to explain why it was possible, but the responses I got ranged from intelligent denialism to simple insults along the lines that I was neoliberal, I didn’t care about the working class and so on.

I’m used to that kind of interchange as a result of Brexit. But there was an important difference here. I was not attacking MMT, but outlining how things work in a mainstream view. So I was not attacking their school or their politics. They had no reason to be defensive. But it was clear to some that I was the enemy simply because I was not an MMTer. This very tribal attitude reflects one of the dangers of plurality in economics. Another is language. MMTers have their own way of describing things, so if you say something like a ‘tax financed increase in government spending’ you are jumped on: according to MMT tax never finances spending, but follows it, or something like that. I don’t mean to make fun, and I can see what they are trying to do, but talking separate languages is a key problem when you have different schools of thought, particularly if you insist that only your language is the right language.

Another problem is that schools of thought also tend to be political. As a result, to use Paul Romer’s phrase, all too often scientific discourse is replaced by political discourse. To some of these MMTers because I was a mainstream economist I had to be neoliberal, as if those two things had to go together. The idea that deficits could redistribute income between generations moved from being an economic statement to a political one. Presenting models that showed how it could happen meant those models had to be unrealistic, without specifying why that lack of realism mattered to the issue in hand.

It is a shame, because these MMTers are clearly interested in economics because of their political interest, so I would love them to be discussing both mainstream as well as MMT ideas. I probably spent too much time on twitter with them as a result. Those that tell them the mainstream is neoliberal and a waste of time are in my view almost criminal because that attitude leads to such a waste of enthusiasm and interest.

It does not have to be like this. I have had plenty of good discussions with MMT academics and some supporters which I have found interesting. They have been courteous and not aggressive. But not all the leading lights in MMT encourage these things. Such as those who write

“Wren-Lewis just should stick to Twitter. He seems to like that. It would save us the time reading the other stuff.”

He wrote that, and worse still which I will not repeat, because he is angry that Labour have adopted a fiscal rule based on my own work with Jonathan Portes rather than MMT’s ideas. Actually I didn’t enjoy the conversations he is referring to at all, and I should have stopped much earlier because it was a waste of time, but as I said above it is a shame to see people who have closed themselves off to so much interesting and, for them, politically useful knowledge.

As I said, I do not blame anyone being in a macroeconomic school of thought because the current mainstream is exclusionary. Many MMTers are open and my discussions with them have been interesting for me at least. But unfortunately some in MMT appear to want to make it a kind of cult, where only MMT sees the truth and everything in the mainstream is neoliberal and wrong. They attract followers because of their politics, but then they turn their followers into converts with closed minds. Which I think is a real shame and completely unnecessary, because MMT is strong enough to stand on its own feet and encourage open minded thinking, not dogma.

[1] I do not think that is the only aspect of the mainstream that excludes other schools. There is too little room in mainstream journals to discuss policy or history in a discursive, holistic way. I happen to like the way most mainstream economists use models to discuss issues, but sometimes it is useful to make sure we are not abstracting from what is really important.