Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 1 March 2018

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.


  1. I think it would be more constructive if Bill Mitchell used more temperate language and kept the personal stuff out of the his arguments, but I also understand that alongside the insults there is a valid critique of New Keynesian models.

    MMT rejects mathematical models for the most part because, in their view, the models don't reflect the real world, and are based on questionable assumptions such as microfoundations and rational expectations etc... And the New Keynesian approach has these models at its very foundation.

    I think that's the issue that needs to be addressed: what use can the models such as IS-LM, DGSE etc have in economics, when their predictive power is zero, and their assumptions are built on such unrealistic premises?

    So while Bill Mitchel's language is unfortunate, his critique of the fiscal rule is salient: the rule is built on a premise of sand, because the models which underpin it are unrealistic and based on questionable assumptions.

  2. Gah! i followed the link to Billy Blog.

    He writes "governments do not need taxes to pay for government spending."

    There is no way the UK could fund getting on for £1tn of public sector spending with £1tn of annual seigniorage (and/or borrowing) without any taxes. Sane MMT says we could probably get away with adjusting level of public spending and the mix of taxes/borrowing/seigniorage in directions the mainstream would resist, insane MMT says we don't need taxes (i.e. we could set taxes to zero)

    1. MMT describes how taxes are not a necessary prerequisite for government spending. Nowhere does it suggests dropping taxes to zero, rather that taxes play a different role (demand management and redistribution). So I think you're strawmanning.

    2. Setting taxes to zero risks some inflation. It should just be made clear that taxes are not necessary to fund the govt, but rather to control inflation. (Monetary operations are very inefficient in this regard.)

    3. Fact based MMT says that neither taxation or bonds fund spending at any level, nor could it ever.

      Taxes delete currency that has completed its journey.

    4. "He writes "governments do not need taxes to pay for government spending."" That statement does not say that governments do not need taxes, which would be borderline insane. What it does say is that the tax receipts are not used "to pay for" the spending, and Mitchell means that the tax receipts are not the limiting factor for a currency issuing government to be able to spend. The spending in a fiat, floating currency by the issuer is better understood as an entirely separate operation from the taxing of it (and the borrowing, if any, would be as well). But an effective tax system is very important to MMT- it provides a baseline demand (value) for the currency and it removes spending power from the private sector so that government spending can be accomplished in a non-inflationary way.

      A fiat currency is a tool the issuing government uses in order to provision itself and accomplish the goals we set for it. The currency has no intrinsic value other than that. Taxes drive some of the demand for the fiat currency giving it the ability to be used as a tool to accomplish the government's aims. If people want to save in the currency, and use it for exchange among themselves, then that extra demand for the currency will provide extra room for non-inflationary deficit spending. It might even make the deficit spending necessary for the government to accomplish a goal of full employment.

      Well, at least that's my understanding of what Mitchell and MMT say about taxes and fiat currency and government spending. Hopefully it is accurate- I don't want to get kicked from the cult just yet.

    5. all y'all need to realise how stupid "oh we don't need actually taxes to finance expenditure, we just need taxes to remove all the money from the economy we injected by money-financing expenditure" is.

  3. And yet the economy is always the political economy - not the the weather. We, through the elected government decide how we want it to work through the rule of law. And if you start from the idea that the government is a money factory with its own bank attached, which seems to me to be irrefutable, it is easy to see why people are decidedly unsympathetic to tax and spend.

  4. "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"

    Don't you think this observation feeds into your later issues with the (sometimes) antagonistic reaction of MMT supporters? There is a natural frustration borne of being effectively ignored by the mainstream, especially when said mainstream has (let's be honest) rather struggled to deliver on its promises.

  5. MMT is pretty unique in recognizing accounting foundations as essential underpinning for understanding monetary operations - and that for understanding possibilities for a monetary economy.

    Unfortunately MMT seems to be allergic to useful compartmentalized management accounting. It also wraps itself in a blanket of distortion in conflating descriptions of factual monetary operations with counterfactual possibilities. This includes a vision of government budgetary operations as if they were central bank open market operations. The result includes wasteful and essentially inaccurate language as in taxes don't fund spending.

    It is a tragedy. Recognizing accounting foundations is essential to the substance of the subject matter. But it is not developed or taught that way. The result is that Nobel prize winners don't even seem to understand what happens to the monetary system when you go in for a bank loan. This basic stuff then gets theorized as "endogenous money" when it's just basic accounting.

    So it's a tragedy on all fronts.

    You're late to the MMT complaint party.

    You will eventually retreat.

    1. Can you provide some specific examples? (I think you are right.)

    2. "The result includes wasteful and essentially inaccurate language as in taxes don't fund spending."

      JKH, it is plainly obvious that taxes have not 'funded' the totality of US government spending even over the entire history of US government spending. And it is also pretty obvious that the government can spend at times (and has spent in the past) far more than it collected in taxes. Is it "essentially inaccurate" to say that when an economy is not operating at full capacity to say that "taxes do not fund spending"? If no, then isn't the 'essential' question more about how often the economy is at full employment? It seems to me that the econ I was taught was too optimistic about how often the economy would be in that full capacity situation. And far too optimistic about how quickly it might return to that situation when it wasn't there.

      In any event, in the situation of full and best employment of resources, wouldn't it be fair to say that MMT's view of necessary taxation to avoid inflation might be even more strict than the mainstream? MMT doesn't think government borrowing restricts demand, at least in my understanding.

  6. "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."

    Servicing the debt has nothing to do with how much a cohort can consume or want to save. Empirically the change in debt and the saving rate doesn't support the idea of government debt being burden. The causality seems to run from higher saving rate to higher government debt.

    1. It makes a difference whether the fund is denominated in a reserve/widely-accepted currency or the domestic currency.
      1) If a foreign currency, the govt can provide a future generations with Mercedes for everyone! Yay!
      2) If in the Domestic currency, the future govt may offer Chevies for everyone! but then, assuming the economy is already at full employment, resources have to be shifted from the production of something else to the production of Chevies. That makes a difference.
      If the Govt has debt or a bank account in the domestic currency makes no difference to the upcoming generation who has to work for their share in any event.

  7. In financial terms the three periods of life are roughly categorized as follows: (1) undertaking an education; (2) accumulating financial assets ; (3) accumulating more financial assets or spending down financial assets in retirement.

    There seems to be a debt repudiation and disruption of investment problem when everyone is trying to accumulate financial assets in perpetuity including the sovereign wealth funds.

  8. Professor Wren Lewis, I sympathise with you very much for the abuse you have received; it is very clear that your heart is in the right place and disagreements should be conducted in the appropriate manner.

    Regarding the intergenerational transfer issue, I feel that you are mixing two issues. One is fiscal deficit and the other is current account deficit. In normal cases a fiscal deficit makes a current account deficit more likely, but this need not always be the case.

    With a current account deficit, the country is using more than it produces and owes resources to the country it borrows from. In this case there is a clear spending of resources now that could be saved until the future. The currency is too high and the buying power is artificially high.

    With a fiscal deficit but no current account deficit, there is neither borrowing of resources from another country, or taking of resources from the future so the argument does not apply.

    If, for example, a government were to borrow more money to create a sovereign wealth fund, they would actually be giving the country a higher claim on resources from abroad in the future. It would result in a lower currency now, less of a current account deficit now and more savings for future generations to use.

    1. It's not about redistributing across time. It's about redistributing across generations alive in the same time.

      Imagine the government gives me a trillion dollar coin, and I hide it under my mattress. There is no economic effect. In twenty years, I sell it and spend the proceeds, suddenly injecting a trillion dollars into the economy. The government increases taxes on everyone to offset the inflation. Clearly, there has been a massive transfer from everyone else to me. There's no change in the resources available each year, but I suddenly captured a huge chunk.

    2. - That could happen. But in real world, the increase in demand from you or whoever else owns a claim on the nation's wealth (Govt Debt, Reserve Deposits, Securities, Private Debt, or even just money) will gradually increase spending, and the economy will respond by increasing investment/employment/output.
      - Somebody will always have a claim on the nations wealth. As a new worker, do you really care who owns the capital? Whether its the Norwegian Sovereign Fund, a Chinese businessman, or the rich guy in the big house 2 towns over?

    3. Brian: Further: And it matters what kind of taxes are imposed to cool the inflation. The Federal govt should broaden its tax levies to include: a Sales/VAT and an Asset Value Tax in addition to income taxes. This will cool your trillion dollar coin spending.

  9. Speaking as a self-confessed MMTer, I agree with SW-L’s point that “you cannot transfer real resources (output) through time in a closed economy.” What do I call myself: an SWLer?

    Yours confused.

    1. Sure you can, because finance turns future IOUs into money today, then rolls them over or pays them from insurance itself based on future IOUs and final settlement is put off indefinitely. It is the business model of banking.

  10. Professor: I hope you don't consider the Dog as one of those rude ruffians.

    I think the reason MMTers such as Billy Mitchell and the Pup come off aggressive is that we feel the misguided constraints of traditional economics is causing untold misery among billions of people worldwide - which is somewhat - criminal. The mainstream view is borne of a misunderstanding of the fundamental structure and mechanics of a fiat sovereign government. Sovereign currency, sovereign debt is not something that needs to be measured, kept track of, or even reported. Its totally irrelevant. My comments on your "Do Deficits Matter" column spell out why intergenerational equity in sovereign debt is irrelevant: Sovereign Debt is interchangeable with Sovereign Currency. When a generation comes of age, its irrelevant who owns the existing capital (unless they as individuals own it.). Somebody else owns it.

    Do you disagree with any of the Pups assertions?:

  11. Dear Simon, you have, in fact, engaged with MMT (and more than many others bother to do so and more often with an open mind as to understanding it rather than trying to dismiss it out of hand). As someone who might be described as a 'MMT follower' (not my preferred description), I just want to tell you that I appreciate your willingness to discuss the ideas and to assure you that Bill Mitchell has not turned me into some kind of closed minded cult follower. Nor has that been his goal in my opinion.

    As you note, MMT sometimes describes things rather differently than other economists do. This is because it is described in more or less standard, but necessarily very, very specific English in Mitchell's case, (although he does have that Australian accent). Your example of a "tax financed increase of government spending" is a case in point. MMT would not say that statement is necessarily wrong- plenty of local and even national governments who do not issue their own currency do have to finance their spending through taxes or borrowing. But MMT would say that describing any particular spending of a country such as Japan as being 'tax financed' is just not the right way to describe it because it obscures the actual ways in which that spending is accomplished by implying that a tax increase would be necessary for the increase in government spending to occur.

  12. MMTers are combative because the theory is more akin to an ideology than a theory of economics. You either buy into the ideology or you don't. There's no place for nuance because the ideology does not leave room for nuance. Their followers are blind to it because they only see the policy ideology and fail to understand the underlying inconsistencies in getting there.

    They are so sensitive to criticism because their theory is weak and they cannot defend it on its merits. Instead, MMT interactions inevitably turn into personal fights often times with the "leaders" of the cult leading the charge.

    MMT is an interesting theory with some clever concepts, but I wouldn't get too worked up over it. The more you peel back the onion the more it stinks.

  13. MMT has no interest whatever in being a "school of thought." It is interested only in being a description of reality, and if it is not that it is (probably) completely worthless. Since that is the case, the only valid attack that can be made on MMT is that it does not describe reality. You say "some (not all) of its leading lights give their followers the idea that the only truth is to be found within MMT". I can assure you that every one of the leading lights of MMT would agree that the truth is only to be found by accurately describing reality.

  14. Neoliberal is like octoroon: if you share 1/8th of your assumptions with neoliberals you are one. If you are offended that says more about your thin skin than it does about your neoliberal assumptions ...

  15. ".. Labour have adopted a fiscal rule based on my own work with Jonathan Portes rather than MMT’s ideas. "

    It concerns me that Portes still has this kind of influence in Labour. Portes is a decent and intelligent man, but he belongs to the New Labour era. To understand Brexit (and how to deal with it - hopefully even reverse it, but at least stop something even worse happening in the future - eg the Boris Johnson as PM) you need to understand why the ideas of New Labour are not trusted and were rejected. These ideas arealso linked to Neo-classical economics which from the word go makes some very questionable and even dangerous assumptions about how individuals and societies behave and function.

    Personally I don't think brilliant ideas like a Sovereign Wealth Fund as they have in Norway are going to come people who have basically just solved mathematical puzzles through their PHDs. It is more likely going to come from people with multidisciplinary backgrounds.

    MMT might not be satisfactory, but you must not exclude people from outside having a hard look at the economics profession including its very core assumptions and fundamental methodological approach. This is the exclusion and tribalism we should be worried about. Unfortunately there are good reasons why many cannot believe that adequate introspection and reform can come from inside.


  16. "instead of following Norway in creating a sovereign wealth fund. Subsequent generations have therefore been deprived of the benefits of North Sea oil"

    You inadvertently raise an issue which doesn't ever appear to be reflected in economic thought. My interest in your column and my weak efforts to getter a better understanding of economics flows from a lifetime concern with sustainability, climate change and human impacts on the environment.

    You speak of those who believe there's no such thing as true intergenerational debt. I would suggest this is a deep blind spot in the thinking of economists. There appears to be no accounting for the value of global commons. Thatcher's decision to use north sea oil to fund consumer spending rather than creating a sovereign wealth fund was a crass and destructive misuse of what David MacKay describes as "a once in a planet time capital asset". North Sea oil revenues should have been used to create a sustainable infrastructure. As it is, future generations have nothing to show for it except the environmental costs of dealing with teh carbon released by using the stuff. Ecological costs of all kinds are intergenerational. They are not paid for or accounted for by the those who create them and by their very nature are socialised with no public consent. I wonder if you have any thoughts on this?

  17. Could you back up your claim that "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" by textual evidence? It seems to be a really important point that you make in both introduction and conclusion. On the other hand, do you think that one could find evidence of mainstream economists saying that everything intelligent that can be said about macro can be said in a DSGE model or it is not intelligible?

  18. Who is being intransigent? As a non-economist MMT advocate (my PhD is in philosophy), it looks to me like the mainstream is the intransigent party. "The methodological debate is over."

    JKH, not an MMT advocate, also makes a key point above that the mainstream largely fails to take accounting into consideration when accounting is the language of business and finance and is dismissive of its importance in comparison to mathematics.

    MMT is hardly original emphasizing accounting, finance, institutional arrangements, the difference between risk and uncertainty, etc. These were pointed out by Keynes, Lerner, Tobin, Godley, Minsky, etc., before the MMT economists came on the scene.

    I would argue that what seems to be needed from an outsider's point of view is a renewed debate on methodology that questions key assumptions like methodological individualism, maximization, equilibrium, etc. that the mainstream considers settled issues.

    I agree that the present form of "debate" such as it is tends to get overheated. But this appear to result from the perception on the MMT side that the mainstream is being intransigent about what is settled, on one hand, and the dire results in terms of policy and its effects on real people, on the other.

    It would be nice to have a calmly reasoned debate in an open forum but the parties have to be willing to join it. I don't see many mainstream economists willing to debate openly with so-called heterodox economists, not limited to MMT. Where are the Post Keynesians, the Paleo Keynesians, the Institutionalists, the Marxians, etc.

    The issue usually boils down to "Where is your model?," meaning a model in the form that the mainstream stipulates, or "The methodological debate is already settled."

    I get that the mainstream considers that its "orthodox" (that word should scare you) approach is the paradigm for doing normal science in economics in the Kuhnian sense, and that if the normal paradigm is to be challenged it must be approached in terms of failures and the resort to ad hoc fixes that basically negate falsifiability. I would say that this has been done adequately and most of the mainstream refuses to recognize it.

    These issues are going to be settled one way or the other because they affect policy and policy is, well, political. The present system in not working for a lot people and they are not going to be convinced by the mainstream arguments much longer. The mainstream has to deliver or they will be replaced and there are various options available along a range from extreme right to extreme left. This is not just an academic debate, as the macroeconomists offering policy advice are well aware. Lives are at stake as well as political regimes.

  19. I love MMT but have no doubt that SWL has legitimate complaints with MMT folk. There are no doubt self-proclaimed MMTers who are idiots, as well as more serious MMT folk who are abrasive if not close-minded.

    My own experience has been that the MMT language is much more straightforward than the mainstream BS. I have a degree in Economics from the University of Michigan, but never learned about banking, accounting, and money there. I learned about these much later on the web from MMT folk. I never learned anything from SWL either, despite reading his blog occasionally based on references from Tom Hickey and others in the MMT community.

    Still, I have no reason to disagree with what SWL says here. We have different perspectives based upon different life experiences, and I certainly agree that MMT folk should not be close-minded or rude.

  20. “there is nothing in MMT that cannot be presented using standard mainstream tools”

    Maybe it is technically possible to impose a stock flow consistent double entry accounting framework (MMT) on, say, an intergenerational equilibrium model with a transversality condition, so that all state issued liabilities must fall to zero at infinity (Neo-Keynesian)?

    But I think, and please anyone show me where I go wrong, that in order to this model to generate MMT results we will struggle to hold onto our well behaved Lucasian micro-foundations. You could probably maintain a form of household optimisation and even the transversality condition whilst retaining an MMT type government, which ‘voluntarily’ restrains itself from issuing unfunded liabilities or defaulting (say through inflation). This model wouldn’t necessarily have to specify when the government needs to start running surpluses. It could in fact run deficits indefinitely, but not infinitely, and the ‘optimising’ households could still act as though they will get their money back (Japan), or we might imagine that people fear they will not get their money back, but nevertheless go to the grave with huge savings (Germany). It all depends on the type of ‘optimisation’ used by the agents.

    And that’s the point. When we specify our model we are also specifying a specific type of society with a specific type of behaviour. We impose a legal ‘constitution’ on the behaviour of the agents. If everyone behaves as the model tells them to behave, then the resulting coordination will necessarily bring about the result the model predicts. But the problem faced by applied as opposed to theoretical economics is that humans have differing versions of the model in their minds, and so we face coordination problems, which we need to overcome. Politics is the name we give to the socially negotiated process of overcoming coordination problems in an uncertain world. That’s why "scientific discourse is replaced by political discourse", whenever we actually have anything meaningful to say.

    So perhaps you can indeed get MMT results from an NK model, or I think Marxist, or even Austrian results if you are technically inventive, but only if you substitute ‘scientific’ micro-foundations for ‘political’ micro-foundations.

  21. Political economics: Who hijacks British Labour?
    Comment on Simon Wren-Lewis on ‘The dangers of pluralism in economics: the case of MMT’

    Bill Mitchell writes: “Another point that interests me here is the role of academia. Historically, our role was to bear witness to governments and their behaviour. To provide ‘independent’ scrutiny. That role was one of the reasons that tenure was introduced ― to allow us security of employment no matter what we said about governments or other powerful entities. …These days, academics have largely lost tenure … and are bullied by managerial bosses into virtual silence for fear that Government Ministers will ring up their institutions and damage their prospects if they speak out openly.”#1

    Economics always claimed to be a science. It never was. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

    There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

    Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. And this means, in turn, that economic policy guidance NEVER had sound scientific foundations. Economists have NO scientifically valid knowledge about how the price- and profit-mechanism works.#2 There is a total logical DISCONNECT between economic policy arguments and economic theory.#3

    The lack of a scientifically valid theory, though, never prevented economists from assuming the role of useful political idiots.

    What can be observed at the moment is that New Keynesianism and MMT is trying to get hold of Labour’s economic policy lever. New Keynesianism is derived from Walrasianism which is scientifically dead since 140+ years. MMT is derived from Keynesianism which is defunct since 80+ years because Keynes messed the analyitical foundations of macro up. So, neither approach has sound macroeconomic foundations.

    Apart from this lack of qualification, economists have entirely forgotten that politics and science are ruled by entirely different principles and that both spheres have to be strictly kept apart. As J. S. Mill had it: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

    This did not make much impression on the agenda pushers of all colors and this, in turn, explains the fact that economists are since 200+ years fooling around at the proto-scientific level. Scientific failure, of course, does not matter at all in the political sphere where a scientific bluff package has at all times been quite sufficient.#4

    Egmont Kakarot-Handtke

    #1 billy blog

    #2 Mass unemployment: The joint failure of orthodox and heterodox economics

    #3 Paul Krugman and economic poultry entrails reading

    #4 MMT and grassroots movements

    1. MMT isn't derived from Keynesianism. It draws more from Lerner than from Keynes. See:

      And MMT's focus is very much on explaining "how the actual economy works." That's precisely why it takes money and the actual operations of banking and the monetary system into account.

  22. I wonder if part of the problem here lies with the very size of the subject.

    In so far as it can be described as a science, economics has much more in common with, say, theoretical physics than with the chemistry I did in school, and we need only look at that field to see that there is no place for dogma. Einstein was brilliant, but plenty of what he said has been shown to be incorrect, or has been moved on by those who came after him.

    Equally, in my own field as a physician, I know that there are strong scientific principles, and reams of evidence about most of what I do, and yet I have to remain open to the possibility that patients and their diseases haven’t heard that, and behave as they damn well please.

    So, not only is it the case that far from truth and facts, economics really only deals with, at best, what is probably the most correct description of what has gone before informing predictions about what will happen next, and then reexamining those descriptions to see how wrong they were, but I think it is probably also likely that even if the description was spot on, sometimes things just won’t pan out like that.

  23. Quite a prominent economist on the right complained that in discussing MMT economics with MMT'rs it descended into accusations or challenges of who funds him not the economics.

  24. Identity politics tries to shut down those of a contrary view. I'll call MMT, identity economics, as it seems to try and shut down those of a contrary economic view to theirs.

  25. Political economics: Who hijacks British Labour? continued

    To debunk Wren-Lewis’ New Keynesianism, as Bill Mitchell has done in his series#1, is the easy part. Yes, anyone who has said in the last 140+ years that mainstream economics is garbage has been right. The point is that debunking has run its course by now and that the world is tired of Walrasianism, Keynesianism, Marxianism, Austrianism and wants to know what the true economic theory looks like.

    Bill Mitchell makes two claims, (i) that MMT is the scientifically correct description of how the actual monetary economy works, and (ii), that MMT’s progressive political agenda promotes the cause of the ninety-nine-percenters.

    With regard to the actual political situation in Britain this boils down to (i) New Keynesianism, represented by Simon Wren-Lewis, misleads Labour, (ii) MMT, represented by Bill Mitchell, and Labour are the political dream team.

    Both claims are false. MMT does not satisfy the scientific criteria of material/formal consistency. It has been proven that the MMT balances equation is false.#2 So, MMT is NOT scientifically superior to New Keynesianism. Both share the same methodological defect, that is, the foundational economic concepts profit and income are ill-defined. This is lethal for every economic approach.

    The two most popular MMT claims, i.e. deficit spending/money creation easily fixes most economic problems and debt does not matter, are misleading at best. Deficits matter for distribution.#3 More specifically, public deficits are the main drivers of upward redistribution from Keynes onward.#4

    The academic Wren-Lewis has been denounced by MMTers as neoliberal agenda pusher. So, the question is legitimate, whose agenda the academic Bill Mitchell is pushing.

    Bill Mitchell argues: “Another point that interests me here is the role of academia. Historically, our role was to bear witness to governments and their behaviour. To provide ‘independent’ scrutiny.”

    This independence never existed. Economics started as Political Economy and only wrapped itself at some point in history in the cloak of science. In fact, the majority of economists never rose above agenda pushing. As a consequence, economics never reached the heights of scientific independence, objectivity, and truth. From this follows: “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman)

    What do we see when we look closer into MMT? Bill Mitchell argues: “A rising fiscal deficit is neither good nor bad. It all depends on the saving and spending desires of the non-government sector and the state of capacity utilisation. A rising deficit associated with a growing economy and full employment with stable prices is to be desired.”#5

    The MMT swindle lies in the word non-government sector. There is NO such thing as the “non-government sector”, there are TWO sectors, the business- and the household sector. And the business sector does NOT save. Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The word profit, though, does not appear once in Bill Mitchell’s analysis. Why? Because it holds Public Deficit = Private Profit which means that Bill Mitchell does not really care about poor Britain but about the wellness of the one-percenters.#6

    Egmont Kakarot-Handtke

    #1 The New Keynesian fiscal rules that mislead British Labour

    #2 Rectification of MMT macro accounting

    #3 Deficits matter for distribution

    #4 Keynes, Lerner, MMT, Trump and exploding profit

    #5 Oh poor Britain …

    #6 MMT: academic snake oil for the people

  26. Not an economist, and the details are above my head, but I’ve been following the debate as best I can because, well, it’s important, and it’s our responsibilty as voters to try to make our decisions informed. And I read Mitchell’s post, and thought this is well out of order, not just because it was unnecessarily insulting (although it was), not just because it got the back up of a decent and influential potential ally (although it did), not just because it was obviously untrue, but because it further built up walls around MMT and further implied that people have to be one one side or the other, either inside the school or outside. And that isn’t pluralism, or if it is, it’s the “pluralism” of a cult religion who demands its right to be listened to but refuses to allow anyone to criticise it. I hope that some time in the future MMT will no longer exist because what’s true or useful in it will have been absorbed into mainstream, displacing the untrue and useless there, and that that will be a good thing. Until then, let’s use MMT as a “minority report”, listened to and repected and often acted upon.

  27. .
    Is there a definitive definition of MMT?

    I get the impression their useful insights are mixed with apalling oversights, but I do not know for certain.

  28. " 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."

    You are confusing financial benefits with real wealth. Sovereign wealth funds do not benefit anybody, whether that be the living or any future generation. The taxes from the North Sea did not go anywhere. The government simply let the financial assets that it would have withdraw from the private sector stay in the private sector instead. This enabled the private sector, as you note, to spend more. You suggest that this deprives future generations of the "benefits of North Sea Oil." But that's false. The spending generated wealth today, including infrastructure, that future generations will rely on to educate them, heal them, transport them. It will contribute to cures for cancer today so that future generations don't have to die from cancer tomorrow.

    The suggestion that throttling growth today by curbing spending today somehow benefits the future is extremely bizarre. If that were the case, we could reduce current spending even further, leave more people unemployed, and reduce wealth creation and economic activity even more today "for the benefit of future generations." That's just absurd, right?

    True, as long as the government issues more "debt" today, future generations will have to "service" it. But what is neglected here is that it doesn't cost anything, in real terms, to service the debt of a currency-issuing governments. It just issues the currency by crediting the accounts of bond holders, the same way it spends on anything else. So this isn't a "burden," unless you count receiving risk-free interest on savings as a burden. That, too, seems absurd.

  29. I asked commenters at Bill Mitchell's blog how the accounting was done to support the claim that in practice "government spends money into existence." I sketched the (typical to me) scenario of a government that didn't have enough amount in its account with the central bank to support its spending plan. How then would it spend without first (i) collecting taxes or issuing bonds or (ii) simply commanding the central bank to lend or give it new balances? (i) doesn't support "government spends money into existence" and (ii) is what governments and central banks claim they don't do. I never did get a clear description of the accounting, or how the accounting is captured in accounting records if (ii) was being practiced. What I did get was various restatements of "government spends money into existence".

  30. How MMT fools the ninety-nine-percenters

    One of MMT’s wake-up shocker slogans is: Taxes Don’t Fund Gov’t spending. This is operationally true, of course, but raises false expectations. What is sold as a benefit for the ninety-nine-percenters turns out to be a benefit for the one-percenters. MMT policy is false/misleading because MMT theory is false, more specifically, MMTers do not know how the price- and profit mechanism works.

    In order to go back to the basics of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Q≡C−Yw, saving/dissaving S≡Yw−C).#1

    It always holds Q+S=0 or Q=−S, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. This Law refutes the MMT profit theory. So, strictly speaking, MMT is scientifically finished already at this point.

    Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.

    The average stock of transaction money follows as M=kYw, with k determined by the payment pattern. In other words, the “quantity of money” M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy never runs out of money.

    Now, the goverment starts deficit spending. Economically, it does not matter much for what purpose. The money, which is created by the central bank, is simply handed over to a social subgroup which fully spends it.

    Government spending is denoted by G. The new market clearing price is now given by P1=(C+G)/X which translates into P1=P+G/RL, that is, there is a price hike which depends on the amount of the government’s deficit spending G. If G is small in relation to total output O=RL the price hike is almost imperceptible. There is NO such thing as inflation if the deficit is repeated period after period. The elevated price P1 remains constant. However, the debt of the goverment vis-a-vis the central bank rises continuously. This can go on for an indefinite time.

    MMT is right, taxes are not required to fund government spending and debt does not matter for the time being. However, that does not mean that the wage income receivers are not taxed in real terms. The price hike reduces the real quantity Yw=C can buy, that is, the wage income receivers are taxed in real terms.

    What about the one-percenters? With total expenditures C+G and unchanged wage income profit is now equal to government deficit spending and rises from zero to Q=G.

    Due to stealth taxation and the profit Law which says that Public Deficit = Private Profit, deficit spending/money creation is always a bad deal for the ninety-nine-percenters. MMT policy ultimately benefits alone the one-percenters.#2

    Right policy depends on true theory. MMT is proto-scientific junk, just like Walrasianism, Keynesianism, Marxinaism, Austrianism, and Pluralism.

    Egmont Kakarot-Handtke

    #1 For the detailed description see ‘How the intelligent non-economist can refute every economist hands down’

    #2 For the full-spectrum refutation see cross-references MMT

  31. Which came first - money or taxes?

    1. Tax. Because, without the demands for tax, the government would be unable to issue money.

      Demands for tax first-> the people need to pay their tax bill means they work for the government who then issue the money.

  32. This is kinda off-topic but here is an example of work that integrates heterodox and conventional macro:

    Also see

  33. I'm struggling to find anything in MMT (and most other economic material for that matter) which deals with the fluctuations of the ratio of distributed profit to wage income, and its effects. Whilst I agree with Egmonts formulations and substance regarding how MMT fools the 99%ers, it can easily be interpreted to mean there is only 1% who receive distributed profit and 99% that don't and that this ratio is fixed.

    The profit ratio is always fluid and increasing due to increased demand coming from the supposed 99% who wish to become like the 1%. With the ever increasing size of the middle class and its increasing demand for financial assets/passive income, I find it difficult to accept that this 1:99 ratio would even be close, nor can I accept that as this ratio increases it does not have any material effect.

    So whilst providing job guarantees, government stimulus, etc as means to spur on growth and prosperity for all might sound like a good idea, where in all of this is the study of the effects of such government initiatives on increasing the demand for financial assets from the middle class and lower classes? Do we really believe everyone in the world can own a portfolio generating passive income? If not, then why do we assume we can all function properly under one economic system?

    1. ANC Driver

      All issues concerning profit/distributed profit have been settled. See working paper at SSRN: The Emergence of Profit and Interest in the Monetary Circuit

      Egmont Kakarot-Handtke

  34. Yes Egmont,
    you also touch on it in:

    Reconstructing the Quantity Theory (I)

    But, you, with the possible exception of Keen, is the only who has that I am aware of.


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