Sunday, 20 May 2012

The difference between MMT and Keynes.

Dean Baker said recently that he couldn’t see the difference between Modern Monetary Theory (MMT) and Keynes. Which is fair enough because the differences are not great. So I’ll try to set out some differences.

Failure to understand MMT, far as I can see, is actually a failure to fully grasp two points: first, the difference between macro and micro, and second, the difference between a monetarily sovereign country and a non-monetarily sovereign country. (A monetarily sovereign country is one that issues its own currency.)

And the list of household name economists who do not fully understand the latter two points is truly amazing. The list includees Brad De Long, Lawrence Summers, and Martin Wolf, as I’ll show below.

The above claim that failure to fully understand the significance of monetary sovereignty is an important element in failure to understand MMT is supported by the fact that MMTer Rodger Mitchell constantly bangs on about monetary sovereignty and constantly finds examples of economists who trip up because they don’t fully get the significance of it.

To say there are differences between MMT and present day Keynsians (or at least people who are not strongly opposed to Keynes’s ideas) is not the same as saying there is a difference between MMT and the actual ideas put by Keynes himself. I won’t dwell much on the latter, as I’m not a Keynes expert.

1. Micro and macroeconomic entities are different.

Re the difference between macro and micro, DeLong and Summers are concerned here about whether a government deficit will in the long run be self-financing.

That concern makes no sense. MICROECONOMIC entities must in the long run be self-financing. For example, a household’s outgoings cannot in the long run exceed its income, else it goes bust.

In contrast, GOVERNMENT’S outgoings can exceed its income till the end of time. (Incidentally I’ll use the word government in the sense “government and central bank combined”).

Indeed, the US and UK’s government’s outgoings ACTUALLY HAVE exceeded income decade after decade for the last seventy years at least.

And the reason government can do this that it can print and spend money. Of course there are limits to how far government can indulge in this practice if excess inflation is to be avoided. But there is no question but that governments of monetarily sovereign countries can do this.

2. Government borrowing is pointless.

A microeconomic entity, if it wants to spend more money than it actually has, must borrow (as indeed must non-monetarily sovereign countries, like Eurozone countries).

In contrast, a monetarily sovereign country does not need to borrow: it can simply print money and spend it.

Keynes said that in a recession, government should either borrow extra money and spend it, or print extra money and spend it. Personally I doubt that Keynes actually meant what he said when suggesting that government should borrow. He was politically very astute, and knew what the reaction of economically illiterate politicians would be to anything they didn’t like the sound of. I suspect Keynes knew what the reaction of politicians would be had he put too much emphasis on the “print and spend” option. He thus tended to advocate “borrow and spend”.

In contrast, MMTers are not bothered about the reaction of economic illiterates. MMTers tend to blurt out the truth, as they see it: namely that it is pointless for a government that can print infinite quantities of currency whenever it wants to borrow the stuff. Certainly Abba Lerner (often said to be the founding father of MMT) did not advocate that government should borrow and spend in a recession. He favoured the print and spend option. (He did advocate government borrowing, but only as means of controlling interest rates – not a policy I personally approve of.)

3. Effect is all that matters.

As Lerner stressed, the important consideration in connection with a change to government spending is not the numbers involved but the ACTUAL EFFECT of that change. That might sound like a statement of the obvious, but plenty of present day Keynsians (never mind Austrians and others) don’t get it.

A classic example concerns the multiplier. Plenty of present day Keynsians (e.g. Alberto Alesina and Francesco Giavazzi) think there is merit in a recession in channelling government spending towards areas which have a decent multiplier. Reason being that one gets a bigger effect employment-wise than from low multiplier type spending.

The thinking behind this is of course that “money is saved” in the process. And the flaw in that argument is that printing and spending more money costs nothing in real terms. Or as Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.” (That’s from Ch 3 of Friedman’s book, “A Program for Monetary Stability”.

In other words, there is no point distorting the economy towards high multiplier areas, because there are no REAL COSTS involved in ignoring the multiplier.

The above “multiplier myth” is another example of failure to see the difference between macro and micro.

4. “Fiscal space” is hogwash.

A popular idea currently doing the rounds and adhered to by many self-styled Keynesians (particularly in the IMF and OECD) is that when a country borrows too much it runs out of “fiscal space”. That is, such a country loses the ability to effect stimulus because it cannot borrow any more.

Well the answer to that is, as pointed out above, a monetarily sovereign country does not need to borrow in order to effect stimulus – a point that MMTers have grasped, but which others apparently have not.

Martin Wolf and Jonathan Portes (head of Britain’s National Institute of Economic and Social Research) are examples of economists who adhere to the idea that high interest rates demanded by potential creditors limits and country’s ability to effect stimulus.

For more on the nonsensical “fiscal space” idea, see here.

5. The purpose of tax is to counteract inflation, not to collect revenue for government.

The above is a point often made by MMTers. It’s a bit of a semantic point. But the point certainly contains an underlying truth. It derives, logically, from the statement that inflation is the only constraint on the deficit or on government spending.



  1. There is huge confusion and misunderstanding both amongst the populace and politicians regarding the term "borrowing". Treasury officials know very well what this is all about but they know to keep their mouths shut. I particularly like the comparison made by JD Alt - bonds are no more different from treasury deposits than term deposits differ from checking accounts.

    1. I agree with the "J.D.Alt take". I thought it was Warren Mosler who first came up with that "checking account" comparison, but I might be wrong.

  2. I think I understood the bulk of this, except for the "multiplier myth" bit


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