Book review of Nersisyan, Y. and Wray, L.R. (eds): The Elgar Companion to Modern Money Theory

The 'Kansas City' Approach to Modern Money Theory

This paper discusses Modern Money Theory (MMT) with a particular focus on the role of the state in its monetary system and the nature of money. It addresses the main differences between the orthodox, heterodox and MMT approaches to monetary theory while reconciling endogenous money theory with the state money approach. By emphasising the symmetry between how banks create money as they finance private spending and how the government creates money when it finances its own spending, we clarify some of the misconceptions surrounding MMT while showing that it is more consistent with the facts of experience. Furthermore, we argue that MMT’s insistence that government spending or lending must precede bond sales is consistent with the Keynesian emphasis on effective demand as the driving force behind income and saving. We delve into MMT’s implications for monetary and fiscal policy, with a particular focus on the eurozone. We conclude our paper by discussing two proposals of ‘monetary cranks’: narrow banking and government issue of debt-free money. This allows us to re-emphasise MMT’s views on the nature of money.

The major shift in the nexus between monetary and fiscal policy worldwide and the emergence of a “new era” of low growth, interest rates and inflation following the 2008 Global Financial Crisis have led to widespread criticism of today’s mainstream economics, and have given rise to the extensive popularity of modern money theory (MMT). The growing prominence of MMT stems from a fundamentally different understanding of the nexus between money and public finance compared with today’s mainstream and orthodox economics. Orthodox economics combines the orthodox monetary tradition of barter with the fiscal tradition of sound finance, and employs a real analysis that associates commodity money with in-kind finance, thus examining this nexus within the theoretical framework of government budget constraints. In contrast, MMT integrates the unorthodox monetary tradition of debt with the fiscal tradition of functional finance, and adopts a monetary analysis that links credit money with monetary finance, thereby exploring this interrelation from the perspective of the modern money circuit. The orthodox concept of the nexus is essentially negative, passive and narrow, and is thus flawed. MMT is able to remedy these defects, thereby enriching our understanding of the monetary and fiscal nexus.

This chapters traces the development of Modern Money Theory (MMT) over the past 25 years. It explains that MMT “stands on the shoulders of giants”—it builds on the State Money approach of Knapp and Innes, the endogenous money views of the Banking School and post-Keynesian authors, the works of Keynes on money and monetary theory, the sociology of money of Ingham and Dillard, and the history of money of Grierson and Hudson. It further incorporates the functional finance approach of Abba Lerner. MMT reaches conclusions about the fiscal and monetary policy space available to countries that issue their own sovereign currencies that are in opposition to mainstream economics, and often to heterodox authors as well. Consequently, MMT has come under critique from both. The chapter concludes by addressing these critiques.

Eric Tymoigne and Randall Wray's (2014) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT's policy claims are based on unsubstantiated economics.

Modern Money Theory: a Response to Critics

This article considers the current economic situation from the lens of modern money theory (MMT) and expresses a policy response rooted in post-Keynesian theory and empirical data for the US and the euro area. First, MMT supports targeted deficit spending to promote production. Increasing domestic supply will reduce the prices of goods and energy. Second, MMT advocates for reducing the interest rate to make production more profitable. Third, MMT pushes for a job guarantee and increased unionization to alleviate wage pressure. Fourth, MMT believes in rationing, postponed consumption, patriotic saving, and regulation. Increasing interest rates and limiting government deficit spending are not the only ways to address the post-COVID-19 period. We show there are better ways to restore price stability.

In Karl Polanyi’s The Great Transformation (TGT) there are two central narratives: first, he discusses how nineteenth-century society attempted to consciously construct a self- regulating market economy, and, second, how this contradictory epoch created the need for intellectual content that could justify the emerging order via “scientific” legitimacy. Polanyi criticized both, yet what receives little attention is the extent to which his monetary analysis is rooted in what is now known as modern money theory (MMT). The purpose of this article is to elucidate these connections, particularly in their shared rejection of metallism and embrace of economic anthropology to create an alternative framework depicting how “taxes-drive-money,” the mechanism that regulates the value of money and the process by which it is created, and the overlap between their political economies. Thus, we conclude that there is a significant and underappreciated connection between Polanyi and MMT’s respective monetary theories.

This paper addresses the limitations of Modern Money Theory (MMT) as a guide to development policy. We explore two main questions on this topic: whether policies championed by MMT advocates (i) ought to be implemented in low- and middle-income economies and (ii) can be implemented. In relation to the first question, we argue that the MMT literature mischaracterises the essence of the development challenge for low- and middle-income economies. Our argument is that the chief long-run growth challenge faced by developing countries concerns structural transformation rather than general aggregate demand insufficiency. We use several formal representations of the consumption–investment trade-off in growth theory, found in the Harrod–Domar growth model, the Feldman–Mahalanobis model and Kalecki’s 1963 growth model to illustrate this point. Concerning the second question, we argue that even if MMT had the correct diagnosis of the principal growth challenge faced by developing countries, its chief policy recommendations would likely be counter-productive if implemented outside of select advanced economies. We draw from the international economics literature on currency hierarchy and exchange rate volatility to illustrate this point.

Modern Money Theory (MMT) describes the functioning of a pure credit economy, assuming that the state can finance public spending via monetisation on the part of the central bank: in this light MMT proponents maintain that taxation and bond issues are irrelevant to public deficit financing. Another feature peculiar to MMT is the belief that expansionary fiscal policies can guarantee full employment in a condition where the state acts as an employer of last resort (ELR). The aim of this paper is threefold: (a) to understand and rationalise the logical framework of MMT (Section 2.1); (b) to address some of the controversial issues of this approach, with particular regard to the ELR programme proposal and to the actual role played by taxation and bonds in public deficit financing (Section 2.2); (c) to propose an extension of the ELR programme, arguing that it can be used for the application of innovations by the state (Section Three).

This chapter discusses the Modern Money Theory (MMT) approach to evaluating the affordability of government spending, comparing it to the mainstream approach. MMT rejects that taxes are needed to pay for government spending. Instead, it demonstrates that the function of taxes is to create real resource space in the economy to devote to the public purpose. Mainstream economists often claim that MMT brings us back to square one - you still need to raise taxes when the government is spending more. Using the examples of green transition, Build Back Better and Medicare-for-All, this chapter demonstrates how the MMT approach leads to conclusions different from the mainstream “pay for” approach to spending. It concludes by explaining the functional budgeting approach championed by MMT economists.

This is a review article on G. Epstein’s new book What’s Wrong with Modern Money Theory?: A Policy Critique (2019). The first section reviews the main contributions of this book in clarifying the characteristic contents of Modern Money Theory (MMT), and their worrying limitations if applied generally in the world. The second section demonstrates that the Japanese economy in the past decades in fact cannot be a model case to support the applicability of MMT, though it is often cited as a favorable model case for MMT by MMT theorists like R. Wray. We have to wonder and rethink why mere expansive fiscal state policy in cooperation with the central bank could not successfully work for so long, especially from the view of the majority of working people. The third section argues how Marxian political economy can coordinate with such post-Keynesian research fields on monetary policy as MMT. The necessity of a more concrete level of analyses of contemporary capitalism, based on principles of the political economy like in Marx’s Capital and stages theory of capitalist development, is methodologically underlined.

Drumetz/Pfister (2021) make several claims about the inadequacy and fallacy of modern money theory (MMT) and conclude that MMT is nothing more than a political manifesto; there is no theoretical and empirical foundation beneath it. The present paper addresses this last point by focusing on the fiscal and monetary policy aspects of their criticisms. Contrary to what they claim, MMT is backed by a large body of empirical evidence, a rich institutional analysis, and a well-developed theoretical framework (including mathematical models). MMT provides a detailed analysis of the coordination between the fiscal and monetary branches of government, emphasizes that fiscal deficits are a stylized fact, and uses theoretical tools grounded in institutional realities to explain this stylized fact.

This paper addresses the limitations of Modern Money Theory (MMT) as a guide to development policy. We explore two central questions on this topic: whether MMT policies 1) ought to be implemented in low- and middle-income economies and 2) can be implemented. In relation to the first question, we argue that the MMT literature mischaracterizes the essence of the development challenge for low- and middle-income economies. Our argument is that the chief long-run growth challenge faced by developing countries concerns structural transformation rather than general aggregate demand insufficiency. We use several formal representations of the consumption-investment trade-off in growth theory, found in the Harrod-Domar growth model, Kalecki’s 1963 growth model, and Feldman-Mahalanobis model, to illustrate this point. Concerning the second question, we argue that even if MMT had the correct diagnosis of the principal growth challenge faced by developing countries, its chief policy recommendations would likely be counter-productive if implemented outside of select advanced economies. We draw from the international economics literature on currency hierarchy and exchange rate volatility to illustrate this point.

:Modern money theory is a conjecture concerning fiscal spending and the nature of money. I show that modern money theory provides two interesting insights into distributive justice that have not been addressed in the recent Anglo-American distributive justice literature: (i) that the nature of a sovereign fiat currency allows for some distributive conflicts to be avoided; and (ii) that recent Anglo-American distributive justice theories assume that the economy is at capacity. Based on this, I consider whether the policy results of modern money theory can help foster a sense of justice.