Whilst writing my post on Modern Monetary Theory (MMT) and tax havens at the weekend a thought occurred to me that was, maybe, lost in that rather long item. For that reason I repeat it now. I said:
Whereas neoclassical economics is designed to suggest the government has no role in an economy, MMT says (not by design, but because it is a fact) that government choice is implicit in macroeconomic management.
I added:
MMT might be descriptive, [but there] is within the process it describes an economic theory that demands macroeconomic management in a way that is the precise opposite of the neoclassical economic prescription which suggests that governments must leave everything well alone.
I want to stress the significance of this. It is why Simon Wren-Lewis is wrong, in my opinion, when he argues that MMT is just a subset of neoclassical Keynesianism. It isn't.
Neoclassical economics is built on the assumptions of microeconomics that say that all government activity is a market aberration and therefore to be minimised. It is this logic that underpinned the idea of the cowardly politician that I described in The Courageous State (summarised here). They, when encountering a problem assume the market will always have a better solution than any they can create and so run a mile in the opposite direction. The consequence has been feeble government, impoverished political thinking, austerity and a collapse in well-being.
The MMT politician does, on the other hand, have to be courageous. It is their job to decide how to put the resources of the economy to best use to the point where full employment is reached, when it is their job to then maintain economic stability. They have to intervene.
This is not accidental: this is what the logic of the two systems delivers. And they are fundamentally different. Modern monetary theory cannot be a footnote to Keynesianism in its various guises; it is something that demands a whole new approach to political economy.
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The MMT politician also has to be cunning and think systemically.
There is still no doubt in my mind that financial markets are under regulated and MMT will fare better when it is launched into a more becalmed sea than present as a result of more rigorous regulation.
The Wikipedia entry for MMT says it is ‘ based on an empirical account of the ” operational realities ” of interactions between government and its central bank, and the commercial banking sector ….’ If that is so it is not a ‘ theory ‘ given that a fundamental component of any theory is that it is independent of the thing to be explained . In order for MMT to gain wider acceptance as a description of reality I would suggest that the word theory be dropped altogether . Second as a description of reality without emotive political jargon e.g. ‘ money printing ‘ ( see the John Redwood blog you linked to a couple of days ago ) then the possibility of its wider acceptance might be all the greater. For economics as a profession there is an irony here which is that the mainstream economists who strive to have their mathematical equations treated as ‘ scientific ‘ and yet leave money creation outside their purview ( potentially ) could embrace a description of economic reality because how more scientific could any study of anything possibly be. So yes MMT can’t possibly be a subset of Keynesianism old or new . The really big question I would suggest is just to what extent, and in what ways, government should attempt to manage the economy and it appears that no-one in government wants to ask that question.
You prove my point: they are cowards
A theory, in science, is not the same thing as a hypothesis – a “theory” is a body of accepted and empirically proven knowledge. MMT is a “theory” in the scientific sense because it is a description of the actual facts of how money works.
I did not wish to intrude here, but let me quote from the philosopher of mathematics and science, Imre Lakatos:
“One can today easily demonstrate that there can be no valid derivation of a law of nature from any finite number of facts: but we still keep reading about scientific theories being proved from facts.” ( I Lakatos, The Methodology of Scientific Research Programmes; Vol.1, 1978: ‘Introduction: Science and Pseudoscience’: p.2).
Physics (for example, but a robust example) makes predictions. Good theories produce reliable predictions. Reliable predictions are based on evidence. They work because you can repeat them, but if you mean by “proof” something more, it is as well to be reminded that all theories are contingent. They may (yet) be wrong; indeed in many cases they will (already) be wrong (we just do not know it), because there is always some ‘outlier’ fact, data, evidence that does not quite fit the theory (read Lakatos on Newton and ellipses, on the same page of his chapter). The outlier may be dismissed, but it may yet come back to bite the theorist.
“And Universal Credit is collapsing.”
Dated precisely 5 years ago 6th March 2013.
Plus ca change….
“They, when encountering a problem assume the market will always have a better solution…..”
But with no visible evidence of this ever having been true.
Anywhere. Ever. Throughout the entire recorded history of mankind.
I believe it to be a combination of political cowardice, ignorance and self-interest. As is evidential over the course of the past 30-some years, the economic status-quo has served a minority of the population very well indeed, at the general expense of the majority. As I understand it, MMT not only provides government (of any persuasion) with more viable options – both quantitatively and qualitatively – but it enables a progressive government to deliver a more democratic framework within which society can flourish.
The fact that it is ‘counter-intuitive’ inevitably means it will take some time before it is accepted into the main-stream. Applying Keynesian logic in order to understand MMT will only serve to create confusion and frustration in the mind of the thinker – as one detects with ‘Guy’ who posted on your NHS blog this morning. One has to have a ‘light-bulb’ moment. All the oft-quoted analogies apply, from Copernicus to Lord Kelvin, one of the 19th century’s most respected scientists, who famously stated: “Heavier-than-air flying machines are impossible”.
On a positive note, I’m not an academic, an economist nor from any emotely related discipline. Just a truth-seeking coffee house critic. So if I can ‘get it’ … anyone can. Have faith. Shift happens!
I have faith
John D says:
” to Lord Kelvin, one of the 19th century’s most respected scientists, who famously stated: “Heavier-than-air flying machines are impossible”….”
I wonder what he thought birds were made of….phlogiston !!
I am frequently amazed at the way in which expertise generates stupidity. Now that really is counterintuitive.
I think it is a little unfair to Keynes to call call neo-Keynesianism Keynesianism. After all the ideas of Keynes were hijacked and never really fully implemented. Some people actually renamed neo-Keynesianism bastard Keynesianism – what I jokingly call Milton Keynesianism, which is nothing to do with the town but rather the pernicious influence of Milton Freedman.
I accept the point, entirely
Oops – ‘remotely’ not ’emotely’ – which Google informs me is ‘a new social network focused on expressing and sharing emotions’. You learn something new every day!
On my MBA I had a lecturer who said ‘There is nothing as good a good theory’.
Basically he was saying that theory needs to be tested in practice and then you ascertain whether or not it is a good theory. In the university library case study after case study revealed the good and the bad.
We’ve been testing neo-liberalism since the early 70’s and it has not really worked (except increasingly for the few).
It’s time to test something else and MMT is it. I think it will pass as long as we can also rid ourselves of some of the architecture that has propped neo-liberalism up.
Hmmm.
MMT (as noted by Thomas Palley and to some extent L. Randall Wray) developed as more complete extension of Post-Keynesian thought and most particularly, Post-Keynesian theories of endogenous money. Those theories are largely consistent with those of Keynes and his close contemporary Gunnar Myrdal of the Stockholm school who was, in turn, guided by Knut Wicksell among others.
https://en.wikipedia.org/wiki/Stockholm_school_(economics)
All of which is a proud legacy that in no way diminishes either Keynesian thought or MMT.
As for Simon Wren-Lewis observation, I would suggest that “neoclassical Keynesianism” is a contradiction in terms.
Neoclassical “Keynesianism” is a bowdlerized form of Keynesianism and the man who invented it later agreed that it was wrong, and not “Keynesian” at all.
MMT may be said to be descendant of Keynes’ original theory, not the bowdlerized version.
I just looked up “bowdlerised”.
I like it.
By the way, you are dead right about this bit:
“MMT may be said to be descendant of Keynes’ original theory, not the bowdlerized version.”
In this article Thomas Palley overviews the history of endogenous money theory. While the article is academic and heavy going for those without a close interest in the topic I do recommend the diagram on Page 8
It depicts the post-war historical divergence in monetary theory with the Post-Keynesian schools to one side, on the other side he lumps the “Neo-Keynesian ISLM” group in with the “Monetarists”. This basically (and correctly) refutes Wren-Lewis suggestion.
Oops, forgot the link:
https://www.econstor.eu/bitstream/10419/105987/1/imk-wp_121_2013.pdf
and the diagram is at the top of Page 6.
Michael Hudson, in this book “J is for Junk Economics” has an entry on Keynes. I
Starting in the 3rd paragraph “Keynes General Theory pointed out that Say’s Law had ceased to operate. Wages and profits were not being spent on new capital formation or employing labour, but were hoarded as savings. Keynes viewed saving simply as non-spending on goods and services, not as being used to pay down debts or lent out to increase the economy’s debt overhead. Banks had stopped lending in the 1930s (American context?). He also
did not address the tendency for debts to grow exponentially in excess of the economy’s ability to carry the debt overhead.
It was left to Irving Fisher to address debt deflation, pointing to how debtors ‘saved’ by paying down debts they had earlier run up. And it was mainly fringe groups such as Technocracy Inc.that emphasised the tendency for debts to grow exponentially in chronic excess of the economy’s ability to carry its financial overhead. Emphasis on debt has been left mostly to the post Keynesians, headed by Hyman Minsky and his successors such as Steve Keen and Modern Monetary Theory, grounded in Keynes’s explanation of money and credit as debt in his Treatise on Money 1930”
I think this backs up your point. As a non economist it seems MMT has a number of parents, of which Keynes was one. Or, to put it another way, a number of streams have flowed in the river of MMT.
Agreed
But it is something more than the sum of its parts
Right, OK. I’m glad you cleared that up.
Robert Skidelsky, Keynes’s biographer, says that Keynes emphasised the extreme difficulty, in an unmanaged market economy, of maintaining a state of expectations consistent with full employment. When unemployment peaked in the Thatcher years at around three million following the destruction of much of our industry and its replacement by finance, all kinds of fudges were put in place to massage the numbers , but the problem has never gone away ; it’s just been ‘ normalised ‘ and the poor and the unemployed have been shunted off into a siding which is forgotten. The problem as we have seen with the crash of 2008 is that uncertainty and risk were muddled up and what was called the ‘mispricing of risk ‘ was in fact uncertainty, having its way with the world ; something all of us experience from time to time. And this is precisely where MMT and the bailing out of the ‘ too big to fail ‘ banks are one and the same. If as a government you have outsourced a big chunk of money creation to private companies you need to do anything and everything to ensure that they are going to go on doing it which is precisely what Steve Keen was saying in the podcast on here the other day. By all means say that there could have been some / more strings attached , but were Keynes alive in 2008 I think he would have been at the head of the queue to bail them out . The very same people who say government should get out of the way and let the market rip were right behind the bail-out because they would have been hurt very badly if it hadn’t happened. But change, no that wasn’t on the agenda. No grass roots movement had enough energy behind it to bring it about . Remember Cameron’s ‘ Big Society ‘ in 2010. What a con that was ,It didn’t happen because there was no energy behind it because it meant change and no-one wanted change so everything went back to where it had been before . Except that nothing goes back to where it has been before and the feeling that things are quite right pervades ours and the whole of western society . Keynes’s genius was that he had insight and understood something of humans beyond the ‘ economic man ‘ envisioned by lesser men ( other economists ) and so could talk about ‘ animal spirits ‘ and such like as a description of the way humans are apt to act.
Skidelsky’s book on Keynes (was it Keynes, The Master? Something like that) is brilliant and includes a lively summary on uncertainty and risk which the world forgot pre 2008
Yes it was called ‘ Return of the Master ‘. It came out in 2009 .
Return of the Master.
This is kind of boring for most (yes, I admit it).
But, without seeing the relevant Wren-Lewis material I am guessing that his suggestion may be based on the current central bank regime of interest rate targeting (aka inflation targeting) which was quietly introduced in the late 80’s/early 90’s after the old Monetarist idea of money supply targeting had so clearly failed.
At this point, Monetarist (verticalist) models were ditched, and the old IS/LM model was replaced by the horizontal IS/MP model (MP = monetary policy) in both ‘New Keynesian’ and straight mainstream (‘New Consensus’) teaching. The old mainstream stalwart, Olivier Blanchard said that inflation targeting sought to “influence the portfolio choices individuals institutions and firms” and that it therefore “assumes endogenous money”.
Understandably some took all this to be a victory for the Post-Keynesians although the Post-K. Thomas Palley was cautionary, warning that:
“Unfortunately, (the) horizontal aspect of the neo-Keynesian model has clouded
understanding of the money supply process by obscuring differences between the Post
Keynesian and neo-Keynesian approaches.
Over the past thirty years, as central banks have abandoned money supply targeting regimes and shifted to interest rate targeting regimes, this has led to mainstream claims that the money supply is endogenous. That has created the appearance of equivalence with Post Keynesian theory”
“On one hand, the mainstream’s recognition that the money supply is endogenous is an improvement. On the other hand, by obscuring differences it has made it more difficult to establish a correct understanding of the money supply process”
https://www.econstor.eu/bitstream/10419/105987/1/imk-wp_121_2013.pdf
I’m guessing that this might somewhat explain (and clarify) Simon Wren-Lewis’ inference?
I think you may be right
What Simon says is he recognises the power of MMT, especially (obviously) at the zero bound but retains his belief in monetary policy as the key macroeconomic tool
I have to say that makes little sense to me
If we accept that there should be two money circuits – governments and banks – then you need control of both – fiscal and monetary policy.
http://www.progressivepulse.org/economics/the-duopoly-of-money-creation
The relative weight we attach to either is a matter of political preference – between the individual and the collective.
If anyone says monetary policy is the key that is a matter of political preference rather than a statement about how economics works – we make the rules and decide how we want things to work.
Of course balance is tricky, but everyone agrees (including IMF, World Bank, etc) that we are less balanced now (too much weight towards monetary policy) than is optimal, i.e., we could be doing much better.
Agreed
Balance is key….
(Simon Wren-Lewis) “retains his belief in monetary policy as the key macroeconomic tool”
Wow! What a die-hard. The zero lower bound has left monetary policy stranded for years now.
I don’t get it.
Correction: ” sought to influence the portfolio choices of individuals institutions and firms”
This excellent CounterPunch article sums up much of the debate on the direction we seem to be travelling in. Well worth reading.
“The neoliberal economic model of deregulation, downsizing, and privatization was preached by the Reagan-Thatcher junta, liberalized by the Clinton regime, temporarily given a bad name by the unhinged Bush administration, and saved by telegenic restoration of the Obama years. The ideology that underlay the model saturated academia, notably at the University of Chicago, and the mainstream media, principally at The New York Times. Since then it has trickled down to the general populace, to whom it now feels second nature……….. Proponents of neoliberalism recognize that the state is the last bulwark of protection for the common people against the predations of capital. Remove the state and they’ll be left defenseless. ”
https://www.counterpunch.org/2018/03/02/colonizing-the-western-mind/
Geoff says:
“The neoliberal economic model ….. Proponents of neoliberalism recognize that the state is the last bulwark of protection for the common people against the predations of capital. Remove the state and they’ll be left defenseless. ”
Proponents of neoliberalism are also well aware that the state provides there only ultimate protection. For bailout, for income and for law and order that defends their power and privilege.
The free market poster boy which is the US has the most expensive government in the world and it’s all dedicated to protecting financial interests at home and abroad.
Do you remember ever hearing squeals of anguish when the police, homeland security, and defence budgets are presented ? Small government my backside !
Lies, all lies. Second Amendment right to bear arms (irrespective of its original intention) is most vociferously supported by those who would defend themselves against the power of the state. Wider mass popular support comes from those who wish to make good the lack of state protection for themselves because they aren’t wealthy enough to merit state protection.
Thank you Geoff for linking this. I’ve read it twice and will read it again because his analysis of the ‘ something is off with the way things are ‘ narrative is spot on and it is the beauty of blogs like this ( hat tip Richard ) that they provoke comments and links like this one of yours. Those of us who even remotely think about the future ( especially if like me you are old enough to have both children and grandchildren ) know that there is no concept of a future in the West and the writer spells that out clearly in this piece. However the cracks in the ruling consensus have begun to appear in the social order with certain individuals making their voices heard decrying the neo-marxist, neo-fascist hegemonies designed to keep us in our place .