We put out this short version of this morning's video this evening. Some might find the short version of use:
Keynes vs MMT is one of the most important debates in economics today. Keynesians think governments must tax and borrow before they spend. MMT says spending comes first, taxes and bonds follow. The choice between these views isn't academic – it shapes whether governments fear debt or focus on using resources for people.
This is the transcript:
What's the difference between Keynesian economics and modern monetary theory (MMT)?
In a nutshell, both of them support government intervention in the economy. This appears to make both of them very different to neoliberal economic thinking, which says "Governments should get out of the way of markets."
But Keynesian economics and modern monetary theories see money very differently, and as a consequence, the outcomes are quite different.
The Keynesian worldview is that money is a scarce resource that is available within marketplaces because this was written in the 1930s, when we still had a gold standard, and somehow or other, they've never got over that.
So the Keynesian worldview is that governments must tax and borrow before they spend, when we know that's no longer true.
They do believe that governments may borrow, but only in recessions.
And they do think that governments should then run surpluses, even though there is no post-World War II record of that happening. And with those surpluses, they should repay debt.
Keynesian economics does, therefore, fuel the debt paranoia, which is now seen amongst our modern politicians.
The MMT worldview is that money is a tool under the control of our politicians because, as a matter of fact, it is. Governments create all the currency that we have in operation in the UK, either directly themselves or by licensing banks to create it.
Spending always comes first, whether that is with regard to government spending, which creates money as a consequence through the Bank of England, or in the rest of the economy by banks lending to create the money that is used elsewhere.
Taxation and bonds follow after government spending, in other words.
And bonds in particular behave very differently in the MMT worldview. These aren't debts. These are simply money put on deposit with the government, because that is the safest place for people like the City of London to save.
There isn't, therefore, an obligation to make repayment because these are voluntary arrangements between what is in effect a banker - the government - and those who've got surplus money that they wish to find a home for.
So there is a difference as a consequence in the perception of what the real limits upon the economy are.
In the Keynesian worldview, the real limit is the availability of money and the obligation to repay it.
In the MMT worldview, the real limit is the availability of resources within the real economy that can be put to use by the use of money.
This ends up with a very different view of what economic management should be all about.
In the Keynesian worldview, we avoid full employment, although that is what Keynesians say they would like. And we avoid full employment because of the risk of inflation.
In the MMT worldview, we take the risk of pushing the economy to the point where all resources are used because the MMT economist knows that the government has the tools available to it to deal with that inflation if it arises through taxation.
That means that Keynesians fear debt.
MMT fears inflation.
But only one delivers the best for people in the economy as a whole. And that's MMT because it tries to produce the best outcomes in the real world. And that means everybody gains.
So, which makes more sense for you? I would suggest only one does, and that is MMT.
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Perfect for sharing to those that are just beginning to take an interest. Thank you
Thank you.
It has proved very popular.
I should have read this post first before I replied to another on banking! I wanted to ask the question as to why economists have differing views on how to run the economy. Do any other countries do things differently to how we do, and will we or can we change what we do? From history what can we learn? what can we do as I’m sure we can do something collectively.
Ignorance?
Pursuit of power?
Class warfare?
Every major economy actually uses MMT. And all deny it. No wonder we are in a mess.
Interesting thread on novara live tonight. A number of comments criticising Aaron Bastani’s economic review (from a MMT perspective) and calling on Novara to invite Richard Murphy on to explain why Aaron Bastani’s analysis is incorrect!
For some reason, Stephanie Kelton did not impress Bastani when she appeared, although he suggested that they might invite her back again. He concluded by reiterating James Meadway’s contention that MMT would work for the US but not the UK. I still do not understand the argument as to why not but perhaps the problem is in their understanding of MMT.
I am happy to go on, of course.
Aaron Bastani mentioned you on Novara Live this evening. He said he was not keen on MMT. I’m not competent to summarise his argument really but it was something about MMT being ok for the USA that has an empire but not for the UK.
I’d love to see you interviewed by Aaron. Would be informative.
This argument is nonsense. It assumes we are subject to the markets – expand that and he thinks there is nothing the left can ever do. He ignores floating interest rates, the real power of government and the finance curse. He needs to invite me on.
Increasingly, I see commentators, who may not be experts on a given subject, putting forth as if they are. I have no idea of Bastani’s qualifications – does he have something in economics? If he does, then given his comments perhaps it is time he “refreshed” his knowledge. If he does not, then perhaps silence is the better route. (If I want an opinion I can easily & cheaply get one by asking somebody in the street).
Observation: the understanding of money in an economy has clearly progressed from Keynes to MMT. This begs the question – what comes next, given how it would seem that corporations via bitcoin & its ilk would like to muscle in on that aspect of government (= money creation).
https://en.m.wikipedia.org/wiki/Aaron_Bastani
Apologies for posting twice:
https://www.youtube.com/watch?v=C4vQg4yH2sc
@ 2min in – the blathering bullshit by Bastani begins (wow – did you like that – 5bs!)
(quote: “all the revenues governments generate come via tax” &…”if there is a deficit it is funded by borrowing using gilts”.
At no point was the bank of mum & dad mentioned (aka BoE). Neither in his talk about debt was the UK gov – BoE “debt” mentioned (hmm how much money do I owe myself).
13 min in – he mentions RM. His comments ref MMT & the USA shows he has zero idea of what a fiat currency is.
If anybody reading this knows Bastani – you may want to suggest to him: if you don’t know much about summat – keep yer trap shut – cos otherwise you will be perceived as a know-nothing gas-bag.
The reason for this commentary: Novara is part of the UK media; but they know nothing about economics – as evidenced by Bastani’s comments & his trite dismissal of MMT.
He needs me on…..
Bastani is a Marxist and his interpretation of MMT is conditioned by what he believes is or isn’t material. Does he believes budgets are material and can’t be ignored? Or does he believe all money is abstract and means nothing. I don’t know. Ask him? He probably believes that MMT is some kind of conspiracy to hand over tax money to the rich.
Like James Meadway (maybe because of James Meadway) he rejects MMT because it has ‘no implicit theory of class’.
That is not an argument when we are simply describing how money actually – which is simply as a product of double entry book-keeping.
This sort of discussion makes the fundamental mistake of treating MMT as a policy choice, as something that politicians can choose to “do” or “not do”.
That is wrong headed. MMT is a description of how the money supply in a country like the UK or the US actually works. The central banks agree it is correct. You don’t get a choice.
A bit like saying “I don’t like the idea of general relativity” or “I don’t like quantum mechanics” and so I think I’ll stick to classical physics instead. That may be fine from day to day most of the time (assuming you are not trying to design a smartphone or a GPS system, for example) but it doesn’t mean that your simplistic model is correct. And it will go wrong when you push it too far.
The difficulty comes when you analyse policy positions in the light of that knowledge. It opens new possibilities what would otherwise have seemed impossible – things you can “do” that you would otherwise not think you are able to do. And it reveals that neoliberal choices are just that, not inevitabilities. There are are real constraints and limits, but they are not the self-imposed mantras that many politicians and economists intone.
There is an alternative. And that is the real opportunity, and the real danger.
Spot on Andrew.
Another corker, useable on the omnibus.
You are on a roll, sir!
KUTGW!
Thanks
Thanks Prof
Such a good explanation, so accessible:)
Thanks
It ought to be obvious that the human use of money by necessity contains a drainage function to manage any inflationary pressure due to over-bidding of real resources. This being so the ability of governments to create money means that citizens must be able to derive income to pay taxes (whether direct or indirect) yet the market is unreliable as a stable source of that income. Varying unemployment rates is the signifier of that reality. Keynesians and Monetarists never properly engage with this market unreliability they are always looking for excuses. Black holes are the latest avoidance fad in the UK under the Starmer government!
Neat.
Richard, I have been regularly following ( from India) your lucid explanations about money’s role in the macroeconomy. Thanks for these insightful videos and the transcripts are a real bonus. I have one doubt/comment about todays video:
‘And bonds in particular behave very differently in the MMT worldview. These aren’t debts. These are simply money put on deposit with the government, because that is the safest place for people like the City of London to save.
There isn’t, therefore, an obligation to make repayment because these are voluntary arrangements between what is in effect a banker – the government – and those who’ve got surplus money that they wish to find a home for.’
On the assumption that we are talking about govt treasuries ( ‘bonds’) doesn’t the govt. issue these to banks ( through the Central Bank) to match its fiscal deficit and don’t these get further bought/sold by domestic and institutional investors which then determines the price/yield on these on a day to day basis? So, isn’t there a sovereign obligation for the govt. to repay the principle and interest on these debts? And, doesn’t that then place a check on the amount of the fiscal deficit which a govt can safely run ? Isn’t that what happened in the UK in 2022 after the ‘mini-budget’ when the govt announced a slew of tax cuts and additional expenditure proposals, which sent the bond/treasuries market into a spin?
Apologies, if I have misunderstood the import of transcript statement I’ve quoted above, but I think that even in an MMT world, there is a regulating brake on the amount of debt ( money) which a government can issue relative to the economy’s growth.
I will post a reply as a blog post.
Brilliant analysis, well put. But however much I agree, I would not encourage a competition between MMT and Keynes. Keynes was a revolution against neoclassical economics then and stands in contrast to neoliberalism today. Neoliberalism is the enemy of democracy and all things moral. Neoliberalism is built on amoral principles and tends towards immorality.
I would focus on Keynes moralaity and use that as a platform from which to build a more stable social and economic basis from which to build a better society as post Keynesianism and MMT does
Sorry Richard, as always, I’m coming to this very late. I must try to set aside time to read your blog every day.
You say that
In the Keynesian worldview, the real limit is the availability of money and the obligation to repay it.
In the MMT worldview, the real limit is the availability of resources within the real economy that can be put to use by the use of money.
I’m increasingly often made aware of unreliability of my memory, but I’m pretty sure that I read somewhere (perhaps somewhere unreliable?) that Keynes said 80+ years ago
“Anything we can actually do, we can afford.”
Which I take to mean that government activity is constrained by the availability of resources mot money.
If he did say that, he was, I think, laying down part of he foundations on which MMT has been constructed.
He said it.
No neo-Keynesian has.
And they are wear we suffer. Keynes has never really been tried. A bit like Marx in that respect.
[…] new commentator left the following comment on this blog after my most recent video. They started with a quote from […]
I’ve just read the transcript of the short video (I watched the long one, which I found very helpful). Both very useful; the shorter ones are a good way in for anyone new to your work. Great for sharing, as others have said. Thank you for doing both.
I have two questions:
1-How MMT compares to the economies of socialist countries? They do not have monetary constraints afaik.
2-Assuming a closed economy (no exports/imports), If capitalist class can only have profit or go bankrupt, this means that reducing inequality it compromises profits, the income of the working class rises faster than profits of capitalists and this has a breaking point limit(?), especially If productivity stagnates (technological saturation).
Imo rise of the working class income shouldn’t be go hand in hand with more consumerism or higher rents, as it happened in the past and we should disassociate consumerism with prosperity.
1) I am not writing for socialist countries. Are there any? I am not sure to whom you are referring.
2) I don’t do fantasy economics.
These explanations make a lot of sense, which is as it should be, since they are factually based.
What concerns me is that bad actors might seize upon these economic truths and use them for malign purposes. After all, MMT is explanatory rather than prescriptive.
I know your motives are altruistic when you suggest how a different approach to gov finances can improve lives through reducing inequality. Others might use such knowledge, for example, to bribe electorates by diverting savings to promise tax concessions.
This might sound far-fetched since bad actors are certain to be neoliberals, but the devil can play any game he likes.
I have noticed Reform are promising things like stopping Bof E paying interest on reserves, and increasing tax-free allowances to £20,000 for taxpayers. The first is something we would see as good sense, the second appears unfunded and unlikely, unless they’ve read and understood your Taxing Wealth Report.
I am not going to let evil be the enemy of the good.
Money is money.
MMT describes how it works.
Like a police force – you can use it to preserve law and order to protect the vulnerable citizens, or you can militarise it to protect the wealthy and powerful as is already happening.
If Fa***e wins power it won’t be MMT to blame for his fascist bullying behaviour any more than the law of gravity is to blame for bombs falling on Gaza.
Don’t let him get power, and forget about being “careful” when talking about him. Reform are very dangerous, and Labour are smoothing his path to power with their lies about money and their moral cowardice and racism.
Much to agree with
bad &/or Incompetent governments can screw up any economic system, there’s no protection from that
My thinking on this is probably wrong, if the national government spend this year is £1.27trillion and tax raised is just south of £900 billion how do they the government make up the difference apart from unsustainable borrowing.
Why not when the chancellor of the day makes their budget statement say £X is what we need so £Y pounds is what we have to raise to avoid a fiscal deficit.
At the end of the day virtually all of tax revenue does not evaporate, the majority apart from overseas spending recirculates back into the economy and reflects in so called GDP.
This constant tweaking around the edges or dramatic statements of black holes actually representing a few percent of the budget but sensational headlines just seems to make somewhat of a farcical way of running the countries government finances.
Like I said my simple minded approach may be wrong, or is it ?
Yes.
I suggest you read this blog for a while to find out. I really do not have time to deal with so many false claims in one post. In fact, it feels like time wasting trolling.
Hi Richard,
Sorry to go back to Bastani’s take on MMT the other night, but he cites a common argument which he says is a MMT-killer. He argues that deficit spending will (and he sort of implies automatically and in all cases) lead to currency devaluation, which will hurt the UK which is a big importer of food and energy, so it can’t be done and you must balance your budget. I know there is a body of work by Khaboub et al. on MMT in developing countries (food/energy importers) to show strategies to mitigate this. Can you explain to me why we are not simply beholden to currency exchanges and why a balanced budget does not automatically garuntee a stable exchange rate? (as I’m figuring out the logic still)
This has nothing to do with MMT.
We have floating exchange rates already to manage any risk MMT could create.
The rpoblem is The Finance Curse – see https://eprints.whiterose.ac.uk/id/eprint/143275/1/Baker%20The-UKs-Finance-Curse-Costs-and-Processes%20final.pdf