“Modern monetary theory (MMT) is dangerous nonsense.”
That line, or something very close to it, is now appearing with weary regularity from left-wing economists and commentators James Meadway, Grace Blakeley, and Paul Mason, and the circle of commentators around Novara Media. It is as if they are desperate to undermine all that Zack Polanski is saying and doing right now, even though some of those people have actually joined the Greens. Their tone is often not just dismissive, but derisive. And yet, when you examine what they say, it becomes very clear, very quickly, that they are attacking a version of modern monetary theory that exists only in their imagination.
They usually make five claims.
First, they suggest that MMT says governments can “print money without consequence”, but that is absurd. No MMT economist has ever said this. MMT quite specifically says printing money has very real consequences if there are no real resources for the government undertaking that exercise to buy. Then there is a very real inflation constraint on its behaviour, and it repeats that point to anyone who will listen as often as it can. This claim is, therefore, complete nonsense. All that MMT describes – accurately – is how money is created and who controls that process.
Second, MMT's opponents claim it ignores the role of tax. Again, they are arguing with a straw man. Taxation is absolutely central in MMT: not only does it explain the central role for a government's legally created currency, which is forced into use in a jurisdiction becase tax must be paid using it, but it also drains excess spending power, meaning tax is an essential tool in controlling inflation, and it is one of the primary tools for shaping the economy, whether by redistribution of income or wealth, or repricing market failure, or shaping fiscal stuimulus. What MMT says is that taxes do not fund spending, but that is a fact. But MMT never says tax is unimportant; in fact, it says the exact opposite.
Third, they say that MMT denies the need for bond markets, and so it is irresponsible. In fact, MMT explains – correctly – that bond issuance is a policy choice, not a funding necessity for a currency-issuing state. The government issues bonds to give pension funds, life assurance companies, banks, foreign governments, and others somewhere to park large sterling balances, to support interest-rate management, and because we have chosen to maintain the ritual of bond issuance established during the Gold Standard era, which ended, at the latest, in 1971. But the state does not need markets to lend it money denominated in its own currency because, first of all, it creates it in the first place, and second, if it wants more of it, then it can create more whenever it wants. Again, this is just an accurate description of reality.
Fourth, they argue that MMT would lead to runaway inflation, but there is no evidence to support this claim. Nothing in MMT recommends permanent fiscal expansion. All MMT says is that the appropriate level of government spending is the level required to deliver full employment and sustainable use of real resources within the economy. Saying so, the inflation constraint is explicit. When critics claim MMT denies inflation, they reveal that they have not read the literature. It would be argued that MMT is obsessed with controlling inflation, but never with promoting it.
Fifth, they insist MMT lets governments off the hook – that it tells politicians they can do everything without choices. In fact, MMT is all about choices. However, it requires those choices to be made honestly. You cannot, for example, blame the markets for austerity once you understand that a currency-issuing state is not revenue-constrained. You have to justify austerity as a political act. That is precisely why some on the left resist MMT: it forces them to own their politics.
So why this hostility from sections of the British left?
There are three reasons, sometimes overlapping.
First, some, and perhaps all, of these commentators have invested their entire political identity in the belief that “the markets” constrain Labour governments. This is their comfort blanket. MMT disrupts that narrative. It says Labour is free to act as it wishes, within available resource constraints. Markets cannot stop it from doing what it wants. The limits on what it does are, then, political, not financial. This has two consequences. First, it takes away the excuses. Secondly, it forces MMT's critics to say what they would do. That is, I suspect, deeply unsettling. This, after all, is much harder than blaming "the markets" for everything.
Second, many of these critics built their arguments during the Corbyn years on a very particular theory of Labour needing to invest to grow. That theory (once my idea of People's QE was rejected) was always based on the assumption that the state must borrow from private markets to fund investment. When MMT points out that borrowing is not the constraint, their entire framework begins to wobble. Rather than rethink their economics, it is easier to mock MMT.
Third, some are not comfortable with MMT's political implications. If a government is not constrained by tax revenue, then the question becomes: who benefits from public spending? Who gains from austerity? Who holds power in the economy? That leads directly to the politics of class and distribution, which these critics of MMT say it lacks within its framework, when the exact opposite is true. MMT does very clearly require that the politics of power be confronted when financial constraints do not exist, because it then becomes clear that it is power (and power hierarchies) alone that prevents things from happening when MMT is properly understood. Many on the political left, in whichever party they currently reside, would seem to prefer to stay at the level of neoliberal accounting identities rather than confront the actual politics of power, which MMT would require them to do.
What are the counter-arguments?
These are straightforward.
First, MMT reflects operational reality:
- Every time the government spends, new money is created.
- Every time tax is paid, money is destroyed.
This is not a theory. It is, in fact, how the Bank of England says the system works.
Second, MMT offers a coherent explanation of inflation. Inflation arises when spending exceeds the capacity of the economy to supply real goods and services. The constraint is real resources, not the Treasury's bank balance. That is why the correct tools to manage inflation are directed at resources, not arbitrary financial targets, which is why interest rate policy can never be effective in tackling this issue. And it also has to be recognised that in practice, we are a small open economy with a floating exchange rate. Inflation, more often than not, is driven by external forces beyond national government control, and realising this is essential; otherwise, you end up with the wrong policy response. Sometimes the correct response is to let that exchange rate float and do nothing else, knowing that such pressures always pass, and usually quite quickly. Inaction can be the right policy choice.
Third, MMT restores democratic accountability. It says governments cannot hide behind markets. If they cut services, cap benefits, or impose austerity, they do so because they choose to and not because the bond markets made them. As we have seen repeatedly this year, markets are not the grown-ups in the room. They are institutions whose power exists because politicians choose to give it to them. MMT demands that this be admitted.
Fourth, MMT is the only framework on the left that takes the climate crisis seriously. The green transition cannot be financed by the private sector. It requires public direction on a scale never seen in peacetime. MMT explains how to mobilise those resources without pretending that taxes on the wealthy must be collected first. That does not mean those taxes should not be imposed; it just means they are not the precondition for action.
Finally, MMT forces the left to stop lying to itself. You cannot build a caring, sustainable economy while pretending that “there is no money left”. Nor can you do it while basing your economics on myths designed to protect the power of finance.
Conclusions
There is nothing radical about MMT once you clear away the caricatures. It describes how money works, it places the real constraints where they belong, and it asks politicians to take honest responsibility for the decisions they make.
That, I suspect, is why some on the left react so angrily. MMT removes their excuses.
And perhaps that is exactly why we need it.
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I think this is why it is important that MMT proponents have discussions with their critics.
Polanski is doing this with the results we see.
If ever there was a need for podcasts with the critics, the time is now.
Paul Mason……………what a disappointment………..anyhow, a ‘Swiss Army knife’ of a post – thank you very much.
The paucity of understanding of MMT betrays that atavistic nature of the trad Left – the trad Left is all about the ‘eternal struggle’ – winning is not the aim, just the struggle which leads to the politics of no ideas, just like Neo-liberalism with its fascist tendencies.
Thank you Richard. This needs to be an article in a national newspaper.
How do those opposed to MMT think money is created?
I am glad you spent as much time as you did on the “WHY do they say these things?” question, because that is where the challenge needs to be.
It’s politics.
The left are entitled to their political opinions, but they are NOT entitled to tell lies about money and MMT to promote them and the reasons behind those lies need to be exposed.
Their dishonesty about money is as bad as, possibly worse than the neoliberal right.
(and I speak as one who attended a campaign training session in central Bristol led by Bastani, in the 2019 election)
In politics, like religion, once ideology and dogma overtake the pursuit of justice and righteousness, then the focus shifts to gaining factional power, rather than achieving functional change.
(Hence the current mess in Your Party.)
My lead question to Novara in a face-to-face interview would be,
“Why do you tell lies about MMT?”
with the follow up of
“Well, here’s 5 lies you’ve told … … … … … what is it you’re so scared of? Why keep pretending that water isn’t wet, or that governments don’t create money?”.
They don’t want to know simply because you are taking away from them their raison d’etre. Rather like witch doctors confronted with real medical knowledge, they are clinging to the wreckage of their handed down wisdom from their ancestors. Their economic ‘knowledge’ doesn’t fit reality, and they have nowhere to go.
They remind me of T S Eliot’s magi who witnessed the birth of christianity, but realised it was also the death of their present beliefs. They journeyed home realising they would have to change and it wasn’t a pleasant prospect for them.
Agreed
A good post.
My only quibble is what you say about MMT as a “coherent explanation of inflation”…. or rather what you omit. Yes, it is a neat explanation but in practice we are a small open economy with a floating Exchange Rate. Inflation, more often than not, is driven by external forces beyond national government control…. and realising this is important otherwise you end up with the wrong policy response.
I have updated for that. Thank you.
Thanks Richard. Paul Mason’s recent article in the New World in which he denounced MMT really infuriated me. It was absolute nonsense. I am glad you have made the point about MMT reflecting operational reality. It is clearly acknowledged in the relevant legislation and is briefly highlighted in the current edition (June 2018) of the Bank of England’s own document “The Bank of England Act 1988 and the Charters of the Bank and related documents”. It would not surprise me if none of these commentators have read, let alone understood, these documents. I agree with your suggestion that they do not do so out of pure political cowardice.
Thanks and much to agree with
It’s the old saying: “First they ignore you, then they laugh at you, then they fight you, then you win.”
Good to see that we have moved out of the first zone; however, there is still a long way to go. More power to you and ZP, there is clear progress!
I think we are in zone 3
Back in 1992 a colleague passed me a draft paper to read. It came from a Hedge Fund on headed note paper with the strapline…
“First they ignore you. Then they laugh at you. Then they attack you. Then you win.”
It was a primitive description of MMT but the thrust of the paper was that governments could never default in their own currency. Said hedge fund bought local currency debt debt hedged into US dollars earning large “risk-free” spreads.
At the time (1992) we government bond traders said – “of course this is the way money works – why the pompous paper?”
In 1998 after Russia defaulted on its ruble debt and the Hedge Fund took a massive loss some unkind soul found a copy of the paper and pinned it to the wall …. with a minor adjustment.
First they ignore you. Then they laugh at you. Then they attack you. Then…. they laugh at you again.
The author of the paper? Warren Mosler…. (self appointed) “high priest” of MMT.
🙂
While they are, obviously, hostile to MMT, isn’t it time they were called by their proper name? Liars?
As an MMT advocate who has never met another human in real life that understands how the economy works, I spend a lot of time trying to look at the counter arguments, very much asking myself “am I the crazy one?? Maybe I’m wrong in this??”. But all I ever come up against are the same arguments you’ve outlined here…i.e a load of arguments that are almost completely contradictory to what MMT actually says.
I’ve come to a similar conclusion to yourself as to why these people are impenetrable despite the nonsense of their arguments…it’s almost impossible to convince people that everything they’ve ever believed is just wrong, even if the alternative is actually better. It’s harder for them to accept that all the hardship they’ve endured is completely unnecessary, than it is to just accept the hardship.
Thanks and gods luck.
Yes, was very disappointing with the analysis on the recent Novara video, I am normally a big fan. I was kind of shocked too when Michael Walker clearly had not bothered to do his homework
https://youtu.be/7X9b8xCVkTM?t=434
And again, it then descends into the usual “economic flat Earthism” (at least that’s how it looks to me) re “you can’t simply spend spend spend” etc (you might fall off the edge of the Earth)
Aaron Bastani from Novara media describes the budget as ‘surprisingly progressive’. He does not begin to explain how he arrived at this conclusion.
It just is not…
Great blog Richard. Great breakdown of how people have forged in themselves identities in reaction to an ideology, and you rightly point out, if that ideology is explained as being false or incorrect, that by default threatens people’s forged identity that they have for years defended.
I’ve only found myself the MMT community’s explanation of how the government actually operates, in the last several months so I am having a lot of catching up. I have been amazed why some seem to be so heavily resistant without offering evidenced based alternatives.
Thanks as ever Richard!
Thanks
I was converted to MMT by the author some time ago and I accept the explanations he advances here. I believe the piece would have even greater authority if it were rewritten in academic language without the personal references and pejorative terms. When they go low, go high.
I have done both.
This is a not an academic site.
… and thank goodness for that.
Michael Obama no longer says when they go low, we go high. The Obama’s know what gets under the skin of Trump and those that are post-truth. Jokes. And there is nothing funnier than the truth. Trump can’t stop talking about birth certificates because he is emotionally out of control and full of rage 14 years on. We need more.
I don’t understand how those on the left who were massively in favour of borrowing a lot to money when interest rates were low look at MMT and dismiss it. They appear to me to be tone deaf and addicted to class politics.
I am an advocate of MMT myself and there are other advocates in the Green party’s Economy Policy Working Group. It may be a majority view, but MMT is not, at least yet, formal Green Party policy. Its formal adoption of policy is one of several practical progressive changes to its manifesto that could be made.
MMT is alert to the dangers of excessive inflation, that is above the 2 percent target.
But there is a danger of excessive inflation implicit in the Green party’s program, both as it stands and as it may develop.
First, a progressive tax system would produce a greater tax yield from the rich from both income and wealth, and possibly a reduced yield from poor taxpayers, and redistribution from rich to poor taxpayers, together with full employment would produce more effective demand because of the balanced budget multiplier, with the rich having a lower marginal propensity to spend and the poor a higher such propensity.
Second, MMT with ongoing judicious budget deficits, not necessarily fully covered by borrowing from banks, either in new bond issues or by quantitative tightening, would itself be expansionary, although it should also produce extra productive capacity via increased investment in public services.
And third, a subsistence Universal Basic Income, would itself produce significant excessive yearly inflation. Even without the other two factors, a subsistence UBI, at say 60 percent of the median UK wage, or anything approximating to it, would be ruinously inflationary. It might make 10 percent UK annual inflation a regular thing. 40 million non-pensioner adults would be entitled to a UBI and it would be impossible to claw back this free income from the rich, however progressive the tax system became.
The first two policy items are justified, but the redistribution from a progressive tax system must preponderately take the form of improving public services, under Universal Public Services, disproportionately benefiting the poor, or at least the non-rich, through making public services affordable, available and accessible. In this way, capacity can be increased rather than merely extra demand that UBI or direct redistribution from rich to poor would entail.
There is still urgent work to be done to make the Green Party’s economic policy more coherent and comprise exclusively practical policies. Several omissions must be rectified but the UBI is the most obvious policy that must be dropped.
MMT is not a good name. Maybe it will draw less flack if we say its how the BoE says money is created etc.
‘Lord’ Jim O’Neil – one of radio 4’s favourite gurus , aligned himself with your view that the budget does very little . But then said Reeves should have bitten the bullet this early in the terms to benefit later from…..getting rid of the triple lock, raising tax rates, and ‘reforming’ (cutting ) welfare. In other words – continue what the Tories were doing over the last decade – – continue the demolition of the NHS and raise inequality even higher
They all say that welfare spending and the tax system are in various kinds of contradictory messes . But they don’t point to the massive profits made by Tesco and other big business while half of their employees have to draw UC to make ends meet. So UC is a direct subsidy to big business. If there was a way of sorting this out while still protecting small business – that might be a good ‘welfare reform’
O’Neill served the Tories well…
I know it’s probably not practical and may in itself cause job losses BUT the government should recover money from the companies profits the cost of their employees state benefits, as this is the true cost of their labour. That way we are not subsidising their profits
Good luck with that…
“The individuals behind a new political movement must become economically literate, reject neoclassical orthodoxy, establish and widely disseminate a renewed economic discourse and accept the fact that the territory we should be allowed to love again – the sovereign nation-state – evolved as the optimal unit of political organisation [..] Cultural leftists are damaging politics in both a positive and negative mode, with what is present in its discourse and with what is absent – on one hand stirring up divisive cultural antagonisms, while on the other distracting attention away from the efficacy of exerting democratic control over currency issue and investment”
Source: The Death of the Left: Why We Must Begin from the Beginning Again (2022) by Simon Winlow and Steve Hall
https://amzn.eu/d/eNBZpoj
I think it’s perfectly possible to accept the core insights of MMT and still end up with very different political programmes. Once you recognise that a currency-issuing government isn’t constrained by “finding the money”, the real limits become resources, capacity and inflation, not funding. That framework doesn’t inherently belong to the left or the right.
If someone genuinely believes the private sector is more efficient, or that generous social security weakens work incentives, they can still build a right-leaning manifesto within an MMT understanding. Equally, a left-leaning programme can use the same framework to justify stronger public services, redistribution, and a job guarantee. MMT tells us what is possible; politics decides what is desirable.
The real gain from adopting MMT is that it forces a more honest debate. Instead of hiding behind “we can’t afford it”, politicians of all stripes would have to justify choices in terms of real-world constraints and priorities. That would make disagreements clearer, the democratic contest healthier, and the outcomes better.
I’ve noticed MMT being discussed more and more in the press and social media recently, mostly in negative terms, but mostly by right-wingers. A recent article in the Spectator called ‘Zach Polanski’s insane economics’ describes MMT as nonsense and it’s appeal similar to that of conspiracy theories. On X I often see comments like “MMT flat earthers”. The Spectator article referenced a criticism of MMT by Tim Worstell. I’m aware this chap has a blog in which he routinely ridicules your ideas without providing any reasoned arguments, and so I am always suspicious of such people, but I would be interested to know your thoughts on this particular criticism. He says that in MMT, for taxation to successfully reduce inflation (by taking money out of the economy), you would need to tax poor people more than rich people because poorer people have a much higher marginal propensity to spend?
The Spectator article was by the Institute of Ecnomic Affairs spokeperson. ‘Nuff said.
I have a draft response planned to that article.
Thanks for this Richard. You haven’t mentioned imports and foreign exchange issues, which came up at an economists debate at the Green Party conference between James Meadway, Josh Ryan-Collins, Faiza Shaheen and Ann Pettifor. On the subject of MMT, James Meadway said he agreed with the description of how government financing works given in the paper by JRC and others on The Self Financing State. But he said the government is only 45% of the economy, while the private sector trades with the rest of the world. The government therefore can’t control the price of money. He gave the example of the price of gas going up and as we import 50% of our gas, which we have to pay for in foreign currency, the value of sterling in foreign exchange markets matters. So, the government can change the amount of money it spends but because we rely on imports it doesn’t control everything.
This is based on my notes so I may have missed out a crucial part of his argument but I found it confusing.
Ann Pettifor said MMT only applies to the dollar. And also that MMT says tax can be used to control inflation, but inflation is largely driven by commodity trading and speculation, which the government and BoE can’t influence.
JRC came back on that so say the UK has a high degree of monetary sovereignty, and the constraint is the currency value. He also said you don’t want to constrain demand through tax but you may want to redistribute. He added that MMT is good on saying the real constraint is resources.
Can you throw any light on this please Richard?
James Meadway is right – we can’t control everything. So? Does he think MMT is disproved becaise we can’t? And is neoliberalsim – which he proposes – is proved as a result.
Ann Pettifor is utterly clueless on MMT, and just offensive when it comes to those who propose it. I have given up with her, and I tried. She is an antisocial human being and at best economically clueless. I regret wasting so long trying to communcate with her on the Green New Deal, which she hindered greatly, IMO.
JRC is right, broadly speaking.
A great article again thank you which links well to one Michael Hudson wrote about how MMT was hijacked post financial crash:
“Modern Monetary Theory (MMT) was developed to explain the logic of running government budget deficits to increase demand in the economy’s consumption and capital investment sectors so as to maintain full employment. But the enormous U.S. federal budget deficits from the Obama bank bailout after the 2008 crash through the Trump tax cuts and Coronavirus financial bailout have not pumped money into the economy to finance new direct investment, employment, rising wages and living standards. Instead, government money creation and Quantitative Easing have been directed to the finance, insurance and real estate (FIRE) sectors. The result is a travesty of MMT, not its original aim.
By subsidizing the financial sector and its debt overhead, this policy is deflationary instead of supporting the “real” economy. The effect has been to empower the banking sector, whose product is credit and debt creation that has taken an unproductive and indeed extractive form.”
Apologies, I see you updated your post to mention imported inflation. I hadn’t seen that when I submitted my comment. I still feel I need a better understanding of the MMT view of imports and currency value, if you can help with that.
It has no view: it just says let the exchange rate float. That is what economic reality requires.
Let’s be honest the mainstream left/centre/right economists believe unquestioningly in their cult orthodoxy. They are too stupid to countenance any challenge even though the challenge actually explains how the real world of money works, not their fantasy rules world.
Perhaps a way forward is for an independent tv production company to produce a tv special about the two curses and the sensible cure offered by Richard. Call it “why your children/grandchildren are not in work”.
Or a games app “kill the two curses”.
People are only as smart as the information they have been given. Many have undertaken classical economics degrees believing them to be an accurate representation of economics. Only a small number of people know that “The problem we face is the total dominance of one way of teaching, which promotes the marketisation of society, leading to increased inequality, injustice and significant harm to the natural world.” — Source: https://rethinkeconomics.org