I recently made a video explaining modern monetary theory, albeit not for the first time.
What we did note when that video was complete was that almost every section within it could, in fact, also be used as a YouTube short on an aspect of MMT.
We put out the first of these a couple of weeks ago, before Trump decided to take over the whole world agenda. Now that things are just a little quieter again, we are putting out some more.
This is the second, on a particularly important point, which is that it is wholly appropriate to call MMT a theory, but that does not mean that it tells you what to do:
This is the transcript:
Let me make a simple comparison.
Think of physics. Gravity explains what happens. It's called a theory, by the way, and it does not then tell you whether to jump off a cliff.
MMT is like that. It's also a theory, but just like gravity, modern monetary theory explains how the economy works, but it doesn't write your budget for you or tell you what your politics should be, and this is really important.
MMT describes what money is, how government spending occurs, what taxation does, why borrowing is different for states and households, and what constrains government in reality, and this is important because most people don't understand any of those things.
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I liked this response from Greta Thurnberg
“To be fair, I don’t have any ‘views on climate change’ either. Just like I don’t have any ‘views’ on gravity, the fact that the earth is round, photosynthesis nor evolution… But understanding and knowing their existence really makes life in the 21st century so much easier”.
Richard, I have to admit that I struggle with some of your links to physics – this MMT “theory” or the quantum ones. If these concepts help you think things thru, that’s great …. But do they help to explain or are they then unnecessary abstractions?
People knew that objects, like hammers, fell. An *attempt to explain* the natural phenomenon that objects seemed to attract each other (ie a theory) was developed, and was shown it could be extrapolated and applied to things like planetary motion. Newton’s theory of gravity is a good explanation for a lot of situations, but has now been superseded.
I still see MMT as a *description* of what actually happens, as part of a man-made process – controlling creation and destruction of money by fiat.
You say yourself
“MMT *describes* what money is, how government spending occurs, what taxation does, why borrowing is different for states and households, and what constrains government in reality, and this is important because most people don’t understand any of those things.”
I see more value in more people understanding that MMT is simply a description of day-to-day activity rather than anything more abstract. I’m a big fan of keeping everything simple.
In essence, MMT isn’t trying to explain something complex or magical (magic money tree?) or that needs to be evolved if the economic conditions vary. That’s what the spivs and neolibs would like normal folk to believe. (“Its all too hard for me to explain to you, dear.”).
It’s simply a description of what governments do. This description clarifies that “availability of money” is not the primary constraint on government policy. All the politics flows from that …. Such as why do our representatives make those choices and not others?
I am baffled.
You say the theory of gravity is a simple explanation of an observed phenomenon – which still works in almost all situations – and you like it.
Then you say you want a simple explanation of how money works – which is what MMT is.
You do, in fact, seem to want what I have just done.
And this is a short – link to the long video for the whole explanation.
I hope you can see why I am baffled.
Gravity and MMT are not an abstractions. They are explanations of the observable facts.
What is a theory? To quote Wikipedia:
“A scientific theory is an explanation of an aspect of the natural world that can be or that has been repeatedly tested and has corroborating evidence in accordance with the scientific method, using accepted protocols of observation, measurement, and evaluation of results. … Established scientific theories have withstood rigorous scrutiny and embody scientific knowledge.”
They theory of gravity explains why hammers (and apples, and leaves) fall – there is a small but remorseless fundamental force of mutual attraction between masses. Newton’s law (F=GMm/r^2) turns that simple insight into a mathematical equation that can be tested empirically.
MMT explains how money is created and destroyed in the modern state. No doubt you could add some equations to explain aspects of that if you wanted.
I don’t really understand why this is difficult. (That said, I don’t find the parallels between economics and quantum theory very helpful, but others do, so there we are. Some poetry moves one person but not another.)
Thanks.
I agree, unsurprisingly.
What I don’t get here is that if MMT is as obvious as the fact that if you jump off a cliff, you fall down, then why is Rachel Reeves using the household analogy? (Considering that she’s fairly well educated)
I struggle with that as well.
The answer: because it makes clear the neoliberal narrative is wrong and she is wedded to it.
Mark, Richard
When a gilt auction is held do the “proceeds or monies” end up in the govt’s “way & means” account at the BoE available for spending?
If the answer is Yes then perhaps this explains her comments & perhaps her anxieties too as a Chancellor.
No
They just reduce the central bank reserve accounts
I agree with the post. 🙂
Actually, MMT is a better theory than gravity (with apologies to both Newton and Einstein).
MMT accurately describes what happens in all relevant circumstances.
Gravity, by contrast, works brilliantly on a human or solar scale but fails to accurately describe the motion of stars within galaxies or the motion of galaxies within galactic clusters. That’s why physicists introduced dark matter to resolve these anomalies. Dark matter is supposed to be something we can’t see, hence dark, and that also doesn’t interact with the normal matter that we see. We don’t know what it’s made of (if it exists at all). That’s a bit suspect as a theory in my opinion. Recent observations show that even dark matter doesn’t describe the motion of stars within galaxies very well (it’s rather better with the motion of galaxies themselves).
So currently theories of gravity are incomplete but MMT is complete. 🙂
🙂
I like it
Well, we know the force that we interpret as gravity is not in fact created by the mutual attraction of masses in the sense that Newton described, but rather by the curvature that masses create in space-time as described by general relativity. But that is still gravity. The classical equations are still good approximations except in the most extreme situations.
And you are right that the observable “normal” baryonic matter is not enough to describe the observed movements of objects from the scale of spiral galaxies (and their flat rotation curves) to galaxy clusters. So we hypothesise some sort of unknown and otherwise undetected “dark” matter. And then we need “dark” energy – a weird form of vacuum energy – to explain what we see on the very largest scales. Perhaps these “dark” things are epicycles built on a fundamentally faulty picture to make observations fit the theory, and someone may come along and provide a better idea explanation. But it will still contain gravity within it because that remains a good explanation of what we see on smaller scales.
Perhaps someone will come along with a better explanation of the money supply in the modern state than MMT. Well great. Let’s hear it.
I like this
Excellent post! I have often felt that the ‘theory’ part of MMT exposed it to being considered little more than a disputable opinion from cranks. That the indisputable reality of Gravity is also a theory, helps enormously. Thank you.
Thanks
I’ve posted before a definition of Theory, in everyday speech people use “Theory”. “Hypotheses”,”Guess”, “speculation” and “assumption” as more or less synonymous, but they are different words for a reason. Anyone struggling with this may find the following biological dictionary article helpful, https://www.biologyonline.com/dictionary/theory
Thank you.
I posted a glosary entry in this issue, as I recall.
I can recall Andy Haldane a few years ago stating in front of the PAC or TSC to MPs that:
“MMT wasn’t modern, or monetary and certainly not a theory” I think I have the quote correct.
He was at the time Chief Economist at the BoE.
The MP who raised the question was ineffect slapped down and as I recall no further conversation took place.
What MP nevermind journalist is going to argue with the Chief Economist at the BoE?
Towing the neoliberal line is probably the sensible move for most MPs and media commentators even today.
How do we shift them so MMT becomes freely accepted?
I wish I knew the answer.
Me too
I will just keep talking about it
I hope Richard will not mind me contradicting him given he knows far more about MMT than I do, but MMT is not a theory. Parts of it are factual eg the starting point that the government can create money. Another part of it is a credible claim (not theory or fact) that the government can use this power to create a better society (as seen I believe in the ‘All In’ campaign to tackle homelessness during Covid). It may not matter much but I think MMT may be easier to ‘sell’ if we recognise this.
Theories are used to explain facts that would not oterwise be explicable. As I say in this blog’s glossary:
“A theory is not a guess. Nor is it an ideology, a hope, or a political preference. As the philosopher Wilfrid Sellars once put it, a theory is a structured attempt to “explain how things hang together.”
In economics, that means offering a coherent account of how money, markets, governments and real resources interact; one that can be stated clearly, tested against observable facts, and used to make sense of what otherwise appears opaque.”
So, yes, MMT is emphatically a theory.
The government can create money. Isn’t that a fact? Isn’t it the starting point of MMT?
Yrs, but everything that explains what that means is a theory. Just as evolution is a theory. Gravity is a theory. And music and even driving have theories to explain them.
I liked this from Dan Mitchell this week
The death tax presumably is the most destructive tax on a per-dollar-collected basis, but I suspect the capital gains tax is in second place.
Like the death tax, the capital gains tax is pure double taxation, thus exacerbating the tax code’s bias against saving and investment.
And the capital gains tax is particularly foolish since people can avoid the tax simply by holding on to assets that have appreciated in value.
This is why all good tax reform plans, such as the flat tax, would abolish the capital gains tax.
I have a selfish perspective on this issue. As I wrote last September (consider this column to be Part B), I’ve been in the same house for more than 30 years. It’s a big house, but all my kids are now on their own. Logically, I should sell.
But if I sell, the government will grab a big chunk of my gain (even though a big part of the gain simply represents inflation over the past three-plus decades).
If I stay in my house until I die, by contrast, the kids won’t get hit with the capital gains tax.
As such, since I love my kids more than I love government, I’m not selling.
It seems from this anecdote that taxation changes behaviours.
Dan Mitchell
A man i debated maybe 15 years ago in Florida
Later at the World Bank in DC
It wasn’t hard to win. He has never spoken anything but drivel.