by Paul Krugman has piled onto the "MMT explained by non-MMTers" bandwagon, with a critique of Functional Finance. Functional Finance is largely associated with the Old Keynesian Abba Lerner, and is one of the key intellectual roots of Modern Monetary Theory (MMT). In my view, the most interesting part of the article is that it contradicts the commonly made assertion that there is very little new in MMT (which Krugman hints at in the article as well). In presenting his summary of Functional Finance, Krugman obviously has theoretical blinders on, and the objective of MMTers is to point out the existence of those blinders.… The fundamental problem with the New Keynesian approach of Paul Krugman, Brad DeLong, Simon Wren-Lewis, etc., is that the model is fundamentally neoclassical rather than
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Paul Krugman has piled onto the "MMT explained by non-MMTers" bandwagon, with a critique of Functional Finance. Functional Finance is largely associated with the Old Keynesian Abba Lerner, and is one of the key intellectual roots of Modern Monetary Theory (MMT). In my view, the most interesting part of the article is that it contradicts the commonly made assertion that there is very little new in MMT (which Krugman hints at in the article as well). In presenting his summary of Functional Finance, Krugman obviously has theoretical blinders on, and the objective of MMTers is to point out the existence of those blinders.…The fundamental problem with the New Keynesian approach of Paul Krugman, Brad DeLong, Simon Wren-Lewis, etc., is that the model is fundamentally neoclassical rather than Keynesian., only departing somewhat in assumptions but not methodology. This methodology falls into the class formal (mathematical) rather than empirically based and it ignores the role of institutions and operations. As a result, it is either utopian or fitted.
For example, "full employment" in the neoclassical model is defined down to fit the assumptions about "natural rates" that are theoretical constructs and are not observables. The proof is in the pudding and the data reveals that the model only fits special cases, and it doesn't fit the non-trivial aspects of the issue, namely the turning points in the financial and business cycles.
As a result conventional economists missed the most momentous financial and economic event of contemporary times, the global financial crisis, because it was beyond the scope and scale of the model, explained as an "exogenous shock." Other models, in particular the Godley stock-flow consistent model based on accounting that MMT economist did, because such occurrences are within the scope and scale of the model.
Moreover, the remedies for the subsequent recession when the financial crisis went viral and spilled over into the global economy proposed by conventional economists failed. The country that dealt with the crisis successfully used the fiscal approach recommended by MMT economists. That country was China.
MMT economists were all trained in conventional economist in their academic studies and teach it along with other approaches in their classes. They have provided nuanced critics of other systems in their writings by showing the differences between MMT and these approaches, which conventional economists seem not to be aware of. Keynes and other of his followers have also, notably in the Cambridge capital debates in which Piero Sraffa and Joan Robinson defeated Paul Samuelson and Robert Solow, although the inadequacies of the model were not addressed subsequently. In fact, the "Keynesianism" of the New Keynesian synthesis developed and popularized by Samuelson is based on John Hicks' misreading of Keynes, and so the IS-LM model that Paul Krugman loves to cite is not true to Keynes.
The charge that there is nothing new in MMT, or that "we knew that already," are clearly false, as MMT economists have pointed out. So is the charge that the monetarism of the New Keynesian approach is superior to the fiscal approach of MMT. Finally, New Keynesians define down "full employment" to fit the NAIRU model based on dubious assumptions, resulting in a buffer stock of unemployed that involves million of people throughout the cycle.The MMT approach includes actual full employment (less transitional) by using a buffer stock of employed in which the government-set wage provided a price anchor by denominating the hourly wage for unskilled labor in the currency as the government's unit of account.
Bond Economics
Functional Finance Versus New Keynesian Economics, Krugman Edition
Brian Romanchuk