What Paul Krugman Could Learn From The Post Keynesian Roots Of MMT

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Robert Vienneau
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To the common reader, the distinctions among old Keynesianism, new Keynesian, and Post Keynesianism might seem confusing. You might find these are political doctrines, with broad agreement among their followers. Governments should run deficits in periods of sustained unemployment. Maybe sometimes fiscal policy should be more emphasized over monetary policy. After all central banks cannot stimulate the economy by lowering interest rate when it is zero. In an inflationary period, central banks can fight it by raising interest rates, although this is a blunt, crude tool. What is there to argue about?

Yet economists argue. Kelton (2020) has a popular book emphasizing that, given how money and banks work, governments need not be concerned with balancing their budgets because of a fear that the money to pay for it will not be there. And then Clinton's Secretary of the Treasury and Obama's director of the National Economic Council responds to Kelton getting publicity:

"I am sorry to see the [New York Times] taking MMT serious as an intellectual movement. It is the equivalent of publicizing fad diets, quack cancer cures or creationist theories" -- Larry Summers

Those who follow MMT have seen the claim that it is revolutionary and that mainstream economists do not understand money. Paul Krugman, a leading mainstream economist, reacts:

"...And I will say that I am, to use the technical term, pissed at this kind of thing. I spent years after the 2008 financial crisis arguing against austerity and the obsession with debt, taking a lot of abuse in the process.." -- Paul Krugman

What is going on here? Is this just pettiness about who should have more influence in the public square?

I have said before that what is being argued is not the desirability of certain policies. Keynes stated that his book was about something else:

"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the application of this theory to practice." -- Keynes (1936) [first three sentences]

Keynes' attempt at revolution failed. Mainstream economists, after Keynes and maybe before, argued that sometimes governments should spend more and tax less in a recession to prod the economy toward a long run equilibrium.

The background theory is that of an economy that is always approaching an equilibrium, in the long-run. The current "saltwater" school, also known as new Keynesianism, argues that this approach is too slow to be relied on for policy. Monopolies and limitations to competition, information asymmetries, sticky wages and prices are just too large. Government policy should focus on removing these limitations or somehow getting the economy to simulate a desired equilibrium path. I do not know that Joseph Stiglitz, for example, would argue that some these hindrances to equilibrium could ever be removed.

The "freshwater" school, once known as new classical economics, argues that, empirically, modern economies function close enough to the ideal competitive model that any such government policies should be looked on with great suspicion. Their simple macroeconomic models are the baseline with which both schools operate.

The names come from historical associations. Freshwater economists came out of the University of Chicago, the University of Minnesota, and the University of Rochester, all near one of the Great Lakes. Saltwater economists tend to be nearer ocean coasts, such as at Harvard and the Massachusetts Institute of Technology.

New classical economists, such as Robert Lucas and Thomas Sargeant, overthrew, in the 1970s, the Neokeynesianism or Old Keynesian of Alvin Hansen, Paul Samuelson, and Robert Solow. In the 1960s, Old Keynesian was known as the "New Economics" and the neoclassic synthesis. There is good reason for the common reader to be confused.

MMT builds on Post Keynesianism, and I am going to take it for granted that their proponents accept a Post Keynesian take on the above. (Which is not to say that Post Keynesians do not argue, sometimes vehemently, among themselves.) Joan Robinson called the neoclassical synthesis "bastard Keynesianism". Both freshwater and saltwater economists are pre-Keynesian. Carter (2020) provides an interestingly structured popular presentation of the unjustified rejection of the economics of Keynes

I find it hard to locate the logic in arguments that labor markets, good markets, and money markets tend to clear in any run. Some, such as Davidson (2007) emphasize money and uncertainty. Minsky (2008) and Marglin (2021) note the dynamic setting of Keynes' theory. In a model of the United States economy, it should not matter whether one calculates prices in dimes or dollars. This is a far cry from arguing that money is neutral, that the same real equilibrium would be approached if prices fell to 10 percent of their current nominal values.

I tend to emphasize microeconomics, following Sraffa. The theory of prices of production does not provide a logical foundation for the substitution mechanisms marginalists require for their ideas to make sense. Well-defined supply and demand functions do not exist in the long run.

Mainstream economists are apparently not taught any of this:

"...This article aroused the anger of just about every macroeconomist on Twitter..."

"...The brief description of freshwater and saltwater economics is fine, but to describe MMT as being 'brackish' — i.e., some sort of fusion of freshwater and saltwater, or a middle ground between the two — is absurd..."

-- Noah Smith The NYT article on MMT is really bad

I suspect many economists on twitter were not angered by this article. As far as I know, James Galbraith came up with the metaphor of brackwater economics. As seen above, it is not intended to be a fusion or middle ground. Rather it is a matter of rejecting both freshwater and saltwater economics. The nonexistence of an intertemporal budget constraint is another aspect of macroeconomics that Noah Smith seems to be confused about. Mainstream macroeconomists absurdly postulate that governments must always pay off their debts as time approaches infinity.

But why should Noah Smith be any different? Larry Summers ignorantly cited James Galbraith, who is a proponent of MMT or, at least, theories of endogenous money. I doubt that Summers believes this:

"I am all for intellectual diversity and wish that the NYT would give more attention to Marxist scholars like Steve Marglin, whose book Raising Keynes deserves extensive debate, or other left scholars like Tom Palley, Dean Baker or Jamie Galbraith." -- Larry Summers

You can find a post-2008 YouTube video, where Marglin says something like that his colleages are polite to him at holiday parties, but they have nothing to say about his research. Anyways, his long tome, which I have barely started, is clear that Keynes was arguing about more than government policy. He argues that models like the Keynesian cross and IS/LM are only a first pass description of the General Theory. The dynamic setting has to be taken into account in further passes. According to one review I stumbled upon Marglin's book could be improved in its account of money. Keynes' Treatise on Money contains a theory of endogeneous money. I can see reading the General Theory as assuming the central bank can set the stock of money, as a concession to the view he was arguing against, even though others say otherwise.

One could pursue political economy because one is interested in advancing political means that improve the lives of the vast majority of the population. One might make a compromise here. One might think one's policies are more likely to be enacted if one does the least to challenge hegemonic ideas about how the world works. As I understand it, Krugman has said somewhere that his academic strategy is to think in terms of simple models, like IS/LM, and then recast the argument into a publishable model of a Representative Agent, Rational Expectations (RARE) economy, also known as Dynamic Stochastic General Equilibrium (DSGE) model. In this approach, one puts forth arguments that one correctly believes have nothing to do with how actually existing capitalist economies function. One ignores some conclusions of the model. And it is doubtful that this approach will ever approach an useful description of a capitalist economy. I think Brad DeLong has said somewhere that this approach of boring from within is wasted time. (I welcome explicit links for the above.) It would seem that however politically useful such attempts have been, maybe after a half century of scientific failure by mainstream economists, heterodox approaches should be taken more seriously.

• Zachary D. Carter. 2020. The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. Random House.
• Paul Davidson. 2007. John Maynard Keynes. Palgrave Macmillan
• John Hicks. 1981. IS-LM: an explanation. Journal of Post Keynesian Economics 3(2): 139-154.
• Stephamie Kelton. 2020. The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economics. Public Affairs.
• John Maynard Keynes. 1936. The General Theory of Employment, Interest, and Money. Harcourt-Brace.
• Stephen A. Marglin. 2021. Raising Keynes: A Twenty-First-Century General Theory., Harvard University Press.
• Hyman Minsky. 2008. John Maynard Keynes. McGraw-Hill.
• Franco Modiglani. 1944. Liquidity preference and the theory of interest. Econometrica 12(1): 45-88.