by From David Colander MMT has done what few heterodox economic theories have done; it has become part of the mainstream conversation. It is talked about by pundits and politicians, which means that standard macro economists have felt compelled to respond to its arguments. That’s an enormous accomplishment that will, I hope, lead to improvements in macroeconomic theory and policy. Its creators deserve to be congratulated. But I am not too hopeful. MMT is more of a marketing success than an intellectual success that has caused standard economists to rethink their theory or policy views, and I suspect that, once MMT’s political usefulness to progressive politicians diminishes, standard economists will push MMT back into the heterodox wilderness, and settle back into their unwarranted
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from David Colander
MMT has done what few heterodox economic theories have done; it has become part of the mainstream conversation. It is talked about by pundits and politicians, which means that standard macro economists have felt compelled to respond to its arguments. That’s an enormous accomplishment that will, I hope, lead to improvements in macroeconomic theory and policy. Its creators deserve to be congratulated. But I am not too hopeful. MMT is more of a marketing success than an intellectual success that has caused standard economists to rethink their theory or policy views, and I suspect that, once MMT’s political usefulness to progressive politicians diminishes, standard economists will push MMT back into the heterodox wilderness, and settle back into their unwarranted complacency.
Since MMT is not a precisely spelled out formal theory, but more a narrative about the nature and development of money and government finance, let me start by summarizing how my interpretation of it used in this article. What I mean by MMT are the set of shared ideas about monetary and fiscal policy attributed to economists such as Randall Wray (2014) and Stephanie Kelton (2001). The ideas that I will focus my discussion on can be summarized in three distinct and separable propositions.
- Idea 1: The way to understand the role of money in the economy is to think of money first as credit – money is an abstract accounting system of interpersonal obligations. Physical money plays only a secondary role in that accounting system. MMT holds that in the historical development of money, abstract money credit preceded the development of physical money rather than physical money preceding credit, as it does in most standard histories of money.
- Idea 2: Government spending, taxing, and monetary policy should be thought of in Abba Lerner’s functional finance framework, in which the policies are judged by their effects on the economy, rather than in a sound finance framework in which government faces a budget constraint, and taxes (either current or future with bond finance) are thought of as paying for government spending.
- Idea 3: The above two ideas are a useful guide to real world U. S. policy thinking. They emphasize that economist’s focus on the need for balanced budgets is misguided and that the supposed financing constraints that require government to pay for new programs with taxes or debt are largely illusory.
I largely agree with the first two but largely disagree with the third. read more