For the last 6 months or so I have espoused some views on this site that are sympathetic to a new school of economics called Modern Monetary Theory (MMT). I’ve been a long-time proponent of Post-Keynesian economics and endogenous money theory and until recently I believed that MMT added some valuable insights to those schools. It turns out that I was wrong. Upon further review, I now see that MMT makes quite a few mistakes in interpreting how the monetary system works. As it turns out, MMT uses some rather unusual definitions to describe things and I made the error of interpreting these definitions in a more traditional economic model. That is my fault and I apologize to the readers here for that mistake.
I had long known that I had certain internal disagreements with MMT views, but this became crystallized due to recent disagreements over the Job Guarantee and the fact that many MMT founders said you can’t have MMT without the Job Guarantee (JG). Specifically, Bill Mitchell said the JG was “central” to MMT. Pavlina Tcherneva then wrote a piece at the MMT website asking if the JG was “crucial to MMT” in which she said:
“The JG is not just an afterthought to MMT but a crucial component that has so far offered the most coherent counter-cyclical economic stabilizing mechanism.”
It became clear that MMT was a macroeconomic theory that offered comprehensive solutions to price stability and full employment with the JG being the “most important policy proposal” (Wray’s words) in achieving this. If you believe in unemployment buffer stocks you weren’t working under the theoretical framework that has come to be known as MMT. So you can see how some of us find it odd that Randall Wray, an MMT founder, wrote a piece yesterday directly contradicting the comments of his founding colleagues saying:
“So, can we have MMT without a JG? Certainly!”
What makes this comment even more bizarre is that Wray wrote a piece earlier this year confirming that Mitchell’s comments were right and that price anchor (JG) was something we “need”:
“Bill’s post led to a bit of a scuffle over what is actually in MMT—with Cullen arguing that the Job Guarantee cannot be a component, while Bill insisted that it mustbe. Warren has sided with Bill and written very persuasive comments arguingthat we need the price anchor.”
So earlier this year MMT included the JG and this fellow named Cullen was wrong. But the MMT of today doesn’t include the JG and this fellow named Cullen appears to have been right? So the obvious question is – does anyone actually know what Modern Monetary Theory is?
Update – 6/10/2012: It turns out the JG is quite essential to MMT as it is the policy variable that is central to the entire theory. In fact, MMT says that the cause of unemployment is the lack of NFA provided by the government. The way MMT creates full employment is by supplying the NFA via the deficit and then cleaning up the residual with the Job Guarantee. This is an interesting policy idea, but it appears to be grounded in an operational misunderstanding of how the monetary system works. The lack of NFA most certainly does not cause unemployment. This appears to be an operational flaw in the MMT view of the world. More to come later….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.