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How modern is ‘modern monetary theory’?

December 28, 2011

Abba Lerner, an early Keynesian economist, made some simple yet profound insights into the nature of money back in the 1940’s and incorporated them into a concept he referred to as ‘Functional Finance’.

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.  This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science as opposed to scholasticism.  The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.

The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate at which the current prices would buy all the goods that it is possible to produce.  If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment.

While this doctrine obviously needs to be conceptualized within broader concerns for the environment, the essential idea is that fiscal and monetary policy are, as FT columnist Martin Wolf observes, “two sides of one coin”.

Lerner’s Functional Finance has been more recently developed and expanded by Bill Mitchell, Warren Mosler, and L. Randall Wray, among others into something they refer to as Modern Monetary Theory.  Like Lerner, they demolish the conservative doctrines of “sound” finance and point the way to a more democratic control of money.  But they’re far more specific in telling us how the government should execute what Lerner called its “first financial responsibility”.  According to Mitchell, an integral part of MMT is a job guarantee program (JG) which he quite economistically refers to as a “buffer stock”.

The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.

I personally object to any program that associates humans with a “buffer stock” commodity and reject the implied premise that people must be treated this way to achieve full employment, itself a contentious and increasingly non-modern term, and price stability.  (I note that Peter over at the always excellent Heteconomist has recently been pulling away from the JG aspect of MMT.)

Mitchell, et al, of course have the complete right to propose what they wish but it seems highly misleading to call it Modern Monetary Theory when a key component is a buffer stock JG.  Something like ‘Buffer Stock Commodity Theory of Labor’ would seem far more appropriate.

There are all sorts of ways in which a fiat currency could be applied to create non-inflationary prosperity.  For one, we could combine basic income guarantees with sharp regulation of the pricing and business practices of the major corporate oligopolies.  The originators of “MMT” have unnecessarily restricted the scope of “modern money” in a very non-modern way.  I don’t think I’ll use the term anymore when referring to the democratic potential of “modern money”.

From → Wealth & Poverty

10 Comments
  1. Stephan permalink

    I somehow sympathize with your objections to the JG. But on the other hand it depends on what exactly is a JOB? As far as I understand Bill he has a rather broad conception what constitutes a job. If an Australian surfing freak can show up and ask for a job to instruct the local kids how to ride the waves I’m all for a JG.

    The same applies to the Basic Income proponents. This idea is very popular here in Germany. But all these Basic Income fans don’t waste any time to outline what they’re doing all the day without monetary remuneration. Basically they are all working! Raising and/or educating kids. Caring for the elderly. Producing art. Whatever.

  2. Hi Stephan,

    I do object to the deep economism of these proposals in which we have humans treated as buffer stock commodities like, to use Bill Mitchell’s analogy, wool. Mitchell traces his JG ideas to Marx and others of the left but there’s no doubt Marx would disagree with labor being a “buffer stock”. In many ways, it seems almost neoliberal in the sense that it leans over backward to fit in to the view of labor as a commodity and to interfere as little as possible with the workings of the “free market”.

    The second point is that the JG idea needlessly restricts the insights on fiat currencies and makes the term “MMT” seem very inappropriate.

    You’re certainly right that it’s in the details.

    Jim

  3. peterc permalink

    Good post, Jim. I’m not sure why the MMT economists seem intent on defining their approach so narrowly. I have come to the view that I will just take the understanding of modern money that these economists have helped to develop and use it to inform my own thinking on the social possibilities it opens up. Like you, I probably won’t make use of the term MMT in future except when it is necessary in identifying the particular economists who fit into that category.

    I liked this sentence in the excerpt you quoted from Lerner:

    “This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science as opposed to scholasticism.”

    I think there is too much scholasticism in economics and not enough attention given to finding ways to make the world a better place. Sometimes I wonder if economists have become emotionally attached to the current economic system, making them reticent to consider the possibility of fundamental change. What would a change to a more transparent and democratic system mean for scholars who have spent large portions of the lives analyzing aspects of the capitalist economy? In my opinion, economists have provided very little assistance in thinking about how a better system might be operated. Most have had very little to say on the matter. Perhaps they have no interest in the topic. If so, it wouldn’t be much fun for them as economists in a post-capitalist society. Would they even be necessary? Probably not. Good riddance.

  4. “I personally object to any program that associates humans with a “buffer stock” commodity and reject the implied premise that people must be treated this way to achieve full employment, itself a contentious and increasingly non-modern term, and price stability”

    The entire point of the JG is to stop treating unemployed people as a buffer stock to control prices, and rather treat employed people as a buffer stock to keep demand stable.

    Our current system uses unemployed people to keep prices stable – a “buffer stock” of human misery. Read the literature about why and how Fed policy works. As you do this, exchange the soft words of “reducing price pressures” with “causing many people to lose their jobs and otherwise destroy their lives” and see how all that writing looks to you.

    You’ll get sick, and then embrace MMT’s Job Guarantee.

    MMT would replace this current buffer stock of unemployed people with a buffer stock of working people. It’s orders of magnitude more humane in action, whatever the terminology seems to imply.

  5. Hello TC,

    Agree completely with you on the immorality of using unemployment to keep prices stable and such associated terms like “natural rate of unemployment”. I’m already sick about these sorts of things and that’s why I write on this blog. I’m also sick about the class nature of actually existing capitalism and the horrendous distribution of wealth, income, and power. But I can’t embrace the JG as I’ve seen it written by the key MMTers.

    The insights on fiat currencies by Abba Lerner, the MMT economists, and others show us that we have great latitude when it comes to assuring widespread prosperity. Our technological resources are vast and it’s clear we have it well within our means for everyone to live very well. Our “problem” isn’t how to produce more but what to do with all the people who aren’t needed to produce everything we need. And productivity is now poised to enter a new era of robotics and automation that will reduce even further the need for work. A great thing, except for the fact of our existing socio-economic system.

    The key MMTers tell us that MMT is a combination of insights regarding fiat money, sectoral balances, and the JG. The idea that the JG is a critical element in something called modern monetary theory seems ludicrous. How about the many other aspects of capitalism that are crying out to be addressed? Tight regulation or nationalization / internationalization of corporate oligopolies, drastic realignment of the mal-distribution of power, wealth, and income, etc, etc? I know that many MMTers would favor action on these fronts but they’re not part of “MMT theory”.

    GIven the great opportunities offered by fiat money, the JG is pathetically limited, offering as it does nothing beyond automatic minimum wage (or slightly higher) employment for those not needed by the capitalists. I don’t see such a program as remotely living up to the potential of “modern money”. And it has great negative possibilities. One can easily see the program developing a massive minimum wage population that could even amplify the divide between the haves and have nots, especially with the ever declining need for “productive” work.

    I think we need something far more radical than an institutionalized minimum wage program. I don’t think capitalism can work if our goal is a just prosperous society; it’s clear to me the only answer is some form of socialism.

    • Stephan permalink

      >I don’t think capitalism can work if our goal is a just prosperous society; it’s clear to me the only answer is some form of socialism.

      Very funny. I agree. Some financial overlords ask for a dose of socialism😉 Which begs the question: what is wrong with our peers? Are they brain-dead?

      • Stephan,

        Yep, our financial overlords like JG / MMT when it applies to them! I’m thru with supporting modest tweaks to an immoral system.

      • Stephan permalink

        Jim. OK. Wrong or bad English from me. With financial overlords I was actually referring to us ;~) My understanding is you’re a former banker? And I’m somehow a quasi-banker. Us to ask for a heavy dose of socialism is somehow an irony. Sorry for the wrong wording in my previous comment.

  6. Peter,

    Good points following up on Lerner’s well phrased, slightly indirect attack on mainstream economics: “This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science as opposed to scholasticism.”

    As you say, “good riddance”.

  7. Stephan,

    Yes, I took your comment in the wrong way as I certainly don’t consider myself a financial overlord. The overwhelming majority of bankers of course are just workers like anyone else. But your point is well taken as I’m fortunate to be reasonably comfortable and assume you are as well. Most who aren’t don’t have time to write on blogs. My views are far to the left of many / most who are struggling. Why is that????? A deep critical question why those not doing well would support the system (and also why some doing well would oppose it). One thing though, I don’t see socialism as a big threat to my personal living standards as I’m convinced we can all live well.

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