How modern is ‘modern monetary theory’?
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”.