Modern Monetary Theory or MMT as it is also known, is a new branch of heterodox economics that is quickly gaining popularity among the political far-left in American politics. While the theory is quite confusing in its exact specifications and rules ( Economist Paul Krugman likened it to “Calvin ball”) the basic tenets are that the assumptions of “fiat currency” and “endogenous money” are the correct macroeconomic assumptions. While these are core elements for most MMT theorists, it is important to stress that like many heterodox economic theories and “Calvin ball,” the ‘rules’ often change depending on which promoter of the theory you are talking too.
The basic meaning of these ideas is that government expenditure and currency control is far more important than private investment and therefore the government should not focus on its deficits and the consequences of government spending on the private sector. The Theory is the work of former Post-Keynesian Economist Randal L. Wray, who himself was a student of another famous heterodox economist: Hyman Minisky. Wray’s work was then propagated through the Levy Institute at Bard College and University of Missouri-Kansas (one of the Universities where Wray teaches). The theory shows a lot of influence from Post-Keynesian ideas as well as Minsky’s ‘unique’ monetary theories.
The question I have had as I have looked into MMT for the past three weeks is why does anyone care? This is not to say it is unimportant to refute the claims of heterodox economics, but how did this branch gain such prominence? It is not as though Italian Neo-Ricardian economists are being talked about by American Politicians.I mean don’t get me wrong, It would be entertaining to hear the Italian prime minister start spouting off about the importance of corn technology to economic growth, but it would certainly be pretty ridiculous.
I believe the prominence of MMT is related to the trend within economics to have radical theories boosted by political interests. Good examples of this are Marxist perfect-competition-based profit explanations, Austrian and Neo-Austrians economics, and of course Reaganomics. Just as Hayek would abhor the use of his theories to justify extreme market deregulation, it is the use of theories that suit politicians’ policy agendas that often lead to the proliferation of “voodoo economics.” Otherwise intelligent and accomplished economists such as Arthur Laffer with Reaganomics (and now with Trumponomics), often become simply political puppets, creating justification for all types of unsound economic policy.
For Modern Monetary theory, economists such as Stephanie Kelton, the economic adviser for Bernie Sanders and the Chief Democratic staff of the Senate Budget Committee. It is weird seeing left-wing politicians who deride the use of fringe minority climate scientists to defend climate change denial, saying these snake oil economists need to be “a larger part of our conversation.” To reference a president that promoted his own brand of “voodoo” crazy economics: Modern Monetary Theory is not the solution to our problem, Modern Monetary Theory is the problem.
Note: Bloomberg Businessweek created a flowchart showing the origins of MMT, however I feel it has some inaccuracies in its categorization of certain economists so I have decided to only include the link here in case anyone very much wants that information.
