One of the things I have noted with regularity is that readers and other second-generation Modern Monetary Theory (MMT) bloggers often fall into the error which we might characterise as the “When we have MMT things will be different” syndrome. Or the “we need to change to MMT principles to make things better” syndrome. Thinking that MMT constitutes a regime change is incorrect and steers one away from the core issues. In this blog, I reflect on that syndrome and some other aspects of the development of ideas, which I hope will provide readers with a clearer picture of what the core (early) MMT developers (Mosler, Bell/Kelton, Wray, Mitchell, Tcherneva, Fullwiler) had in mind when we set out in the early 1990s to construct a better way of doing macroeconomics. The point is that while MMT constitutes a regime change in economic thinking within the academy it does not constitute a regime change in the way the monetary system operates. We need to separate the operational principles exposed by MMT academics from their ideological values to really come to terms with the fact that MMT is what is, not what might be.
I have been reading the 2001 book What Evolution Is by the famous evolutionary biologist Ernst Mayr recently. He took on the establishment in his area of research and has definitely been a major influence on the way we think about biodiversity in modern times.
He was influential in the emphasis on secular explanations for evolution. In one interview in 1999 he was asked:
EDGE: How do you account for the fact that in this country, despite the effect of Darwinism on many people in the scientific community, more and more people are god fearing and believe in the 8 days of creation?
MAYR: You know you cannot give a polite answer to that question.
EDGE: In this venue we appreciate impolite, impolitical, answers.
MAYR: They recently tested a group of schoolgirls? They asked where is Mexico? Do you know that most of the kids had no idea where Mexico is? I’m using this only to illustrate the fact that and pardon me for saying so the average American is amazingly ignorant about just about everything. If he was better informed, how could he reject evolution? If you don’t accept evolution then most of the facts of biology just don’t make sense. I can’t explain how an entire nation can be so ignorant, but there it is.
That insight has bearing on how we think about macroeconomics as well and I will return to that soon.
His account of evolution is interesting and has parallels with the way other ideas develop, including those in economics.
To some extent, Mayr’s work constituted a ‘regime change’ in his discipline after resistance from the established thinkers. in another sense, his discussion of evolution itself has relevance to the ways ideas emerge and move from being unacceptable to broadly accepted.
Evolution, in Mayr’s work, involves novelty, changes to some species. Changes accumulate.
Our understanding of this process through time sometimes takes us down dead-ends or blind alleys as the new ideas are tested against reality.
These ‘mistakes’ in perception are important though, because while they cannot help us understand the reality of interest, they do provide other information that helps us see things in better perspective.
In economics, I characterise most of the mainstream theory as ‘fake knowledge’. Please read my blog – The failure of economics – reality and language – for more discussion on this point.
It doesn’t help us understand the way the monetary system operates. The mainstream explanations and characterisations are just plain wrong – and systematically so – one myth links into and reinforces another in a stream of logical nonsense.
But if you then ask why the mainstream adopt the position that they do, which in any reasonable assessment is ‘just plain wrong’ – then exploring that question is insightful because we enter the world of ideology and the role that ideas have in reinforcing existing power elites.
It is clear that the adoption of ‘free market’ conceptions help maintain the elite position in the deployment of real resources and the income flows that are derived.
There was a recent and interesting article in The Nation (March 6, 2017) – Our political economy is designed to create poverty and inequality – along these lines.
So, while mainstream economics is bunkum, understanding its role is important and helps us understand why ‘better’ ideas struggle to gain ascendancy in the contest of ideas.
There are many examples of such ‘contests’ in the evolution of ideas.
I have previously noted the struggle of American biologist Joseph Altman.
Please read my blog – Whatever – its either employment or unemployment buffer stocks – for more discussion on this point.
He specialised in neurobiology and discovered adult neurogenesis in the 1960s. He showed that adult brains could create new neurons but the idea was fiercely denied by contemporary thought at the time.
The power elites in his field were challenged by the new ideas.
It wasn’t until the phenomenon was ‘rediscovered’ by another scientist (Elizabeth Gould in 1999) that the proposition became fashionable. Neurogenesis is now one of the most significant areas in neuroscience.
Why were Altman’s discoveries ignored for almost 30 years?
In an article – Three before their time: neuroscientists whose ideas were ignored by their contemporaries – which came out in 2008 in Experimental Brain Research. Charles Gross wrote:
… the dogma of ‘no new neurons’ was universally held and vigorously defended by the most powerful and leading primate developmental anatomist of his time.
Paradigms reject change when establishment hegemony is threatened.
A while ago I followed the story of Jacques Cinq-Mars who was a French-Canadian archaeologist who did fieldwork, searching “the Yukon riverbanks and rock shelters for traces of Ice Age hunters”.
His work in the Bluefish Caves in the North-West of Canada between 1977-87 and his subsequent analysis established that human life in that area existed 24,000 years ago.
The findings challenged the established view at the time – the so-called Clovis-First theory – which had dated the arrival of humans to ‘America’ at 13,000 years.
A recent article (March 7, 2017), by Heather Pringle – From Vilified to Vindicated: the Story of Jacques Cinq-Mars – provides an accessible introduction to this controversy.
On May 3, 2013, the editorial in the journal Nature – Young Americans – described what happened when Cinq-Mars released his findings and sparked “one of the most acrimonious — and unfruitful —in all of science”.
… endured brutal criticism from opponents who did not give them, or their evidence, a fair hearing. Scientists who supported the Clovis-first model countered that reports of pre-Clovis sites were examples of poor scholarship.
Heather Pringle describes the criticism and pressures that Cinq-Mars was put under by the academy as he unveiled the findings of his research:
It was a brutal experience, something that Cinq-Mars once likened to the Spanish Inquisition. At conferences, audiences paid little heed to his presentations, giving short shrift to the evidence. Other researchers listened politely, then questioned his competence. The result was always the same … In his office at the Canadian Museum of History, Cinq-Mars fumed at the wall of closed minds. Funding for his Bluefish work grew scarce: his fieldwork eventually sputtered and died.
And studies now support his earlier claims “that humans reached the Americas well before the Clovis culture”. But the facts were not the issue – it was the challenge to the hegemony in this area of study that mattered.
As Pringle writes: “Today, decades later, the Clovis first model has collapsed”. It was fake knowledge all along but built careers and influence.
Well-paid professors who had made a lucrative career and garnered massive social status as a result of their claims about the first Americans were suddenly staring at a void – they had been peddling fake knowledge.
The impacts of the resistance are still being worked out.
Did archaeologists in the mainstream marginalize dissenting voices on this key issue? And if so, what was the impact on North American archaeology? Did the intense criticism of pre-Clovis sites produce a chilling effect, stifling new ideas and hobbling the search for early sites? Tom Dillehay, an archaeologist at Vanderbilt University in Tennessee and the principal investigator at the Chilean site of Monte Verde, thinks the answer is clear. The scientific atmosphere, recalls Dillehay, was “clearly toxic and clearly impeded science.”
Similarly, does an adherence by policy makers to the fake knowledge offered by mainstream macroeconomics force millions of people to endure unemployment and poverty unnecessarily. The answer is clearly yes.
A final example before I move on is closer to home. I refer to the story of Helicobacter Pylori. If you do not know what I am referring to then it is an amazing case of the resistance to new knowledge by those who had entrenched interests in maintaining fake knowledge.
In this case, it also involved the capacity of large pharmaceutical companies to make huge profits by forcing unnecessary drugs onto unsuspecting patients, kept in ignorance by their trusted doctors, who under pressure from the pharmaceutical companies to resist adopting new discoveries.
It involves the research of Dr Barry J. Marshall, who was a young doctor at the Fremantle Hospital in Perth, Western Australia in 1984. He discovered that the bacterium Helicobacter Pylori was associated with the incidence of stomach ulcers. Further research convinced Marshall and his team that the association was causal.
The mainstream of the profession at the time considered ulcers to be caused by “psychological turbulence” (see New Yorker link below).
This New Yorker article (May 3, 2003) – Marshall’s Hunch – provides an interesting insight into the controversy.
It recounts how Marshall first presented his work in 1983:
… at a gathering of infectious disease experts in Brussels. The audience was full of heavyweights … When Marshall finished speaking … The scientists chuckled and murmured and shook their heads, a little embarrassed for a junior colleague whose debut was such a disaster …
One scientist said Marshall’s theory was “the most preposterous thing I’d ever heard … I thought, This guy is a madman”.
The problem for Marshall was that up to that point the pharmaceutical giant Glaxo(SmithKline) were making massive profits selling Zantac to people whose doctors had diagnosed stomach ulcers. The drugs were palliative only – moderated symptoms (pain).
Patients were then on a treadmill where doctors would perform expensive and regular investigative colonoscopy procedures to ‘see’ whether the ulcer was contained and in between times would ingest Zantac and other remedies to control the pain.
They were put on special diets (cutting out things they liked) to stop the ulcer from erupting.
All of which Marshall demonstrated was unnecessary.
Now, Marshall’s findings are standard fare for the medical sector but it took many years before the message got through to GPs who were under the influence of the large drug companies, intent on suppressing the findings and keeping their markets.
All of these stories (and there are many more I could write about) involve regime change. They involve a new set of ideas or explanations coming headlong against the perceived mainstream and then being undermined until it becomes self-evident that the facts support the new idea.
Academic disciplines (such as, neurobiologists, archaeology, economists etc.) work within organised ‘paradigms’, which philosopher Thomas Kuhn identified in his 1962 book – The Structure of Scientific Revolutions – as “universally recognized scientific achievements that, for a time, provide model problems and solutions for a community of practitioners”.
Typically, the body of knowledge that defines the paradigm are “recounted … by science textbooks, elementary and advanced” (Kuhn, 1996: 10).
Kuhn challenged the notion that ‘scientific’ activity is a linear process, whereby scholars add new empirically supported facts to the knowledge base to replace previously accepted notions.
Rather, Kuhn said that dominant viewpoints persist until they are confronted with insurmountable anomalies, whereupon a revolution (paradigm shift) occurs. The new paradigm exposes the old theories as inapplicable, introduces new concepts, asks new questions and provides students with a new way of thinking with a new language and explanatory metaphors.
Once supplanted, the old theories are no longer considered valid knowledge. Kuhn also noted that there is a sort of mob rule among practitioners within a dominant paradigm and they vehemently hold onto their views even in the face of logical or empirical anomaly.
The dominant group becomes trapped in what Irving Janis called Groupthink and initially vilifies those who propose new ways of thinking.
The work of Joseph Altman, Jacques Cinq-Mars, Barry Marshall and countless others across all discplines represented the potential for a paradigm shift and was resisted by the mob until change became ineluctable.
Not all novel ideas face this sort of brick wall. But when the professional bodies become trapped by Groupthink and, typically, there is status and money at stake (particularly, commercial edge) then resistance can be fierce and prolonged.
So we can fairly say that the ideas discussed above resulted in regime change in their particular areas. In some cases, the regime confronted was dominated with real knowledge (such as the dating of the Clovis society) but some assertions relating to that knowledge become exposed.
In other cases, the knowledge is fake all along and the dominance of the discipline is maintained through control of media, professional appointment and promotion, access to research funds, and other smokescreens that are erected to deter outsiders from knowing what the facts are.
Mainstream macroeconomics fits into that latter category. It is fake knowledge and always has been. But the Groupthink discpline among the profession is very tight and coercive. Anyone who has ever challenged its position will know what I mean.
I was giving an invited presentation once at a prestigious conference on my macroeconomic views (I was the token Keynesian they used to have along to say they were providing a balanced roster of speakers! Not!).
Anyway, after I had given the presentation, the discussant started off by saying (with a whirring noise to start his spiel) “ladies and gentlemen, I think we are being visited by a presence from Mars today!” He said very little after that and just rode on the laughter in the audience. That was meant to be serious professional interchange.
It was nothing more than bullying. There was huge laughter at my expense – but by this stage I was a senior professor and had experienced years of this sort of ignorance. Always water off a duck’s back! I was inured to it.
When I was starting out, my very first referee’s report on a journal submission was one sentence long (they are normally, at least, a few pages long). It said “the author obviously hasn’t read or understood the first chapter in Lipsey”, which was a major mainstream textbook at the time, preaching the sort of rubbish that goes for mainstream macro.
That was it. I had spent hours working on the paper ensuring it was very tight and all I got was that. I took it as a challenge. But many more sensitive younger aspirants would have been destroyed by it – their confidence shot and their motivation damaged.
The economics profession is brutal and you have to have a thick hide to survive if you take it on.
So in this sense, Modern Monetary Theory (MMT) constitutes a regime change. It directly challenges (and exposes) the lies and deceptions of the dominant economic theories and provides a systematic and consistent alternative.
At first we were ignored – for the first 10 years at least of our work (the small group I noted above). Then the progressive side of economics (Post Keynesians) started criticising us – mainly because they attended similar conferences. They were hostile because MMT challenges some of the neo-liberal baggage that Post Keynesians still accept.
But as the message has spread further and the ‘second-generation’ MMTers on social media have become more vocal and numerous, there is now attacks coming from the mainstream economists.
I wrote about a recent attack in this blog – When mainstream economists jump the shark and lose it completely.
These attacks are becoming widespread and represent the next stage in our development as a set of ideas. The neo-liberal Groupthinkers in the profession are now sensing that their position is weakening as more and more people are starting to eschew the value of the mainstream economics as a result of its massive failure in dealing with the GFC.
That event exposed my profession, which for years had been operating under the radar, so to speak. But its failures were manifest and the mob rule has began to erect all sorts of defences to protect their regime, including mounting public attacks on MMT.
But the regime shift that I have been talking about up to now is not the same thing as the blogosphere claims that ‘things will be better when MMT is adopted’.
That sort of sentiment implies that we can shift to a ‘MMT regime’ if enough politicians are convinced.
The point to understand is that MMT is a system of thought that allows us to understand how a fiat currency monetary system operates and the central role that government can play in a modern monetary economy.
Modern monetary economies use money as the unit of account to pay for goods and services. An important notion is that money is a fiat currency, that is, it is convertible only into itself and not legally convertible by government into gold, for instance, as it was under the gold standard or later versions of the gold standard.
What is mostly ignored in mainstream economic commentary is that in August 1971, the monetary system agreed at the famous Bretton Woods conference in July 1944, which required the central banks of participating nations to maintain their currencies at agreed fixed rates against the US dollar, collapsed.
The system proved unworkable and when President Nixon abandoned the convertibility of the US dollar into gold, most nations moved to a fiat currency system.
Within a fiat currency system, the government has the exclusive legal right to issue the particular fiat currency.
Further, given that this money is the only unit which is acceptable for payment of taxes and other financial demands of the government presents the government with a range of options.
We know that the government is not just a ‘large household’. The latter is the user of the currency and must finance its spending beforehand, ex ante, whereas government, the issuer of the currency, necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire (raising taxes).
Clearly, a fiat-currency issuing government is always solvent in terms of its own currency of issue.
MMT also teaches us that the purpose of State Money (fiat currency) is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.
Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save.
If the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment. The basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
Different nations (or blocs of nations) structure and use the capacity possessed by a fiat currency in different ways. The Eurozone Member States voluntarily ceded the capacity to Frankfurt and then imposed harsh rules on themselves with respect to net spending.
Other nations have evolved differently.
But the point is that every day, across every nation, monetary systems are in place that operate along the lines described and explained by MMT.
MMT has a very close relationship to reality, whereas mainstream macroeconomics is largely incapable of dealing with reality.
So to think that a better world is just a matter of moving to MMT is to misunderstand the reality. Monetary systems of all shapes and sizes already operate according to MMT.
So when I read comments like “if we introduced MMT …” or “under MMT policies …” or “when MMT becomes the norm”, which all imply that MMT is a regime that we would move to if society was more enlightened and would open up a new range of policy options that a truly progressive government might pursue I know that this point has been misunderstood.
This is tied in with other comments, specifically about the Job Guarantee, which suggest that MMT is a progressive doctrine or a left-wing approach to economic policy-making and what is holding MMT back from being introduced is the right-wing conspiracy to maintain hegemony.
I understand all these comments are well intended and people are genuinely attracted to some of the policy options that MMT proponents advance. This is notwithstanding, what I consider to be some doctrinal and irrational resistance to proposals such as the Job Guarantee.
But the conception that we might move to an MMT world where enlightened policy will free us from the yoke of capitalist exploitation is plain wrong.
The fact is that we are already living in the MMT world. We interact with each other every day in the MMT world. The monetary system, whether it be in the US, Australia, Japan or any of the Eurozone nations, operates along MMT lines.
So it is not about moving to some new Shangri-La, which we might call the MMT world – we are already in, that world.
What MMT provides is a new lens to view the world we live in and the monetary system operations that are important in our daily lives.
This new lens opens up new insights into what is going on in the economy on a daily basis. It’s not something to move to, it already is.
MMT, as a new powerful lens, makes things that are obscured by neo-liberal narratives more transparent.
It means that the series of interlinked myths that are advanced by conservative forces to distract us from understanding causality and consequence in policy-making and non-government sector decision-making are exposed.
So when a Conservative politician or corporate leader claims that the government has run out of money and therefore cannot afford income support for the unemployed any longer at the levels previously enjoyed, MMT alerts us to the fact that this is a lie and that there must be an alternative agenda.
MMT thus empowers a population who learn about it to see things for what they are and to ask questions that they never previously would have thought possible to ask or even relevant.
Previously, when a politician has said the government will run out of money or is maxing out its credit card, an uninformed population will take that statement as granted.
But an understanding of the MMT framework all its lens would mean that the population will now reject the “run out of money” obfuscation and instead demand to know why the government doesn’t want to support a particular policy option.
MMT thus, introduces into the policy debate, the possibility of new policy options and directions that have previously been dismissed out of hand through the use of spurious economic arguments that the politicians and their advisors know will not be properly scrutinised nor understood by the general population who they are trying to manipulate.
MMT is thus, a framework for understanding how the monetary system we live in operates and the capacities and options that are currency-issuing government has to advance our well-being.
It also allows us to understand the likely consequences of deviating from a truly sovereign state, which we define in terms of the currency-issuing status of the government (incorporating exchange-rate arrangements and central bank interest rate setting capacities).
In the latter context, the MMT lens provided us with a clear understanding of why the Eurozone would be a failure with significant negative consequences for the Member States.
Further, MMT is neither left-wing nor right-wing.
Where the confusion lies is in conflating the theoretical and descriptive content of MMT with the value systems that the proponents of MMT overlay on this content.
It might be thought that MMT is left-wing because the values I expound are from the left. But that would be a wrongful inference.
The ideological persuasion of any perspective will manifest in the values that are expounded and the policy prescriptions that are proposed to advance those values.
What MMT has allowed is for the ideological persuasion to become much clearer when a person advances a particular policy proposal.
For example, when a politician, faced with rising unemployment, says that there is no fiscal space for the government to create jobs to deal with the mass unemployment, a person considering that comment through the MMT lens, will immediately realise that the government must have a reason for maintaining higher than necessary unemployment.
We know there must be a ‘hidden’ agenda because our understanding tells us that the government fiscal space is defined in terms of available real resources that the government can purchase with its currency-issuing capacity. So if there is mass unemployment then we know that there are such available real resources.
So why would the government refuse to purchase them and bring them back into productive use?
The focus then shifts on what that reason is and questions are likely to lead, for example, to an examination of corporate influence that might be leading the government to refuse to use their currency-issuing capacities to maintain full employment.
But when a right-wing politician inspired by MMT expresses a desire to ensure there is a reserve army of unemployed because it will suppress wage demands and enhance profits (which he/she values above worker dignity etc) then they would propose cutting the fiscal deficit because their MMT training tells them that is how they will achieve their goal.
MMT just tells us what the consequences of imposing our values on society via policy choices will be. Those values can take any political or ideological colour.
I hope that discussion helps some readers out there who have been struggling with this sort of issue.
Next week, I will present a blog forecasting the “first 100 days of a Melenchon Presidency for France”. Right-wing economists trading in fake knowledge have already published such an exercise. It is comical. I will try to be more serious.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.