I often read that Modern Monetary Theory (MMT) is defective because it has no theory of power relations. Some critics link this in their narrative to their claim that MMT also has no theory of inflation. They then proceed to attack concepts such as employment buffers, on the grounds, that MMT cannot propose a solution to inflation if it has no understanding of how power relations cause inflation. These criticisms don’t come from the conservative side of the policy debate but rather from the so-called Left, although I wonder just how ‘left’ some of the commentators who cast these aspersions actually are. The problem with these criticisms is that they have clearly adopted a partial approach to their understanding of what MMT is, presumably through not reading the literature widely enough, but also because of the way, some MMT proponents choose to represent our work. In this two part series, I propose to interrogate this issue and demonstrate that power and class is central to any contribution I have made to the development of the MMT literature. Part 1 sets the context and illustrates why some people might be confused.
Interesting historical trends
The first thing to think about is the way that economics has evolved over the last few centuries.
When I started studying economics I wanted to be thought of as a student of political economy.
I was also studying philosophy, history, mathematics, statistics, political science and had an interest in sociology and anthropology.
Over the course of my studies I had to make decisions like everyone, but I sought to pack as many electives in as possible and I actually ended up with more points than were necessary to gain the qualifications sought, because I could never quite come to terms with narrowing too much.
Scholars such as – François Quesnay – and – Anne-Robert-Jacques Turgot – were at the forefront of this approach which shifted the focus of national wealth from trade, which had been the focus of the mercantilists, to production and the contribution of labour as a source of value.
They also promoted the dominance of the agricultural sector as a source of economic development. To some extent, they influenced the later ideas of Henry George on land value taxation.
They also spawned the link between liberalism and economics advocating laissez-faire approaches from government, who had responsibility for maintaining property rights.
They were followed by the major British classical economists – Adam Smith, Thomas Malthus, David Ricardo and John Stuart Mill who advanced the discussion by focusing on how production and trade interacted with social norms and government policy with an emphasis on distributional aspects (income and wealth).
At this point, ‘economics’ really was an extension of – moral philosophy – and it was clear that a study of economics had to consider social institutions, which included who could exercise power over production and distribution.
Marx, of course, ground his analysis, in the power that the capital-owning class had over the rest of the population, by dint of the necessity to work to survive.
His analysis considered the socio-economic dynamics that followed from the exercise of that power.
So historically, political economy was concerned, rather explicitly with social classes, power struggles, custom and law, and economic outcomes.
As I have written about before, the growing interest in Marxism in the mid-19th century and the threat that this posed the elites of the burgeoning industrial society required a response.
The – Revolutions of 1848 – which were mostly a challenge to the existing monarchial dynasties, also were driven by working class concerns that they were being exploited by owners of capital.
This was particularly the case for urban working class activism who were the day labourers and factory workers and faced massive declines in their real wages interspersed with chronic unemployment.
Marxism became very appealing.
The – Paris Commune – in 1871, was a further expression of the rise of working class activism, which threatened the status quo.
One of the responses was the development of neoclassical economics – the so-called Marginal revolution, which saw – William Stanley Jevons – shift the emphasis of economic studies to a more mathematical approach in his 1879 book and – Alfred Marshall – publish his famous book in 1890.
This shift marked the beginning of the modern approach to economic problems and the terminology shifted from ‘political economy’ to ‘economics’, which was no small shift confined to nomenclature.
It marked a narrowing of focus consistent with a view that ‘individualism’ dominated and any ‘market power’ (concentration, monopoly, trade unions, etc) were ephemeral phenonema, in many cases, created by errant government policy.
The story went that if government’s allowed the free market to work and concentrated on enforcing private property rights, so that free contract could operate smoothly, then these ‘power’ sources would evaporate.
Increasingly, the concept of class was abandoned as an organising framework, and individual human behaviour was reduced to a series of a priori statements that were amenable to solutions using the available mathematics.
Mathematical technique and its limitations in this context became dominant in the design of the problem, by which I mean, that complex interactions in society were abstracted from and the resulting ‘models’ were so simple that they had no application to the real world.
And that sort of self-fulfilling activity became embedded in the profession.
I discussed that issue in these blog posts (among others):
1. The evidence from the sociologists against economic thinking is compelling (November 19, 2019).
2. How social democratic parties erect the plank and then walk it – Part 1 (June 6, 2019).
A substantial portion of my profession, go to graduate school, receive the heavy indoctrination from their masters, are awarded their PhD degrees, access an academic teaching job, entertain visits from publishers who adorn them with the latest macro economics textbook and all the related teaching materials (slideshows, quizzes, et cetera), and then, essentially, go to sleep!
They teach year in and year out from these textbooks. Some publish ‘haiku-type’ papers which provide no knowledge about the real world, but earned them plaudits from the Academy and, hence, promotion, higher salaries, more status, and a better retirement.
But they learn early on not to question the main parameters of their discipline. The indoctrination in graduate programs is very effective and it is far more simpler to go to sleep and enjoy the rewards that a highly-paid and secure profession brings.
They teach a fiction.
More insidious is that neo-liberal economics privileges the interests of capital and the financial elites.
Power is maintained.
To understand why there is so much resistance to abandoning failed economic theories, we need to understand that the mainstream economics paradigm is much more than a set of theories that economics professors indoctrinate their students with.
In his Op Ed (January 13, 2017) – Why we need political economy – Mark Robbins writes:
The principal shortcoming of economic analysis, as the argument goes, is that it presumes a separation of economy and politics that does not meaningfully represent reality. This is in contrast to political economy … which assumes that politics and economics are fundamentally inseparable and that the relationship between states and markets is key to a rounded comprehension of the world …
The assumed separation of politics and economics is very much a 20th-century phenomenon …
Even the central organising concept of the ‘free market’ is an imaginary construct that has no existence in reality. All markets require legal frameworks – government laws, rules of contract, etc.
I consulted – Google Ngram Viewer – which “charts the frequencies of any set of search strings using a yearly count of n-grams found in sources printed between 1500 and 2019” to demonstrate the historical context in which terms in my discipline have been used.
Here is a Ngram graph for the keyword – Political Economy – from 1750 to 2019.
The graph peaks around 1890 (the horizontal axis is marked in periods of 20 years), which just happens to coincide with the release of Marshall’s Principles.
The next Ngram graph is for the keywords – Political economy and Economics.
The juxtaposition of the term “Economics” (red line) with “Political Economy” (the blue line that you can barely see as it traces the horizontal axis) really demonstrates the shift in emphasis.
By 1900, or so very few people referred to the way we study the economy as ‘political economy’, and that term became the domain of those pursuing more heterodox approaches (Marxists, institutionalists, etc) or the public choice theorists, who were still operating within the ‘free market’ individualistic framework.
The other big shift was the development of macroeconomics in the 1930s as a separate field of study within ‘economics’.
Prior to the 1930s, there was no separate field of study called macroeconomics.
The dominant neoclassical school of thought in economics at the time considered that to make statements about the economy as a whole (the domain of macroeconomics) one could just infer from reasoning conducted at the individual unit or atomistic level.
This reasoning was rejected in the 1930s, and macroeconomics became a separate discipline precisely because the dominant way of thinking at the time, blithely transposing microeconomic truisms to the macro scale, was riddled with errors of logic that led to spurious analytical reasoning and poor policy advice.
Microeconomics develops theories about individual behavioural units in the economy – at the level of the person, household, or firm.
For example, it might seek to explain the employment decisions of a firm or the saving decisions of an individual income recipient.
However, microeconomic theory ignores knock-on effects on others when examining these firm- or household-level decisions.
That is clearly inappropriate if we look at the macroeconomy, where we must consider these wider impacts.
During the Great Depression, British economist John Maynard Keynes and others considered that by ignoring these interdependencies (knock-on effects), economists were creating a compositional fallacy.
I elaborate more on that issue in this blog post (among others) – Fiscal austerity – the newest fallacy of composition (July 6, 2010).
The macroeconomics graph starts to rise in the late 1930s.
Here is a Ngram graph for the keyword – Macroeconomics:
But the mainstream profession is still dominated by neoclassical thinking, even the ‘New Keynesian’ macroeconomists construct their framework on microeconomic principles.
This leads to the the relativities shown in the next Ngram graph for the keywords – Economics and Macroeconomics:
So the first thing to understand is that MMT contains a coherent logic that will teach you to resist falling into intuitive traps and compositional fallacies and teaches you to think in a macroeconomic way.
It is ground in the early insights that led Keynes and others to create macroeconomics as a separate discipline within ‘economics’.
MMT economists reject the individualism of neoclassical marginalism.
They place a priority on understanding the institutional context within which economic outcomes are generated.
That means they understand that power relations that are embedded in these institutional structures are central to understanding the way the monetary system operates and the capacities of government, as the currency-issuer.
MMT ignores the link between money and the real economy
In one article a few years ago (February 21, 2019) – Modern Monetary Theory Isn’t Helping – Doug Henwood, apart from seeming to be settling some personal scores, which are beyond my interest or specific knowledge, introduced this ‘power vacuum’ critique of MMT.
MMTers show a strange lack of interest in the specificity of capitalism — how production and distribution are organized, how demand for credit arises in the course of commerce, how people earn their living and under what conditions — and their rejection of earlier PK work on money renders nearly invisible any link between money and things or money and people (or people and things via money). Marx said a man carries his bond with society in his pocket, a recognition that money is one of our principal modes of social organization and control. Or, as Antonio Negri put it in one of his more lucid moments, money has only one face, that of the boss. If you don’t work and do as you’re told, you go broke and starve.
Through the fantasy of effortless keystroke money, all those relations of necessity and power supposedly get wiped away. But it’s not some imposed scarcity of money itself that produces those relations.
MMT’s lack of interest in the relationship between money and the real economy causes adherents to overlook the connection between taxing, spending, and the allocation of resources. We have homeless people living on the streets of San Francisco blocks from Twitter and Uber’s headquarters, bridges collapsing, trains derailing, schools falling to bits — the entire structure of private opulence and public squalor, as John Kenneth Galbraith put it long ago, because the public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones, with at least the potential for them to be spent on more humane pursuits. Fewer Lamborghinis, more bullet trains. Fewer Hamptons houses, more public housing.
Enacting single payer, for example, isn’t just a matter of a few billion extra keystrokes. It means dismantling the absurd administrative apparatus of the US health care system, shifting premiums for private insurance into public expenditures, transforming the price-gouging business model of the drug industry, and taking care of workers displaced by the renovation.
If we take out the reference to MMT, then what Doug Henwood is demonstrating is the lurid lack of ethics that defines the modern economic system.
But to then introduce that as an attack on MMT is to advance a claim that is is something like, if you don’t have a theory of everything, then what you do offer is problematic.
Apparently, Modern Monetary Theory (MMT) is defective because it doesn’t have a theory of the state, or under-theorises public power, or excludes considerations of gender, ethnicity, sexuality, and more.
Apparently, we don’t advance theories of why the distribution of income allows Twitter to coexist with those who do not have homes.
Now, before the flame throwers are primed, make sure that you read me ‘saying’ that all of these things that MMT apparently excludes are obviously important and deserve intellectual enquiry from those who have the appropriate research skills and background (literature, methods, training etc).
That is why universities have many departments (disciplines) because not everyone has all the appropriate research skills (and interest) to do everything.
It is a flawed critique that says that MMT can never be accepted by the Left, for example, because we have not presented a theory of the state.
To say there is a “lack of interest” in the consequences of “money and the “real economy” is flagrantly false.
A central concern of macroeconomics, the way that MMT develops it, is to understand the consequences of the use of money (as the unit of account) in transactions that link expenditure to production (real economy) to income generation and to employment (real economy).
A major influence on the way we have developed MMT is Abba Lerner’s functional finance.
Please read – Functional finance and modern monetary theory (November 1, 2009) – for more detail.
Functional finance is about the outcomes of government policy decisions explicitly linking its currency capacity to the real economy.
The MMT economists have almost single-handedly attacked the obsession with financial aggregates (nominal size of deficits, deficit to GDP ratios, public debt to GDP ratios) in the modern era and continually tried to refocus the debate onto the real economy.
Even many other heterodox economists who oppose the mainstream still lapse into the ‘sound finance’ frames – ‘tax the rich’, ‘Robin Hood taxes’, ‘okay for government to borrow when interest rates are low’, and all the rest of them.
In incorporating the functional approach, one of the central aims of the MMT literature has been to reinstate full employment as a key objective of government after decades of policy being driven by NAIRU logic.
We are the only economists who juxtapose employment and unemployment buffer stocks in the discussion of inflation.
That explicitly links the real economy (employment and unemployment) to the nominal economy (inflation, money).
So Henwood was just plain wrong in that regard.
But this is the point.
MMT provides an impeccable explanation for mass unemployment and shows what the fiscal position has to be to ensure there is full employment.
That is it links money and the real economy at the macroeconomic level, which is what a good macroeconomics should do.
But the implications of the mass unemployment – the family damage, the likelihood of increased alcohol and substance abuse, the likelihood of increased participation in the justice system, the social alienation, and all the other pathologies that accompany joblessness – are the realms of sociology, psychology, legal studies, etc.
Macroeconomists do macroeconomics.
We show why there is unemployment.
MMT is not a framework for studying the impacts of social alienation arising from that unemployment.
In Part 2 we will discuss the ‘tax the rich’ story as an extension of the discussion just provided.
We will also question the ‘MMT is a lens’ proposal and see why I introduced that sort of framing, the limitations to it, and where we can take it – straight to power relations in a capitalist society.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.