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A Closer Look at Modern Monetary Theory Part 1



December 15, 2010 – Comments (18)

(Note: I realized that this post would end up being too long, so I am dividing into parts. Wish I could make it shorter, but it's just not within my talents.) 

In preparation for this post on MMT, I have spent some time getting you familiar with a couple of topics. (See: herehere, here, here, and here)  The most important of these concepts is understanding the role of subjective value scales in economics. Humans use subjective value scales to judge the usefulness of goods and services at their disposal. In order for market activity to accurately represent these preferences, exchanges must be arrived at voluntarily. Involuntary exchange, derived from coercion, does not reflect but rather alters these value scales. The science of interpersonal exchanges is known as callactics. It is the building blocks of  a coherent economic theory. 

What happens when we try to develop a theory that strips away all that crazy talk about real humans and their preferences?  We no longer need to concern ourselves with how prices are formed in a voluntary, subjective manner. We don't need to worry about prices at all, if we are to be honest. For, if we can use coercion to impact economic decisions, e.g. in the use of money, certainly we are not limited by such a silly notion as prices derived from the imaginary feelings of market actors. The only thing stopping us from regulating prices is our own political will. Any shortages or surpluses caused by uncooperative market actors failing to understand the State's authority, are again easily overcome by political will.

As you can see, a theory that begins with the premise "money derives its value from the State" is going to have a difficult time telling you exactly where the State's authority in economic matters begins and ends. 

Such is the dilemna facing Modern Monetary Theory, a growing school of thought that is neither modern nor a truly ecompassing theory. In some ways, MMT is an improvement on the neoclassical approach of the Keynesian and Monetarist traditions. In other ways, it is at a  complete loss to explain the basic fundamentals of economic activity. It's worth getting to know, however, and I'll try to present it as accurately as I can.

Introduction to Modern Monetary Theory

MMT consists primarily of two parts The first is an analysis or description (probably the better term) of the world's monetary system since 1971, i.e. in a completely paper money regime worldwide. The second is a set of policy prescriptions derived from the initial analysis. 

The roots of MMT go back much farther than 1971, however, though to the popular MMT bloggers like The Pragmatic Capitalist, those roots do not matter. However, I like to know where ideas come from, so I looked into it further.

The original MMT'ers were the Chartalists, paper money supporters that have argued with hard money theorists since at least the 16th century. Chartalism comes from the Latin word 'charta', meaning paper or writing.  Keynes, in fact, wrote favorably about Chartalism in his book A Treatise on Money (1930). Oftentimes you will see MMT'ers also referred to as neo-Chartalists, post-Keynesians, or Nominalists. It seems these are not interchangeable, but understanding the nuances is not relevant to a post of this nature (and probably not relevant at all in the big picture.)

If you can say that MMT has an intellectual grandfather perhaps it would be Georg Friedrich Knapp (1842-1926), a German economist of the Historical School. The German Historical School rejected the idea that economics should be built on theory. They embraced empiricism, had an affection for the State, and become increasingly Marxist throughout Knapp's time. Knapp followed the first two traditions but could never be accused of being a Marxist. Knapp's most significant work was The State Theory of Money, which is a self-explanatory title.  Modern Chartalism is a mixture of pro-market policies but always places the State atop the heirarchy of economic affairs.

Another prominent Chartalist was diplomat/economist Alfred Mitchell-Innes (1864-1950). Innes, like other paper money supporters, denied the connection between rising prices and currency debasement. In a famous article titled What is Money? attempts to show that the State has always had the sole power to produce money, that the money unit's weight was not relevant to the money's value, and that money did not come about naturally.

Finally, we get to today's MMT proponents: L. Randall Wray (Professor of Economcis at University of Missouri-Kansas City), Warren Mosler (Senate candidate and economic theorist?), the aforementioned very popular writer Pragmatic Capitalist, and Australian Bill Mitchell of the Center of Full Employment and Equity.

Major Insights of Modern Monetary Theory

Domestic private sector net saving of financial assets is by definition equal to the government sector’s deficit.

Take a look at this chart. Whether you are trained in neo-classical economics or a self study Misesian like me, that chart and the previous italicized sentence may throw you for a loop.  Are they really saying that the government's deficit is always equal to private savings?  Well, yes and no.

First, the MMT definition of savings is a nominal one. An increase in savings means an increase in financial assets in the private sector. That's not savings in any economic sense (ok, in really bad economics that could pass as savings.)  In an economic sense, savings is an action. Savings is the foregoing of consumption in order to consume or produce more down the road. As a simple example, a fisherman that decides not to fish for a day (and therefore, eat less) in order to build a net is saving. It's an action. The result is higher consumption down the road. The MMT insight is referring to financial assets.  The value of those financial assets is not increased, however, by merely increasing their number.  MMT proponents do not dispute that.

However, in a true Keynesian twist, despite recognizing that merely increasing paper assets doesn't actually make you wealthier, MMT'ers advocate increasing government sector deficits during a recession.  Why?  It appears for the same reason as Keynesians.  They claim that a recession can be eased by increasing the deficit (and therefore, net financial assets in the private sector) and the deficit can be reduced during good times.

This brings us to MMT policy proposals where concerning deficits they appear to turn Republican and advocate lower taxes rather than higher government spending (again, to increase the deficit) during hard times.  If this confuses you it shouldn't. You can advocate for a bigger deficit either way and MMT'ers are fairly pro-market (at least more so than Progressives).  In fact some go as far to say that all Federal taxes in the US are unnecessary (leaving only State taxes needed to chew up some of the excess currency) but that is another matter, entirely (to be covered in Part 2.)

To simplify, let's say that this first rule of Modern Monetary Theory boils down to the not-so-Earth-shattering insight that you can't have funny money in your hand unless the clown makes it.  And since the clown makes it by spending it (the government only needs money to buy things it wants, as opposed to producing money for your benefit), you can't have any unless he buys something first.  The clown buys from the banks. The banks give you the money (at interest, and with penalties, of course.)

One more thing on that infamous chart above. When I look at that chart, I don't think to myself, "wow, if we just increase the deficit, there will be more savings!"  I look at it and shrug, "Yep, no one has actually saved since we started using paper money."  If you don't understand why I would come to that conclusion, hit me up in the comments and I'll try to expand my analysis.

The US government is never revenue constrained

This is another popular chant of the Chartalist. It's a bit silly, and I can't quite figure out why they spend so much time on it. Let's say that I was the monopoly money producer in your neighborhood. Let's say that I had a really really big gun. And I said that no matter what, you have to accept my money if I need to buy something. And I can print up as many notes as possible. 

Would I ever be "revenue constrained"?  Well, not as long as my printing machine (and my gun) were working.  So why is this some big insight? 

It's not. Mainly, the MMT'ers are trying to reframe the debate over deficits by pointing out (correctly) that as long as the US has the power to print its own money, its just a matter of political will as to how much they can spend.  So the point here is to convince the powers-that-be to get over their silly superstitions and stop fretting over deficits. The more important questions are about how to get the economy working smoothly.

You can almost start to see their point, unless you understand how interpersonal exchanges work. Then you realize that the supply of a currency can have a dramatic effect on prices. From the MMT framework, "excess capacity" - a statistical aggregate with no economic meaning - determines inflation.  As long as this mythical creature (winged or hooved, I'm not sure) is greater than the amount of paper money produced, there will be no inflation.  If there is inflation, the government can simply increase taxes in order to remove money from circulation and reign in rising prices.

There is reality and then there is Operational Reality

MMT'ers focus entirely on something they refer to as "operational reality." It's an attempt (justifiably) to present Modern Monetary Theory as a value-free economic science.  Just like every other economic science, however, value-free judgments lead you to certain conclusions that are not value-free.  For example, most Austrian School economists are libertarians simply because the conclusions are that State interference in the market causes unwelcome effects. However, libertarianism is not value-free. Get it? 

The MMT school proposes to deal with "operational realities."  In other words, the world is on paper money. Let's deal with that and make it work as well as possible.  This approach can be good and bad.  On the positive side, MMTers like the Pragmatic Capitalist often do a great job of exposing fallacies concerning the operations of the Federal Reserve.  They can pinpoint exactly why (in their framework) certain Fed policies simply won't work as intended.  

But when the MMT school starts to get into policy proposals, the framework is often not value-free. The first and foremost judgment of MMT is that the State has the authority to regulate every aspect of our economy. That is not a value-free judgment. In fact, some of the judgments get awful ghastly:

How do I enforce your use of these “reserve” notes? I create jobs via a military and a police force and pay them well (notice that when government spends money they are simply buying up private sector productivity). Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….The United States Secret Service was in fact created specifically for this purpose – to protect the US Dollar.  There is arguably, nothing more important to government stability than maintaining the value and faith in the sovereign currency. - Understanding Modern Monetary Theory, The Pragmatic Capitalist, here.

This sounds familiar... wait for it... wait for it...

(from Wikipedia)

The hut tax was a type of taxation introduced by British colonialists in Africa on a per hut or household basis. It was variously payable in money, labour, grain or stock and benefited the colonial authorities in four related ways: it raised money; it supported the currency (see chartalism); it broadened the cash economy, aiding further development and/or exploitation; and it forced Africans to labour in the colonial economy.[1] Households which had survived on, and stored their wealth in cattle ranching now sent members to work for the colonialists in order to raise cash with which to pay the tax. The colonial economy depended upon black African labour to build new towns and railways, and in southern Africa to work in the rapidly developing mines.

Well, just because the guys at Wikipedia think Hut Tax policy is similar to Chartalism, that doesn't necessarily mean that Chartalism can't work. We'll look at that and a host of other issues in Part Two.

To Be Continued

David in Qatar 

18 Comments – Post Your Own

#1) On December 15, 2010 at 8:58 AM, binve (< 20) wrote:


Fantastic post!!!! I can't wait for part 2. These thoughts are precisely why I wrote my posts: and The real use in understanding the MMT framework is bonds. Most people, including those in government, still look at government bonds is a pre-1971 framework, where they were a funding mechanism. And like I discussed in my posts, clearly they are not anymore.

What this gets at is the idea of an outright default of US Government debt, and there is no reason for it to ever happen without specific authorization by Congress. The bond market since 1971 has become a monetary tool, not a funding tool, and the US is not in a postion to default outright. This is why pieces by Moody's recently talking about default risks are so misleading. All of the talk about EU default risks are quite valid, and all of the talk about US and Japan default risks are not.

But this is where I stop agreeing with MMT. For exactly what you say above. If the USD (or more accurately the FRN) was simply a unit of account then everything is jolly. But it's not for exactly the human aspects that you discuss above. Sure the government can run defecits during the recession without any default risks, but what about the 'worth' of the dollar? What about the 'worth' of labor? But about the 'worth' of future expectations for citizens of this country trying to make plans? MMT and Keyensians praise our monetary system for being flexible. Well flexible has a more appropriat synonym... arbitrary.

I read about all kind of monetary for the same reason you do, to understand the world we live in. But any theory that strays too far from the real reason why and economy exists in the first place [ econmines exist so that human beings can interact and exchange good or services meaningfully and efficiently, so that the worth of the transactions are agreed upon ] becomes unuseful for understanding the world.

As much as most people disagree with this, it is precisely why Gold has served as an anchor of value for thousands of  years. And it's really not all that hard to understand why. Just my opinion of course. 

Great post!

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#2) On December 15, 2010 at 9:08 AM, mtf00l (45.58) wrote:

I've been looking forward to this.  Now, I'm looking forward to Part Two.

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#3) On December 15, 2010 at 9:54 AM, GNUBEE (< 20) wrote:


I'm not seeing why having a universally accepted form of money is something to rail about?

By "force", or cooperative agreement- what's the difference? Really your "force" is more faith than force though. It just so happens that the majority would rather accept having faith in the dollar, than those who would not.

If the end goal is to allow more fluid commerce the ends justifies the means. That majority who chose the utility of a universally accepted medium of exchange have spoken. I myself would not like to spend an hour bartering for a bag of rice to feed my family, and how many guinea hens does an lcd tv go for these days, I'm in the market for a 40" one, but need to know how many birds to bring. 

The problem lies in how the value of that currency is used or abused. Not its acceptance.

(oh and I believe it's winged, as no hoof prints have been found. But keep your posts coming)

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#4) On December 15, 2010 at 10:16 AM, whereaminow (< 20) wrote:


I'm glad you are here to critique these posts. Certainly your insight is invaluable to me since you took the time to investigate MMT on your own.  Thanks for your thoughts.  I agree that their insight on bond issues was very clever, so from a descriptive perspective they can do very good work.


I'm really glad you enjoyed it!


I think I would feel the same as you, except that I see that there are very good economic reasons why subjective valuations are so important. One of the most dangerous features of pure fiat paper (besides hyperinflation) is the difficulty of economic calculation, which relies on prices that reflect economic reality. The more you rely on coercion in your economic system, the less likely it will be that prices will reflect relative scarcities.

So, I hope you'll give Part Two a shot as I plan to dive into that concept in more depth.

David in Qatar 

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#5) On December 15, 2010 at 10:39 AM, GNUBEE (< 20) wrote:

I'll sit tight.

I think the way the dollar value has slowly eroded is why there is insignificant difficulty of economic calculation. The market has enough time to react and adjust valuations based on the new inflated dollars. I do not in practical terms see the government directly pricing goods I consume (sure indirectly by affecting the base value of the dollar). But the market determines what I pay based on many factors including relative scarcities and dollar devaluation.

I compare this to the manager who does not micromanage his employees (soviet price determination), but lays out a few rules and lets the players determine the minutia.

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#6) On December 15, 2010 at 10:39 AM, FreeMarkets (38.32) wrote:

Another great post!  Looking forward to #2.

GNUBEE - I agree that we need a national currency, but I don't agree with the Legal Tender laws that FORCED Americans to accept Federal Reserve Notes.  That was done because bad money will always replace good money if the seller is legally obligated to accept bad money.  That Roosevelt later made every free American that held gold a criminal in the 1930's, IMO, was the tipping point that turned us away from freedom and into Socialists.

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#7) On December 15, 2010 at 10:53 AM, GNUBEE (< 20) wrote:


What was the good money up to 1913? As mish mosh of local currencies?  Local rule is good when you are small, but I think in 1913 we needed larger coordination. The Owen-Glass Act was intended to give a cooperative of local banks national organization.

(and did you know your Bold was on?.... :)

The roosevelt Gold snatch is another (related) issue in itself.

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#8) On December 15, 2010 at 11:38 AM, russiangambit (28.92) wrote:

> To simplify, let's say that this first rule of Modern Monetary Theory boils down to the not-so-Earth-shattering insight that you can't have funny money in your hand unless the clown makes it.  And since the clown makes it by spending it (the government only needs money to buy things it wants, as opposed to producing money for your benefit), you can't have any unless he buys something first.  The clown buys from the banks. The banks give you the money (at interest, and with penalties, of course.)

That is right. MMT also good at explaining the mechnicsm of paper money and how government and banks benefit first from it lone before common man sees any of it. But it is the common man who pays the price.

I don't think I understand what is your beef with MMT? We are forced into paper money. The least we can do is to understand how it works.

I agree that "government is not revenue" constrained is very misleading . The revenue comes from somewhere, in the end, somebody else has to pony up real resources top support that revenue. But I don't think MMT argues toherwise. They are just stating the reality without explaining the details behind it.

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#9) On December 15, 2010 at 12:12 PM, whereaminow (< 20) wrote:


I wouldn't go so far to call it a beef. I certainly think they have some real glaring flaws however. But this post really just hits on the basics. I am hoping it will grow people's interest in MMT. It's a rival school, but anytime people are talking economics then I'm happy.

Probably the worst aspect of MMT is that they actually think they can make paper money work (and though the modern chartalists won't say it, their constant references to Knapp and Innes make me believe that they want State issued paper/digit money to be a permanent feature of human existence. Yikes. Of course, that's an impossibility, but we'll talk more about that in Part 2 - or maybe Part 3 if this goes on long enough haha.) 

Other than that, the three most striking weaknesses that I see so far are:
1. A lack of a theory of interpersonal exchanges (and as such, an inability to explain price movements.)
2. Either an unwillingness to assign motives to human actors in government or a misunderstanding of the role of the State in society, thus making their policy proposals seem naive almost to the point of childish State worship.  
3. A positivist framework that has them constantly focusing on what can be 'seen' (and admittedly other schools have clearly missed a couple things they have 'seen'), with almost no attention paid to the unseen economic effects - the really important stuff that separates economics from mere investigative reporting.

Hopefully a few people will take the information given here and do some research of their own. That way, when I come back with Part 2 (soon, hopefully), we can get a variety of inputs.

David in Qatar 


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#10) On December 15, 2010 at 1:29 PM, FreeMarkets (38.32) wrote:

GNUBEE #6 wrote: "What was the good money up to 1913? As mish mosh of local currencies?  Local rule is good when you are small, but I think in 1913 we needed larger coordination."

We didn't have local money in 1913.  That ended with the adoption of the Constitution replacing the Articles of Confederation.

By 1913 we had a national currency for well over 100 years.

P.S.  Yes, I knew bold was on, but clicking it on or off didn't change anything.  Not sure why.

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#11) On December 15, 2010 at 2:45 PM, GNUBEE (< 20) wrote:

By 1913 we had a national currency for well over 100 years.

- you sure 'bout that?

anyway, I'm going to stop talking about the usefulness of a national currency on David's blog. I seem to be making it veer off course.

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#12) On December 15, 2010 at 3:30 PM, rexlove (99.71) wrote:

I feel like i'm back in school. Because I can be so ADD I just scanned your post as my eyes started to glaze over after the first 2 paragraphs. However - giving you a rec for the amount of work you put into it.

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#13) On December 15, 2010 at 4:26 PM, sfullwiler (< 20) wrote:

Good post.  A few things . . 


1.  I find it puzzling that you point out the non-value free nature of MMT policy proposals as if MMT'ers didn't know that.  In fact, we are very, very explicit about that.  There are MMT'ers all over the political spectrum with regard to policy proposals, in fact.

2. You write, "The first and foremost judgment of MMT is that the State has the authority to regulate every aspect of our economy."  Please find one instance where an MMT regular has said such an absolutely ridiculous thing.  I am one.  And I know all of the others.  We've never said anything like that, and we wouldn't, because it's stupid.

3.   MMT is not value free, for sure.  We know that.  Even "operational realities" MMT'ers describe refer to a specific type of monetary system, not every monetary system.

 4.  Many commenters here suggest that MMT'ers ignore inflation.  But that demonstrates a fundamental misunderstanding of MMT.  Inflation is in fact the primary appropriate constraint in MMT.  That is, don't criticize a tax cut because it raises the debt ratio.  Criticize it if it creates too much inflation now or in the future--that's what our focus should be.

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#14) On December 15, 2010 at 4:50 PM, rfaramir (28.62) wrote:

MMT seems to be like Alan Greenspan: a former idealist, who knew the right answers, but succumbed to the temptation to give in to evil, take the existing facts of life (the Fed) as given, and try to work out how to live with it or control it.

There is no point in trying to find meaning in life after giving in to evil and basing your life on it. Once you postulate that The State has the right to arbitrarily dictate the value of what people use as money, all bets are off. All proper understanding of money dictates that the more stable the better and voluntary participation is required or there will be distortions.

"Tu ne cede malis, sed contra audentior ito." (Ludwig von Mises' motton, Latin: Do not give in to evil but proceed ever more boldly against it)

There is no business calculation possible if the units in which all contracts are made are subject to change at the whim of another party. A 'flexible' currency is an untrustworthy currency.

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#15) On December 15, 2010 at 11:03 PM, Diagoras (70.87) wrote:

"From the MMT framework, "excess capacity" - a statistical aggregate with no economic meaning - determines inflation.  As long as this mythical creature (winged or hooved, I'm not sure) is greater than the amount of paper money produced, there will be no inflation."

I could be wrong, but to me, this aspect of MMT sounds a lot like the old Real Bills Doctrine, which stated that "real bills" (future production as collateral) as backing for paper currency is not inherently inflationary. (For more see Since they are measuring "excess capacity" in currency units, their point about inflation not resulting from bank credit seems to be wrong, as the new production would just increase in price due to the new currency issued and thus allow the debtor to settle their loan without paying back all of the paper currency issued.

Shouldn't this fact alone discredit MMT as it applies to bank credit vs. production? This example also makes the assumption that the production is actually realized (and not a malinvestment), and that the loan will actually result in increased production rather than just the purchase of an existing asset. These assumptions frequently are not realized and add more problems with the MMT framework.

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#16) On December 16, 2010 at 12:37 AM, sfullwiler (< 20) wrote:

Actually, "excess capacity" in MMT has nothing to do with the amount of bank credit or "money."  It's the basic argument that you see throughout macro, or at least in most schools of thought, that production relative to productive capacity is the primary source of demand-side inflation.  There are other sources, for sure.  This is standard in the "new consensus" view, too, as the "output gap" sets demand-side pressure, which policy rules such as "Taylor's Rule" respond to.  Perhaps "excess capacity" is economically meaningless, but then most schools of thought have problems--New Consensus, monetarism, Keynesians, New Keynesians, New Classicals, etc.--not just MMT.

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#17) On December 17, 2010 at 10:57 PM, whereaminow (< 20) wrote:


Thanks for making some very good points in my absence. I was looking forward to this post for a while, and then wouldn't you know it, I contracted bronchitis from my neighbor and was out of commission for 4 days.

But now I'm back on my feet (gingerly), and I look forward to some spirited debate on Part 2.

David in Qatar 

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#18) On December 18, 2010 at 10:35 PM, GNUBEE (< 20) wrote:

Glad to hear you are no longer OOC.


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