A Clarification on Political Openness

The previous thread on political openness and MMT has drawn some interesting and diverse comments. Thank you to everyone who has contributed. Having seen how the thread has proceeded in numerous directions at once, it occurred to me that I should clarify what I had in mind in posting, as it may be that the way I am thinking of the topic is idiosyncratic and not what others think of as “MMT”. Reading the thread has been a curious experience for me, in that I find myself agreeing with most things being written, even though in some ways we are discussing different things.

From the outset, I want to state explicitly that if policy prescriptions such as the job guarantee or zero interest rate policy are to be considered integral to MMT, then I think MMT would undoubtedly be seen as political, and not so open. This is not the way I have been thinking of MMT, though perhaps I should have been. I am not sure.

Personally, I find it more useful to separate (at least as much as possible) the MMT understanding of the monetary system and accounting identities from the policy prescriptions and even theories that can be shown to be consistent with this understanding. Any policy or theory that did not contradict this understanding could then be considered among the possibilities conceivable within the framework.

For example, the MMT understanding of a sovereign currency issuer suggests that the aim of full employment (a political choice) might be met by government policies, of which there are alternative policy approaches, including a job guarantee or generalized deficit expenditure. Politics comes in when deciding whether we want full employment (some people may prefer unemployment along with a basic income guarantee, or simply the current system), and politics also comes in to the choice over the method of delivering full employment, if it is desired.

Lots of policies consistent with the MMT understanding of the monetary system are possible. That is not to say strong arguments cannot be made for some policies over others. For example, the leading MMTers have pointed out certain beneficial features of a job guarantee (e.g. automatic stabilization, a claimed price anchoring effect, non-competing wage). The merits of this policy option can be studied and compared with the merits of any alternative policies that are shown to be consistent with the MMT understanding of the monetary system. Ultimately, the policy selected will be influenced by political factors and the arguments and evidence provided for each alternative.

In other words, I prefer to see MMT as an open framework (basically an understanding of the monetary system and national accounting) within which – or out of which – various policy approaches could be developed and pursued. The policies, however, need to be consistent with the MMT understanding of monetary and accounting matters, and theoretical arguments for the various policy alternatives also need to be consistent with this understanding. For example, if a policy’s viability hinges on money multiplier reasoning, it is not consistent with MMT. If the argument for a policy violates the sectoral balances identity, it is not consistent with MMT, and from the MMT perspective would not be a viable policy.

I also prefer to view theory in the same way. To me, MMT seems theoretically open on many questions. In the previous thread, I gave the example of the cause of unemployment. MMT in itself indicates that unemployment occurs whenever the non-government wishes to net save more than is possible given fiscal settings. However, in itself, MMT does not explain whether non-government net saving behavior would be likely to adjust in such a way as to generate full employment, or if not, why not. To address this, it is necessary to theorize or incorporate the insights of a theory that is compatible (or at least can be made compatible) with the MMT understanding of the monetary system. Most MMTers tend to be informed by Keynes influenced theories on this question, but other approaches may also be possible.

In sum, I prefer to think of MMT as open both theoretically and politically (including policy wise). Any theory or policy that is compatible with the MMT monetary understanding can be considered a possibility within the framework. It then requires further argument and analysis (and political preferences) to determine which of the various possibilities are pursued by a particular economist (in the case of theory) and society (in the case of policy).

But maybe this is not the way most view MMT, or the way the leading MMTers prefer to conceive of the approach. I thought I should clarify my thinking, because I do not mean to suggest that MMT, if defined to include the leading MMTers’ policy prescriptions, is politically open. It is the understanding of modern monetary systems and sectoral balances analysis that I think opens up possibilities (across different theoretical approaches and the political spectrum) while disqualifying theories or policies only if they contradict that understanding.

27 thoughts on “A Clarification on Political Openness

  1. “I thought I should clarify my thinking, because I do not mean to suggest that MMT, if defined to include the leading MMTers’ policy prescriptions, is politically open.”

    Understood, but you do have Scott F.’s definition of MMT as two pronged, with descriptive operations and prescriptive policy options. Other MMT leaders define it similarly.

    Repeating here a bit, but I would add a third characteristic, which is the set of policy tendencies and preferred choices of the leadership group itself. These tendencies sometimes reflect political leanings that go beyond the first two elements.

    I find it difficult to disassociate the MMT movement from the policy inclinations of its leadership. It’s a bit awkward when you have to drill down below this to find the real optionality. And I think most outside critiques of MMT put considerable weight on the leadership’s politically oriented views as expressed in blogs, etc.

    In other words, the leadership selects its own choices from an MMT “menu” of options that might otherwise be a neutral starting point, but those leadership choices become MMT as well. I think MMT wants to view itself somewhat as you’ve described, but that the marketplace of ideas views it somewhat as I’ve described.

  2. JKH, thanks for your thoughts. I think you’re right about the marketplace of ideas viewing MMT somewhat differently to what I described in the post. I also agree that there is the two-pronged definition by the MMTers themselves, and that your third characteristic would also influence perceptions of the approach. Regarding the two-pronged aspect, I’m pretty sure I’ve read posts by Bill Mitchell at billy blog where he does recognize somebody might still argue against full employment as a goal or the job guarantee as a policy while accepting the MMT understanding of the monetary system and national accounting. And Scott Fullwiler is explicit that the ZIRP is a policy option but certainly not the only option.

    I think it is clear in the minds of the originators of the theory when they are developing contestable though consistent policy prescriptions within the framework, but maybe not always so clear to critics. I’m not sure what the best approach is, but personally I do prefer what you describe as the real optionality to be clearly visible and explicit as the starting point for further analysis.

  3. When MMT is stripped of the policy recommendations made by its leading proponents, it is not really a new theory of any sort. Actually, I think I’ve seen Mosler and others say as much. I see it as a bunch of existing theories, modified to incorporate current legal practices, placed on top of a foundation of rigorous accounting (as opposed to the other way around, or to just patchwork). This rearrangement itself has implications, in that the sum of all the parts, placed in the logical order as prescribed by MMT, yields different, more congurent, results as if each part were viewed on its own or if they were arranged in a different, less logical, order. Sort of like discovering that we’ve been thinking 1+2×3 all these yeards and wondering why the result reads 9 instead of 7, when at least one obvious answer (the MMT answer) is (1+2)x3=9. I would’nt see that as being politically prescriptive, but rather as being logically constraining (in an enlightening way).

  4. Oliver,

    True to some degree, except that if you read the critique of a traditional Keynesian like, say, Krugman, it’s quite clear that the model he is using is very different from the one we are using. But Randy Wray would generally agree that his framework stands on the shoulders of Keynes (not the Keynesians), Minsky, Lerner, Godley, and a few others.

  5. Scott, I see what you mean. Maybe my number example was silly – it felt good at the time… And maybe it would also be fairer to say that MMT, as an abstract phenomenon, can be reconstructed as an amalgamation of the works of said economists in retrospect, but that the individual economists involved have taken very different paths to arrive at a similar conclusions, while also adding their respective personal insights to the common pool of knowledge tha makes up MMT. In any case, let it be said that I greatly enjoy your writing and appreciate your engagement with the hoi polloi such as myself. And btw. is Fullwiler originally a Swiss name? (just curious)

  6. Dan, it’s great to hear about such interesting talks being presented in churches and other community venues! Thank you for sharing the presentation. Its structure may well be of interest to others.

  7. Matt, thanks for the link. It is a really good post by Bill Mitchell and discussion that follows. Clearly, Mitchell takes a different position to the one I discuss in my post, although in the conclusion he does make explicit the following:

    Second, I have often made the point that an understanding of MMT doesn’t preclude you from advocating mass unemployment if that is your policy persuasion. But then you are naked because you cannot rely on the usual ploys and dodges that mainstream economics uses to cover up the fact that they prefer mass unemployment for ideological reasons to advance the interests of capital.

    Then you will have to openly say that and, then I would contend the advocate would feel the scorn of the populace. Once the chimera of individual responsibility was taken away from mass unemployment I doubt any poll would show that people thought it had nothing to do with a fiscally-effective role for government.

    This is similar to how I see it. MMT makes clear that unemployment is a government policy choice. There is nothing that individuals can do to eliminate it. If people come to understand this point, I would expect most to reach one of two conclusions: either (i) the government should ensure full employment; or (ii) people should be provided with a basic income not contingent on employment status, since unemployment is a macro problem beyond individual control. Of course, there might still be people who disagree with both (i) and (ii), but I would expect them to be in a pretty small minority.

    Personally, I still think I would prefer the policy prescriptions (and causal theory that goes beyond what is clear from monetary operations) to be kept separate as much as possible from the understanding of the monetary system and accounting, but if that is not the view of the leading MMT proponents, then MMT will be defined differently. Fair enough.

    I guess rather than thinking of MMT as a general approach within which different causal theories and policy prescriptions can be developed provided they are consistent with the monetary and accounting insights, alternatively MMT can be defined as a particular synthesis of neo-chartalism, functional finance and Keynes/Kalecki causation. Someone working in a different theoretical tradition might choose to be informed by the monetary and financial understanding while developing different causal theories and policy prescriptions out of that. So, for example, a Marx based approach could be informed by the monetary and accounting insights while rejecting some aspects of Post Keynesianism. Similarly, an Austrian might develop different causal theory and policy proposals while not rejecting the monetary and accounting frameworks.

    Just thinking aloud, really.

  8. I’m not sure I entirely agree with this approach. Trying to separate politics from the economy is a bit like trying to separate body and soul – really there is no separation.

    Separate politics out of the economy and look at it dispassionately and the existing system is working exactly as designed. The creditors are being looked after, as much of the pie as possible is flowing to capital and they are pushing for more. Anybody surplus to requirements is starved to death, placed in poverty so they die young or forced to emigrate so that they are somebody else’s problem.

    And government has been purchased to spin the appropriate line to the proles so they carry on hammering their credit cards.

    MMT is a waste of time unless you at least expect the economy to provide for the needs of the population, rather than the other way around.

  9. Thanks for your thoughts, Neil. Appreciated, as always. I think the leading MMTers probably more or less agree with you, so the following may be moot.

    I guess my motivation is twofold: (i) a desire for a general framework in which different perspectives can be debated as long as not in violation of a shared understanding of monetary and accounting logic; and (ii) a desire to demystify the system so that people can clearly see the alternatives and make up their own minds.

    Regarding the second motive, when MMT is presented as a package of stock-flow consistency plus an interpretation of monetary options plus a particular set of policy prescriptions, I think it is more likely to meet with resistance from people who, based on their current understanding, dislike the policy prescriptions, but who might come around on the policy prescriptions if they first understood the monetary and accounting insights that informed them. Presenting MMT as if it dictates policy will create resistance that might not arise if people first approached the accounting and monetary insights with an open mind, and then on the basis of that understanding considered what it meant to them in terms of policy.

    Regarding the first motive concerning theoretical openness, I am influenced by Marx, and I know there are some others influenced by Austrian economics. In principle, I don’t think there is any reason people in either of these traditions would not be able to explore these approaches in light of the monetary and accounting insights of MMT. Perhaps I am making too much of this. Post Keynesianism, broadly speaking, is already a very diverse set of theories and ideas, into which I think a Keynes-Lerner-Minsky synthesis could be regarded as fitting. But then again, not all MMTers (I am thinking of Bill Mitchell mainly) necessarily consider themselves as Post Keynesian. I guess I am seeing the implications of the monetary and accounting insights of MMT as broader than Post Keynesianism and perhaps broad enough to accommodate theories from Post Keynesianism, Marxism, Austrianism, etc., whereas I think of the particular policy prescriptions and causal explanations as narrower than Post Keynesianism as a whole.

    It may seem pedantic of me to worry about how MMT sits with other schools of thought (my first motive), but I think it is important to understand, at least for the purposes of theoretical analysis. MMTers are actually drawing on a lot of prior theories in coming to their synthesis. In addition to Keynes, Lerner, Minsky and Godley there are (for some) influences from Marx, Kalecki, horizontalists, circuitistes and others. In addition, I consider the Sraffian negative critique of neoclassical theory to be quite important, even though it does not play a positive role in MMT. The Sraffian critique of neoclassical theory undermines the claimed ability of the price mechanism to resolve macro problems.

    For the quality of democracy and where we are heading as communities, I think the second motive (transparency and demystification) is the more relevant one. I believe it will take massive pressure from below if policy is to be steered in a direction that is friendly to general populations rather than a small but powerful elite. But any such pressure from below also needs to be well informed, otherwise it is easy to co-opt whatever movement for change builds. I think it would be empowering for people just to understand the basic MMT monetary and accounting insights. It quickly becomes clear from the understanding of these basics that the policy options are constrained only by real resources if we have the political will to carry them through.

  10. Isn’t this all just a simple matter of compartmentalisation? That’s the way our minds best operate, separating out operations from policy – but keeping in view the nexus? They meet wherever there is a human being!

  11. Or religious denominations. 🙂

    In case anyone hasn’t seen it, Cullen Roche has initiated an interesting discussion on the topic of this thread with a characteristically good post at Pragmatic Capitalism. I’m guessing that anyone who has found heteconomist is already very familiar with Cullen’s contributions, but thought I should mention it here for completeness.

  12. Leaving policy proposals out of a descriptive analysis isn’t the same thing as not blending politics and economics. They are not mutually exclusive. I agree that any descriptive analysis is necessarily normative, but there are always multiple potential policy responses to any description that results from the analysis.

  13. I think some conclusions MMT reach economically aren’t actually obtainable through the political system. So the question becomes, what’s the most MMT-like solution possible under existing political constraints? That’s why I’m more sympathetic than most here to deficit doves,; at least they’re rowing in the same direction as us most of the time.

    To give one example, MMT says trade deficits should be offset by deficit spending. Since the trade deficit reflects foreign savings desire and since domestic and foreign savings combined equal govt deficit, unless the govt runs a budget deficit at least as big as its trade deficit, domestic private savings will drain away. This is exactly what happened prior to the 2008 and 2001 recessions. The MMT solution is simple enough, don’t let the budget deficit get small than the trade deficit. Politically that is impossible since the former gets smaller as economy approaches full employment and the latter gets bigger (and the deficit doves switch sides to supporting a budget surplus). I haven’t read anything in MMT literature about, but the trade deficit will inevitably kneecap the next recovery as surely as it kneecapped the last one (In 2007, the budget deficit was $163 billion and the trade deficit was $712 billion, which means $549 billion in domestic private savings evaporated).

    There are three ways to zero out the trade deficit demand leakage, 1. import certificate cap and trade market, 2. Revenue-neutral tariff to fund tax cuts or 3. Adding on-budget coin seigniorage revenue equal to trade deficit (the only way to overcome deficit hysteria, ultimately, isn’t by changing minds but by changing the subject; put seigniorage on-budget and/or take existing spending off-budget).

    Beyond that, using the tax code to adjust fiscal policy is easier than a Job Guarantee to enact into law and easier for the govt to administer. My druthers is an adjustable payroll tax holiday (countries with a VAT could use that instead) that waxes and wanes counter-cyclically to unemployment. I don’t know any Post Keynesians who’ve endorsed that… unless Lord Keynes counts as a Post Keynesian. :o)

  14. As far as I’m concerned MMT equals Abba Lerner’s idea that given excess unemployment, government should print money and spend it. And conversely, given excess inflation, government should do the opposite. But as Lerner correctly pointed out, the big problem with that idea is that it is too simple. For example academics tend not to like it because they then have fewer opportunities for writing long winded papers written with a view to furthering their careers. And politicians and the population in general just don’t believe in solutions to problems unless the solutions are complicated and technical.

    The above idea, contrary to Neil’s suggestions, is apolitical: that is, the idea is compatible with a far right or far left government. And as to Job Guarantee, that is not an essential ingredient of MMT, since one could implement JG in a non MMT environment. For example the large “make work” schemes in the 1930s (like WPA) were a form of JG.

  15. “The above idea, contrary to Neil’s suggestions, is apolitical: that is, the idea is compatible with a far right or far left government.”

    No it’s not. You have to at least believe that unemployment is a bad thing to want to try it.

    The underlying thread of the current economic system is that unemployment is an individual’s fault and they should either sort themselves out, die immediately, die quickly or leave the country and become somebody else’s problem.

    I will say it again: MMT is a waste of time unless you at least expect the economy to provide for the needs of the population, rather than the other way around. And that is a political position.

  16. The problem is also circular: The position is political to the extent that the Phillips curve is true, i.e. that there is a trade-off between inflation and unemployment. One can be in favour of one or the other depending on one’s moral / political convictions. Once the Phillips curve is debunked, it becomes a question of bad or good economics, which isn’t really a choice and thus not really political. Of course, attempting to disprove the NAIRU, or at least to argue that inflation isn’t really that bad, is already a politically informed act. So it’s hard to get politics out of it completely.

  17. @Neil “MMT is a waste of time unless you at least expect the economy to provide…”

    This seems a little extreme. MMT can still be beneficial (as in – can lower unemployment) even where the median voter is more interested in real GDP growth than about providing for the needs of the population. I don’t see such progressivism taking hold any time soon, sad to say. But I do think MMT has too big a mountain to climb to be able to afford to alienate the right wing, no?

  18. I think it is important to remember we’re living in an MMT environment right now – just a poorly run one.

  19. “I think it is important to remember we’re living in an MMT environment right now – just a poorly run one.”

    That depends on your definition of the theory. By that definition the Eurozone is an MMT environment, just a poorly run one. After all as Prof. Wray mentioned this week, he doesn’t preclude currency pegs…

    By that limited definition a progressive is just a right winger that hasn’t found God yet.

  20. If MMT describes the operational reality of the system, then we are definitely living in an MMT-world. The question is more whether or not government policy is being formulated based upon misunderstandings of the operational limitations of the existing monetary system

    So your analogy could be better framed as “MMT is god, so a balanced-budget adherent is just an economist that hasn’t found god yet”

  21. I’m no expert, but I decompose the monetary component of MMT into chartalism and endogenous money. These ideas are so old… you can go back centuries to find the origins of chartalism in Locke and Berkeley (money as a ticket, agreement, or sign). Endogenous money’s roots traces to the banking school of the 19th century. MMT doesn’t own these individual ideas… they are diffused into the general body of economics.

    There are no intrinsic reasons why the ideas of Locke, Berkeley, and the banking school need be associated with a particular political slant.

    The chartalist version of Locke/Berkeley’s token theory of money surely appeals to big government types on the left and right. This is because it finds in the all-powerful state the basis of the entire monetary system.

    But you can have endogeneous money + Stateless Locke/Berkeley token money. The political form of this, on the left at least, would be social credit and the cooperative banking movement. On the right it would be some form of free banking.

    So in sum, I wouldn’t idealize MMT as being a neutral super structure on which to drape your policy prescriptions. There is politics at the core of the chartalist rendition of Locke/Berkeley.

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