The General and the Specific in MMT

Scott Fullwiler discusses, in a recent paper, the distinction in Modern Monetary Theory (MMT) between the ‘general’ and ‘specific’ cases. Analysis of the general case concerns a sovereign currency issuer prior to the imposition of any self-imposed constraints. Analysis of specific cases will be grounded in the particular operational realities of whatever monetary system happens to be the focus of attention. In part, Fullwiler’s paper is a response to those who question the appropriateness of giving priority, in theory, to the general case rather than specific cases.

My own view is influenced by what attracts me to MMT in the first place. For me, what is most striking about MMT is its clear depiction of the social possibilities that are inherent in a sovereign currency system. MMT gives transparency to the various policy options under capitalism. It may also point to ways in which sovereign currency could facilitate more fundamental change, including a transition to a system other than capitalism.

From my perspective, it would have been a mistake for Modern Monetary Theorists to cast their theory narrowly. Instead they have developed an overall coherent framework that enables analysis of particular instances within it. The purpose of macroeconomic theory in general is not to describe every minute detail, but to achieve an understanding of the whole and how the parts relate to the whole. Certainly it should be possible to mine down to the smallest detail without violating the logic of the overall framework when such details are of interest. If this could not be done within the general framework, there would be something wrong. But I don’t think this is the case.

It is possible for theories to approach macro questions in different ways. In neoclassical economics, for instance, the theorist typically begins by asking what constraints must be imposed on a model to achieve a particular result (e.g. under what conditions will markets generate the socially optimal outcome?) Once a set of constraints has been identified that is consistent with the particular result, the theorist attempts successively to relax constraints to see how few can be imposed on the model without contradicting the result.

In MMT, the approach is somewhat different. Through empirical observation, the theorist tries to identify key features of the system. An attempt is then made to represent these features as simply as possible without missing anything essential. Many details will be ignored in the simplest models to illuminate the most important facets of the system in a clear way. Successive complications, encountered in particular (real-world) cases, can then be introduced to determine how the results of the model are modified, how the key processes operating within the system are attenuated or reinforced, and so on.

The basic methodology of MMT is shared with most other Keynes influenced approaches. For example, a Keynesian might start with the simple two-sector closed economy model. The motive for doing so is that this simple model is thought to capture certain fundamental features of a market economy. It involves interactions between businesses and households. It shows how planned leakages endogenously adjust to planned injections, and how autonomous expenditures determine income through a multiplier process. It is not completely “realistic” and does not capture every detail, but the central processes it highlights continue to hold true when more institutional detail is introduced. In more complex models, planned leakages still adjust to planned injections. Autonomous demands still determine income. And so on.

In a similar way, the exposition of MMT sometimes starts with a two-sector model that simply demarcates government from non-government. A model in this simplest of forms highlights certain fundamental aspects of a currency system. Some aspects apply under all currency systems. For instance, as a matter of accounting, non-government cannot maintain a financial surplus unless the government is in deficit. Other aspects apply only to sovereign currency systems. Notably, non-government is in no position to dictate the rate of interest a currency-issuing government pays on its own liabilities. Indeed, in the general case, government need not issue debt at all. If it chooses to do so, it is a self-imposed constraint. In considering particular cases, self-imposed constraints can be added to the model as and when relevant.

Along similar lines, I think the distinction between the ‘general case’ and the ‘specific case’ described by Scott Fullwiler makes sense, as does the MMT judgment that the general case should refer to the position of a currency issuer prior to any self-imposed constraints. Since the strength of such self-imposed constraints vary – depicted, for example, in Fullwiler’s ‘strong form’, ‘semi-strong form’ and ‘weak form’ – attempting to organize the theory around one particular case – e.g. current US monetary operations – would seem to deprive the approach of generality. As long as the basic monetary operations are playing the same function in the specific case as they would in the general case, the claim to generality seems well founded. Fullwiler gives the following example:

Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations. But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed—to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity).

This is not to say that theorizing specific cases is unimportant. It will be appropriate, for example, when formulating policy proposals that enable the government to adhere to self-imposed constraints. Analysis of the specific case also enables a consideration of what, if any, policy space is relinquished when particular self-imposed constraints are in place.

However, even when analysis of the specific case is appropriate, an understanding of the general case remains relevant. For the very reason that these constraints are self-imposed, they will not necessarily be observed when it comes to the crunch. So it makes little sense to lose sight of fundamental relations of authority and hierarchy within the system, even when analyzing the specific case. To quote Fullwiler again:

The overarching point here is to recognize who sits at the top of the hierarchy of money for a given monetary regime. Since under flexible exchange rates it is the currency issuing government, self-imposed constraints are simply that—self-imposed and not operational. … Indeed, it is the very fact that such self-imposed constraints can be and have been disregarded in the past when it has been deemed desirable (e.g., the law requiring that the Fed only purchase Treasury obligations in the open market has been periodically relaxed) that demonstrates who is in charge

The fact that a constraint is self-imposed is in this sense a strong reason for not including it in the general case. Since such a constraint may be removed, and may not be adhered to by other currency issuers, it is not a general feature of a sovereign currency system.

Of course, at a still more general level, a sovereign currency system is itself just a special case of all currency systems, which in turn are a special case of all monetary systems. The level of generality desired is a function of the type of analysis we wish to undertake. As mentioned at the outset, my own preference, in this respect, is shaped by what I find most interesting in MMT.