Home > Uncategorized > Some constructive remarks on Wray’s “Alternative paths to MMT”

Some constructive remarks on Wray’s “Alternative paths to MMT”

from Arturo Hermann

Dear Randall, I appreciate your article “Alternative Paths to Modern Money Theory” and the novel perspective put forth by MMT in respect to the very narrow views of Austrian and neoclassic theories. Starting from this, I would like to make some constructive remarks around the following aspects: 

(I) In the article you stress that (p.6), when there is a “sovereign national currency” (p.5) and flexible exchange rates, “The sovereign currency issuer:

  1.  does not face a ‘budget constraints’ (as conventionally defined). [Later you clarify that “a sovereign government can impose on itself a ‘budget’ and that “this is normal practice and probably a good idea”, but anyway this path seems to be in your view fairly optional.];
  2. cannot ‘run out of money’;
  3. can always meet its obligations by paying in its own currency;
  4. can set the interest rate on any obligations it issues.”

These aspects are true, of course, and lie at basis of most post-Keynesian theories. The central problem is that this picture would apply only in an ideal situation, where public sector, also considered in a supranational dimension as in the case of the Euro*, has a real control over its currency.

However, also in such ideal case it is necessary to set out some rules**, a public budget and a sufficiently defined set of policy objectives. This is because, if no clear rule applies, all citizens*** would be entitled to ask any amount of free money from the public sector in order to afford their expenses.

This can be a bright course****, but also in this instance some criteria are necessary for ensuring a fair and transparent system. Moreover, even in such ideal situation it makes a difference whether public spending is financed by pure money creation, or is in the next time matched by taxation. As a matter of fact, it is unlikely that tax revenues accruing to public sector “will be burnt”, but will be all the likely employed in other ways.

(II) However, in real situations things stand differently. In fact, virtually all countries have transferred, under the influence of the stronger groups, the creation and management of money to central banks. Consequently, the real control of public sector over interest rate and other policy objectives is rather limited (this holds true, probably to a slightly lesser extent, also for the strongest countries).

This comes about because central banks, while performing a relevant public function, also enjoy a notable sphere of autonomy from government. Furthermore, central banks are also part of the banking system which, in turn, has many ties with financial corporations.

Hence, in our system public deficit is for the best part financed by selling bonds to banking and financial institutions. And at a price of course, constituted by the real interest rates, which such institutions have all incentives to push up (for instance, by convincing policy makers and lay people that this is a good way to attain “inflation targeting”). This has gone along with the massive process of financialisation of the latest decades (and of the related power of financial institutions). Such trend has also been fuelled by large public deficits that were run not only by progressive but also, and perhaps even more, by conservative governments.

In these situations, and in particular when, as indicated by the debt sustainability equation, the growth rate of GDP is lower than the sum of real interest rate and the rate of primary deficit on GDP, the increasing burden of interest payments will crowd out the share of public spending devoted to public purposes. And this, of course, will spell all sorts of negative effects on the economic system. In this respect, I am inclined to believe that,

  1. a permanent low level of real interest rates (as you also suggest);
  2. a reform of the banking system aimed at discouraging speculative ventures and promoting productive activities; (this can be realised also by eliminating the phenomenon of “credit rationing”, which tends to negatively affect small and medium sized firms);
  3. a better policy coordination; this would involve a horizontal level, between policies (for instance, macroeconomic and structural, including the central issue of sustainability); and a vertical level between institutions (supranational, national, local);
  4. and, last but not least, a better dialogue between the various strands of heterodox economics;

would greatly help to reduce the power of financial (and non financial) corporations and to regain a public control over the currency and the whole spectrum of policy action. Such pathway can be steered by a system of democratic planning, a concept chiefly set forth by Original Institutional Economics and other theories of social justice. In moving along this avenue of progress, MMT can help to frame a new architecture of supranational monetary institutions (and J.M.Keynes’s Bancor can provide a good starting point). That step seems crucial for addressing the global imbalances of our economies.


* By the way, you seem rather dismissive of the euro notwithstanding relevant progress is being made, for instance through the institution of the European Stability Mechanism (ESM), link https://www.esm.europa.eu/about-us

After all, the euro constitutes the first full scale experiment of a supranational currency and, also for this reason, should be encouraged, also as a way to overcome the all-important role attributed to national boundaries.

** To be sure, you make clear (p.6) “that MMT does not argue that because a government ‘cannot run out of money’ it should ‘spend without limit’. MMT does not argue that because a government ‘can always meet its obligations’ that ‘deficits don’t matter’. MMT does not argue that because a government does not ‘face a budget constraint’ it should have an ‘unconstrained budget”.

Also, you consider full employment and the stability of prices as the central policy objectives, and I fully agree with you. However, these criteria remain rather indefinite in their application ─ in the sense that can give way to different courses of policy action ─ also because they interact in a complex way with many other relevant aspects of economy and society.  Perhaps a better link with,

  1. post-Keynesian (and  also underconsumption) oriented theories highlighting the structural tendency of effective demand to lag behind the supply of full employment (however defined); and the central role of public spending and credit creation in the formation of effective demand;
  2. the structural theories underscoring the tendency towards a society free from “economic motive” (mentioned also in the next footnote);
  3. the Original Institutional Economics’ concepts of social value and democratic planning would help frame a more comprehensive framework for addressing these tangled issues.

*** I am of the idea that, as underscored, for instance, in Karl Polanyi’s The Great Transformation, John Kenneth Galbraith’s The Affluent Society and in the final section of J.M.Keynes’s Essays Persuasion, we can well move towards a leisure society free from “economic motive” and resting on qualitative development. In order to achieve this, we also need to overcome the psychoanalytic superego, which is not an easy task. This implies moving from the neoclassical notion of “exogenous scarcity” (which however, pays scant attention to the finiteness of natural resources) to the acknowledgment of the endogenous nature of the (mostly neurotic-driven) limitations we impose on ourselves.

These concepts were expounded, among others, by John Rogers Commons’s Institutional Economics: Its Place in Political Economy and John Kenneth Galbraith’s The Affluent Society. The closing sentences of the latter book well synthesize these aspects,

“To furnish a barren room is one thing. To continue to crowd in furniture until the foundation buckles is quite another. To have failed to solve the problem of producing goods would have been to continue man in his oldest and most grievous misfortune. But to fail to see that we have solved it, and to fail to proceed thence to the next tasks, would be fully as tragic.”, [Galbraith 1998 (1958): 260].

These concepts can shed light, in a synergic way, on the far reaching meaning of the MMT’s notion that public sector does not face a ‘budget constraint’ (as conventionally defined).

**** Personally, and also by remembering the Trygve Haavelmo’s “theorem of balanced budget” ─ which is generally overlooked, also perhaps by Haavelmo himself, who was granted Nobel Prize for his contributions to econometrics, not for that theorem ─ I would welcome (along with most heterodox contributions and as a way to really improve the capacity of policy action to pursue its objectives) a substantial socialisation of investment within a principle of subsidiarity (in the sense that we do not need dozens of public officers to run a bar). Such course would be better guaranteed by a high level of public spending with progressive taxation and a tendentially balanced budget (or a mild deficit). One advantage of this arrangement is that it would provide a better social valuation of public (and private) action.  


 Dugger, W.M. (1988), “An Institutionalist Theory of Economic Planning”, in Evolutionary Economics, vol.II, edited by Marc.R.Tool, New York, Sharpe.

Commons, J.R. [1934 (1934)], Institutional Economics: Its Place in Political Economy, New Brunswick (New Jersey, U.S.A.), Transaction Publishers, originally published by the Macmillan in 1934.

Galbraith, J.K. (1958), The Affluent Society, New York, Mariner Books, second edition 1998.

Haavelmo, T. (1945), “Multiplier Effects of a Balanced Budget”, Econometrica, 13 (4): 311-318.

Hobsbawm, E.J. (2012), Nations and Nationalism since 1780, Cambridge (UK), Cambridge University Press.

Keynes, J.M. (1963), Essays in Persuasion, New York, Norton. Originally published in 1931 by the Macmillan.

Mummery, F.A. and Hobson, J.A. (1889), The Physiology of Industry, London, John

Murray, reprinted in 2015 by Leopold Classic Library.

Polanyi, K. (1944), The Great Transformation, New York, Rinehart.

 Skidelsky, R. and Skidelsky, E. (2012), How Much Is Enough? Money and the Good Life, New York, The Other Press.

Tool, M.R. (1986), Essays in Social Value Theory: A Neoinstitutionalist Contribution, New York, Sharpe.Hermann, A. (2017), “The Tendency of Effective Demand To Lag behind the Supply of Full Employment”, in G.P.Lima and M.Madi (eds.), Capital and Justice, WEA Books.

  1. Jan Milch
    October 16, 2019 at 9:00 pm

    Posted on October 16, 2019 by L. Randall Wray | Leave a comment

    “In this part, I’ll resume with comments on the critical contributions to the special issue of rwer. We finished Part 2 with a discussion of the shocking lack of citations to MMT literature in the critiques—especially the dearth of citations to the more academic contributions (as opposed to the summaries of MMT written for undergrads and the general public). Let me return to the oversight of contributions made by scholars such as Fullwiler and Tymoigne—who have mostly written academic pieces… “”http://neweconomicperspectives.org/2019/10/mmt-report-from-the-front-part-3.html

  2. Jan Milch
    October 16, 2019 at 9:02 pm

    Posted on October 16, 2019 by L. Randall Wray | http://neweconomicperspectives.org/2019/10/mmt-report-from-the-front-part-3.html

  3. John Hermann
    October 17, 2019 at 5:12 am

    Central banks have a limited degree of autonomy, however it should never be forgotten that each central bank has been created by the nation’s legislature, may be changed or destroyed by the nation’s legislature, and is ultimately responsible to the nation’s legislature. Moreover each central bank is obliged to work cooperatively with the nation’s department of Treasury.

    • Craig
      October 17, 2019 at 5:18 am

      Yes, John, but when no one in the government knows of alternative policies let alone a new monetary paradigm and when TSHTF like in 2008 who is powerful, the central bank and private banks who dominate it…or the government?

    • June 15, 2020 at 12:14 pm

      Regardless of autonomy no bank, central or otherwise, can “gift” a client with money on its balance sheet. It has to record an equivalent loan. And when government spends from a central bank loan excess reserves are created upon which interest has to be paid, equivalent to those of conventional borrowing. Details are in my article “Why Modern Money Theory is wrong.” https://stochasticpress.com/economics/2020/06/12/why-modern-money-theory-is-wrong/

      • Craig
        June 15, 2020 at 4:52 pm

        That’s only if one lives in the world of Debt Only. Money indeed IS most basically accounting, but give everyone an account at the central bank, change the primary monetary paradigm to Gifting and the debiting and crediting of commerce can proceed uninhibitedly whether their account reflects they’ve borrowed or been gifted.

        Toss in the reciprocal accounting operation of a 50% discount to consumers and a rebate of that discount back to the merchant giving the discount at retail sale and a similar one at the point note signing and you’ve simultaneously resolved the three biggest problems of the economy, namely, the build up of debt, individual income scarcity/business revenue and systemic monetary austerity and chronic inflation.

        It’s reflective of the reformation’s religious paradigm change from the indirect attainment of the sacraments only via the church to the revelation that one could be free to have a direct relationship with god.

  4. ghholtham
    October 22, 2019 at 12:19 am

    Galbraith’s comments quoted above are thought provoking and many people seek an escape from a society of rampant individual consumerism. While the tendency to consumerism is amplified by the capitalist system, I fear its origins are deeper. Technical change by creating new possibilities creates new wants and, at least initially, there will be scarcity until new techniques are perfected and the new possibility becomes a mere commodity. Things that are widely wanted but not widely available because they are either expensive or positional goods, in Fred Hirsch’s terminology, create competition and become associated with status. It may be the rat race is both an effect and a contributory cause of technical advance. And not all new wants are trivial. Some may genuinely enhance the quality of life.

    These are real issues of first importance. Money has little to do with it. You can have a range of ways of organising the monetary system and the problems of consumerism, positional goods and the difficulties of democratic resource allocation would still be there.

    • October 22, 2019 at 11:36 am

      There is a big difference between having ” a range of ways of organising the monetary system” and deciding on a definition of money (say, as itself defining credit limits rather than debt) which makes sense of not just the monetary subsystem but of the whole economic system as a subsystem of Earth’s ecology.

  5. June 15, 2020 at 11:59 am

    Only one claim by MMT matters: that governments can create their own money interest-free. That claim is false because, outside of minting and printing, any form of money-creation by the central bank for government spending creates excess reserves upon which interest has to be paid, equivalent to those of conventional borrowing. Details are in my article “Why Modern Money Theory is wrong.” https://stochasticpress.com/economics/2020/06/12/why-modern-money-theory-is-wrong/

    • June 15, 2020 at 2:35 pm

      Mike, that’s the way things are, and that’s the problem.

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