Home > Uncategorized > The origins of MMT

The origins of MMT

from Lars Syll

Many mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.

New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank  …

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …

We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A  thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of “cash in advance” – LPS] …

For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’  is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.

And here’s another well-known economist with early ideas of the MMT variety:

[Bendixen says the] old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old ‘metallist’ view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.

J. M. Keynes, “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal, 1914

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the legal status given to them by government and the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. Hence spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem, since fiat money means that governments can always make more of them.

Financing quantitative easing, fiscal expansion, and other similar operations, is made possible by simply crediting a bank account and thereby – by a single keystroke – actually creating money. One of the most important reasons why so many countries are still stuck in depression-like economic quagmires is that people in general – including most mainstream economists – simply don’t understand the workings of modern monetary systems. The result is totally and utterly wrong-headed austerity policies, emanating out of a groundless fear of creating inflation via central banks printing money, in a situation where we rather should fear deflation and inadequate effective demand.

  1. Ikonoclast
    November 23, 2019 at 10:05 pm

    What Lars Syll writes about MMT is true as far as it goes. What we have to remember is this. Governments run by oligarchs, plutocrats and capitalists (our present case) will never manage money in favor of the people. Only a truly democratic socialist government could and would do this (apply MMT principles in practical terms for the benefit of all the people).

    We don’t have to change the money system per se. We already have a fully fiat (MMT) and electronic system. We have to change our uses of that system. In turn, to do that oligarchs, plutocrats and capitalists must be stripped of their power and of their financial capital. Nothing short of a social and political revolution will achieve that.

    The economy is more, much more, than just a money system. It’s also a real system.: a real economy run by real people embedded in, and dependent on, a real environment with real resources. The economy is a complex adaptive system and also a dissipative system.

    “A complex adaptive system is a system in which a perfect understanding of the individual parts does not automatically convey a perfect understanding of the whole system’s behavior.”

    “A dissipative system is a thermodynamically open system which is operating out of, and often far from, thermodynamic equilibrium in an environment with which it exchanges energy and matter.”

    Definitions from Wikipedia (“The Peoples’ Encyclopedia”).

    What follows from an understanding of the first point is an acknowledgement of our uncertainty and limited knowledge in the face of complex adaptive systems. A perfect understanding of the money system (theoretically possible because we craft it) does not confer a perfect understanding of its interactions with real systems and the behavior of real systems under its “control”, for want of a better term.

    What follows from an understanding of the second point is that real limits as well as fiat money limits are going to limit the economy. What I am arguing against is the simplistic cargo cult side of MMT populism which imagines we can fix everything if only we fix the application of the money system. I am not arguing here that Bill Mitchell or Lars Syll espouse such simplisitic theory. However, some enthusiasts take a nuanced theory and oversimplify into “the one trick that fixes everything”. It is this caricature of MMT that conventional economists attack.

    We must remember that “socialized money” rather than “capitalized money” is just one plank of a much greater program which is required to transform our society and economy and save it from collapse. Collapse from attempted endless growth, from resource exhaustion and from climate change is most assuredly what we face. Capitalism is destroying the biosphere as a place where complex animals, and perhaps even complex plants, can survive.

    Human brains struggle to model complex systems. Most people cannot keep more than three to five interacting concepts in their head at the same time, even with training. Geniuses do a little better. We use language, mathematics and exteriorized models (real models, written formulae, computer code etc.) to assist us to do better than this limit but the results still fall far short of understanding full complex adaptive systems. We fall back on rubrics and heuristics.

    MMT, in its program prescription guise, is just such a set of rubrics and heuristics. It is not a cure-all. The worst mistake we can make is to let the money system manage everything (in the form of the nominal directing the real with only nominal but not real feedback) whether it is a socialist-managed or a capitalist-managed money system. Money is like fire in this sense: a good servant but a bad master. We must measure the real (empirically and scientifically). We must make policy on real requirements and then use money as a tool to organize to meet the real requirements. Money is a tool of social power (capital as power). Money is not a measure of anything. We must cease believing that money measures and compares “value”. It does not. We must cease believing that measuring “value” in the numéraire is the way to detect and manage real quantities. It is not. Science and its empirical measures are required. To determine values we must make ethical judgements. Money is useless for measuring value in any way except in its own self-reflecting, reificatory manner.

    Money has been completely reified in our (capitalist) system. Money is regarded as “more real than the real”. Capitalist money (financial capital) is a formalism which directs the operations of the real in order to make more financial capital (for the owners of capital). This is the end goal. Actual real production, real supply, is a second order, dependent outcome and necessary only to support financial capital and its potential translation into real wealth at some point. Negative externalities are entirely ignored. The guarantee of the availability of real wealth is only extended to the rich. The poor have no guarantees from capitalism. They may get scraps. They may starve. But this kind of system must sooner or later run up against real limits. “To command nature, we must obey nature,” as Bacon said. If we ignore natural limits we overshoot them. On the other side of overshoot is collapse. If MMT prescriptive principles are applied and everything else left the same, overshoot and collapse are still our destiny.

  2. Yoshinori Shiozawa
    November 24, 2019 at 4:54 am

    Ikonoclast has written a good piece of paper but it may be too long as an answer to a blog post in our busy time. Here are my excerpts from his answer:

    What I am arguing against is the simplistic cargo cult side of MMT populism which imagines we can fix everything if only we fix the application of the money system. … [S]ome enthusiasts take a nuanced theory and oversimplify into “the one trick that fixes everything”. It is this caricature of MMT that conventional economists attack.

    We must remember that “socialized money” rather than “capitalized money” is just one plank of a much greater program which is required to transform our society and economy and save it from collapse. Collapse from attempted endless growth, from resource exhaustion and from climate change is most assuredly what we face. Capitalism is destroying the biosphere as a place where complex animals, and perhaps even complex plants, can survive.

    MMT, in its program prescription guise, is just such a set of rubrics and heuristics. It is not a cure-all. The worst mistake we can make is to let the money system manage everything (in the form of the nominal directing the real with only nominal but not real feedback).

  3. Warren Mosler
    November 24, 2019 at 6:09 pm

    Yes tax liabilities become the prime mover.

    • Craig
      November 24, 2019 at 8:34 pm

      Yes, sovereignty is a legitimate right and function of government in a monetary economy. And in an economy rigged toward systemic monetary austerity and individual income scarcity by the monetary and financial paradigm of Debt Only it is the imperative of the government to find direct and reciprocal monetary policies at a most powerful and economically significant point (think retail sale) that change those conditions into abundance and free flowingness.

      Sovereignty, abundance and free flowingness by the way are all aspects of the natural philosophical concept of grace. It’s important to be philosophically thorough going and aware don’t you think, Mr. Mosler?

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