Home > Uncategorized > Weekend read – MMT, post-Keynesians and currency hierarchy: Notes towards a synthesis

Weekend read – MMT, post-Keynesians and currency hierarchy: Notes towards a synthesis

from Luiz Alberto Vieira and current issue of RWER


The current moment seems favorable to debate and potential reconsideration of theoretical systems, a situation derived both of developments in the analysis of public financing and the nature of money, but also, largely, due to the particular political and social circumstances observed in many countries. US hegemony is in crisis, as its industrial might decreases and is put in question by China’s development. The Asian country is now responsible for a large part of the world’s industrial output, boasting a complex and innovative economy. Another point worth noticing is former president Trump’s challenge of the basic principles of American politics and society, a situation the US shares with other countries.

Trump’s defeat in the last elections was only made possible due to unity of the Democratic Party around Joe Biden, thus overcoming the divide between “establishment” Dems and the self-proclaimed socialists, a minority which nonetheless gets 20% of voter’s preference. Since any victory by the party will require such unity, Democrats’ long held liberal economic policies are likely to be altered. Biden´s economic plan is a result of the new power balance in the party, in the sense that it embraces some of the left’s agenda, in a context heavily influenced by the ideas of Modern Monetary Theory (MMT).

According to Screpanti and Zamagni (2005), times of crisis are usually followed by the loss of prestige of the then dominant theoretical system. When societies go through crisis, the need of representing the economy as an organic and organized body weakens, given that such theoretical systems can no longer deal with the real problems put by the crisis. It should be no surprise, therefore, that mainstream orthodoxy has been in dire straits since the financial breakdown of 2008, when it was unable to foresee or explain it, while central banks around the globe implemented unorthodox policies, for example, aggressive monetary expansion and long-term interest rate operations. At the same time, said policies were ineffective in boosting the job market, where salaries remain stagnated for decades, despite significant productivity gains being observed in the same period. Mainstream authors (O. Blanchard, Dell’Ariccia, and Mauro 2010; O. J. Blanchard and Summers 2017; Fatás and Summers 2018) reacted by revising, at least partially, the role of fiscal policy in the recovery from severe recessions. This made it possible for the mainstream to keep some of its contributions to the real economic agenda, even if at the cost of its internal theoretical coherence.

Economic crisis and policies in the Western hemisphere, as they impact on mainstream economic thought, have opened up room for Modern Monetary Theory. Though still mostly absent in US academics, it has been incorporated into the US hegemonic power balance. This is especially notable in the role assumed by the state in Biden´s plan regarding social welfare and economic and scientific development. As will be seen, the historical analysis of countries like Chile, Mexico, Hungary and, of particular interest in the case of this article, Brazil, also allows for the reflection on ideas proposed by MMT.

As usually happens during a crisis, pressures over the scientific community and individual researchers are weakened, once methodological and doctrine restrictions are lost, consequently releasing creative energies. Researcher’s interests are attracted by real world problems in detriment of theoretical puzzle-solving. Theoretical revolutions take place in such periods, which are marked by confusion in language: this is the context conducive to the establishment of a new theoretical system (Screpanti and Zamagni 2005). Divergencies between MMT and post-Keynesian proponents, the first having originated from the latter, should therefore not be surprising.

However, in order to establish itself as a dominant theoretical system, any school of thought must offer a coherent and complete answer to each problem that emerges or might emerge within a given field of investigation.

The Modern Monetary Theory points out a robust analysis of the functioning of modern treasuries, banks and commercial banks, which shows the current applicability of the fundamental concepts of the Theory of Functional Finance, reinforcing the belief that fiscal policy cannot be limited by the financial limits. The only limits for fiscal policy could occur through the level of employment and inflation.

Despite expanding the possibilities for the practical application of Keynesianism, MMT did not receive a favorable reception among all heterodox economists. In this context, the most prominent criticisms are those that point out the limitations of the monetary conception (Rochon and Vernengo, 2003), by not considering the role of money as unit of account, and how it applies to peripheral economies (Prates, 2020 and Vergnhanini and De Conti, 2017).

The main objective of this article is to show that the absence of financial constraint on public spending will occur as long as the function of money as a means of payment is maintained, even if the functions of unit of account and store of value are lost.

The Latin American experience during the 1980s currency crisis shows that the State was able to finance itself without restrictions, even when contracts started to be denominated in foreign currencies or government bonds indexed to interbank rates. In addition, there was a shortening of the average term of liabilities, including public debt, which had a duration often reduced to a single day.

Thus, as postulated by MMT, there was no restriction on the financing of public spending, but the liability structure brought a series of vulnerabilities to these economies. Therefore, this article will show that an institutional structure of MMT continues to function in monetary crises, but an incorporation of other post-Keynesian monetary concepts and the currency hierarchy can enrich the analysis and provide a functional theory of issues, especially prices.

Furthermore, MMT provides a broad conceptual framework to be used by the state on the periphery, including public banks, which can finance exports and international reserves to overcome the matters of currency hierarchy on the periphery.

A complete synthesis between MMT, post-Keynesians and the currency hierarchy is beyond the scope of this article, the goal of which is to show that divergencies are probably less deep than the heated debate may sometimes appear to indicate. A synthesis between diverse concepts is likely possible without sacrificing any relevant aspects of each of the schools. Besides, presenting a complete theoretical system that deals with the phenomena of the economy, beyond simply stating that what happens is not related to its concepts and proposals, is essential so that a new theoretical system establishes its dominance. Answering to the complex economic context that followed the 2008 crisis is the primordial task for which MMT, post-Keynesians and the currency hierarchy have already developed fundamental ideas, though these ideas are scattered in different publications and lack any cohesive presentation as a proper system.  read more

  1. Romar Correa
    May 14, 2022 at 10:49 am

    I welcome Luiz Vieira’s search for meeting ground between MMT and Post Keynesians. The alleged absence of the unit of account and store of value function in the former can be addressed by the monetary circuit in the Keynesian tradition. MMT will benefit from further detail in terms of the origination of bank (commercial or central) money as an asset-liability. The finance for a project is notably the wage bill. The money wage would be the unit of account. MMT adds government expenditure to the private expenditure of the circuit theorists. A constructive suggestion in the paper (page 100) is the working out of the connection between money and bonds different from that taught in introductory macro. Mr Vieira also fruitfully reminds us that the bare bones of the bank loan can be fleshed out with the modelling of contracts, complete with the paraphernalia of asymmetric information and credibility and reputations. The special Keynesian contribution would be macroeconomics: the contracts are writ in an environment specified by the monetary and the fiscal authorities. My impression is that the ‘open-economy’ version of this tale would be many ‘closed-economy’ stories being narrated. The ‘periphery’ is not homogeneous with the relative importance of agriculture, manufacturing, and services, and indeed trade, varying between countries. The familiar transition from the first to the second to the third has been tossed with many leaping to a narrow services sector from a stationary agriculture bypassing manufacturing. The monetary and fiscal authorities will have to steer the emergence of money and employment in the appropriate sectors through the intervention of banks via nationalization, for instance. In short, each peripheral country will differ from the others in the particularities of activity and the sectors in which it occurs.

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