This post provides a brief outline of the specific components that comprise Modern Money Theory, or MMT. It is primarily based on L. Randall Wray's July 2020 paper, The “Kansas City” Approach to Modern Money Theory, and my interview with Dr. Wray (episodes 52 and 53) where we discuss it (we talk about it in the second half of episode 53).
Finally, at the very bottom of this post you will find a lineage diagram of the various schools of economic thought.
Related post: What is MMT? (And what's its key insight?).
Top image by unknown, made into an MMT-meme by Neil Smith (permission) (with thanks to Raul Carrillo).
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This post was last updated February 20, 2022. Disclaimer: I have studied MMT since February of 2018. I'm not an economist or academic and I don't speak for the MMT project. The information in this post is my best understanding (especially based on my reading of Wray's paper and my conversation with Wray about it) but I don't assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch. |
Wray's paper also contains a brief history of how MMT came to be. An alternative walkthrough of (the broader, non-KC) MMT can be found in Warren Mosler’s 2020 MMT White Paper.
The components
- Chartalism: Money is a creature of the state. Barter is a myth. <Related post: Chartalism (the state theory of money) is historical. Barter is a-historical.
- Endogenous money and the monetary circuit: Banks are franchised by the government to create loans. Banks create loans. Loans create deposits.
- The nature of money: Related to chartalism, money is not a commodity but a representation of an ongoing debt-credit relationship.
- Sectoral balances: There are three sectors: Government, private, and foreign. Spending in any sector is by definition the revenue of another. If government deficit spends, then it will always cause a surplus in the non-government sector. Vice-versa for a surplus. This is critical, since only the government sector can give the other sectors net financial assets (money that does not need to be paid back, beyond taxes). Related post: The MMT view of sectoral balances.
- Abba Lerner’s functional finance: MMT agrees with Lerner’s goal of doing whatever it takes to achieve truly full employment while avoiding inflation, regardless whether this results in a deficit, balanced budget, or surplus. However, MMT’s solution to achieve this goal autmatically is its job guarantee. Here is a brief take on Lerner and functional finance from Stephanie Kelton. Here is a related 1999 paper by Mat Forstater: Functional Finance and Full Employment Lessons from Lerner for Today?
- The three recommended policies by MMT are floating exchange rates, the MMT-designed job guarantee, and ZIRP.
- Hyman Minsky’s financial instability-hypothesis: More is needed than the above three policies for true ongoing stability. (This is the only component not applicable to the overall MMT project, but rather is specific to the “Kansas-City approach”. Confirmation can be found in this 2020 paper by L. Randall Wray: The ‘Kansas City’ Approach to Modern Money Theory. I discuss this paper with Wray in episode 53 of Activist #MMT.)
Institutionalism
Very roughly (more to learn!), Institutional economics is the idea of how you can't do anything well unless it's based on a full and accurate understanding of how the relevant (political, societal, financial, etc.) institutions actually function. In that sense, the institutional aspect of MMT is its accurate and complete analysis of how the central government (and banks) really spend.
Here is an excerpt from around the 51-minute, 45-second mark in part two of my interview with Wray, regarding his July 2020 paper:
Wray: Balance sheet consolidation, how the government really spends. I already mentioned that Stephanie [Kelton] researched that. Scott Fullwiler continued –
Me: I see that as the Institutionalist part of it.
Wray: Yes. And Eric Tymoigne also worked on that. I'm not going to go through this. We've talked about this so much. We know how the government really spends, and it's perfectly consistent with our arguments that: you spend first, then collect the taxes, and you can't run out of your own currency.
Me: I see that as the anchor that grounds MMT. If you can't bring it back to that (in addition, sctock-flow consistent is related to that). That is really what anchors MMT, as I see it.
Wray: Yep. It is related to the stock-flow. It is related to the sectoral balances. And it is related to the whole logic of Keynesian economics [such as] the paradox of thrift. The injections must come before the leakages. It's also consistently Keynesian in the true Keynesian sense.
Marxism
Finally, Marxism. MMT gets the following ideas, among others, from Marxism.
(Aside from the reserve army, the following is not discussed in Wray's paper. This is as I currently understand it. Again, more to learn.)
- There is a reserve army of the unemployed (and there should instead be a reserve army of the employed);
- Inflation is inherently class conflict. From the introduction of chapter 17, called “Unemployment and Inflation,” in the 2019 MMT-lens introductory textbook, Macroeconomics: “In this sense, we cast inflation within the general distributional struggle or conflict that is characteristic of capitalist economies, between workers seeking to maintain or achieve a higher wage, and firms seeking to maintain or raise their profit rate.”
- The Monetary Theory of Production, also expressed as
M, C, M'. This is essentially as assertion that money is a creature of the state, which is the state theory of money, or chartalism. This is discussed on page 46 in Macroeconomics (termed as the “capitalist production sequence”) and in the related post: Chartalism (the state theory of money) is historical. Barter is a-historical.
Also, there are mentions of Marx in this related post: MMT ignores power (No it doesn’t)
One example: here is the Marxism entry in the index of Macroeconomics:
Activist #MMT 