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The emerging status of Modern Monetary Theory

Hector McNeill1

The many "solutions" popping up for our current financial crisis are involving many forms of the so-called Modern Monetary Theory (MMT). Those promoting this approach also consider it to be a new basis for macroeconomic management.

I have been reviewing MMT since around mid-April, 2020 because it has been circulating as a miraculous cure, it would seem, for all ills. In this article I summarize the current conclusions of my assessment of MMT with respect to its place in macroeconomic theory and in terms of its feasibility.

Location of MMT with respect to conventional economic "schools"

MMT, based on the main publications that has so far come into existence on the matter, place MMT in a position of being a natural progression from Keynesian macroeconomic theory.

Keynesian theory was essentially a redirection of monetarism which was established centuries before by adding the role of government spending to help generate employment under conditions of recession. As a result, contemporary monetarism is almost indistinguishable from Keynesianism. However, there is a subtle difference which came to light during the slumpflation crisis in the 1970s-1980s. At that time Keynesian "solutions" could not be applied because raising interest rates, varying taxation or varying money volumes only exacerbated the state of affairs of high inflation and rising unemployment. Then, as now, there were many public exchanges and well-meaning editors allowed Keynesians and monetarists to debate how best to address the depression. I studied these exchanges in some detail because, as an economist, I had become frustrated by the fact that having graduated in, and with post-graduate training in, macroeconomics and microeconomics, I could not identify any way of applying conventional economic theory that could avoid severe prejudice to large sections of the constituency. The same situation faced us in 1929, in 2008 and now.

As in the 1970s, largely under the pushy evidence-less assertions of Milton Friedman, the monetarists gained ground because it was generally considered to be a general "theory" seemed to embrace the whole economy, whereas Keynesianism addressed the specific predicament of depression. However, in reality it did not hold out a solution for long term stability so this distinction was false. The Thatcher government embraced monetarism by deregulating a range of financial regulations as did Reagan and Bill Clinton. Their application of high interest rates and reduced marginal taxation by applying supply side economics2 led to many families losing their homes and farmsteads and rising income disparity.

The long term outcome of the monetarist drive and deregulation was the 2008 crisis. The experience with quantitative easing (QE) as a "solution", again a monetarist solution, has sustained a depression in investment for productivity and depressed real incomes while creating significant inflation in asset markets.

The experience leading up to 2008 and with QE appears to have provided more courage of people who gained from these environments to promote a new perspective on monetarism in the form of Modern Monetary Theory. It is notable that many of those who promote MMT are linked to venture capital and hedge funds and no doubt this includes the funding of leading academics.

The monetary policy decision making environment

To assess the likely implication of MMT in practice it is important to review the decision making environment that governs monetary policies. All monetary policies, for several centuries, have tended to favour those who are asset holders in the form of land, real estate and other forms of assets which have gained significance. Monetary policy has also operated under decisions motivated by asset holders or royalty and governments needing money. In this process, democratic representation and parliaments were late arrivals. However, monetary policy decisions still remain beyond the influence of the electorate. This state of affairs has become institutionalized by making central banks "independent"3. Those who influence monetary policy decisions are essentially those who still wield influence over political parties and what the public are told via the media. These remain firmly in position and to a large extent they are asset holders. However, rentier income is derived from people who need to make use of fixed assets to carry out their business. It has been advantageous for asset holders for the majority of the constituency to be wage earners with few assets to their name. This helps reduce bargaining power and keeps wages at a "tolerable" level.

What are the principal weaknesses on monetary policies?

The main operational or practical weakness of monetary policies (including Keynesianism) is that they rely on the introduction of "exogenous money", that is, money that is additional to "endogenous money" already circulating in the economy. Historically, savings from endogenous money applied as investment to productive growth in products and services so as to increase the purchasing power of existing currency. This proved to be an effective means of increasing real incomes of a growing proportion of the population sharing real growth. Exogenous money attempts to expand activities beyond current levels and established by the normal growth in state-of-the-art technological productivity. This had led to an accelerated rate of increase in consumption for natural resources. Because this expansion is faster than the growth rate in productivity the carrying capacity of the planet declined and climate has been impacted as a result of increased GHG emissions.

The increased influx of money has tended to create inflation. However, this inflation has not directly affected the goods and services markets, but rather the asset markets. This has benefited asset holders because the rate of growth in asset prices has tended to outstrip any inflation in goods and service markets. Therefore the result is a constant rise in the wealth of asset holders driven by monetary policy. This has created a long-established progressive differential between asset holder wealth and the majority of the constituency who rely on wages. This supports a constant rise in wealth and income disparity.

A major drawback is that all monetary policies base their analysis on the national accounts structure which does not include allowances for the fact that different sectors, based on the advancing state-of-the-art technologies, all undergo different rates of transition in levels of productivity. This issue of vital importance is ignored by an "accountancy" approach that sees the economy as a collection of sectoral boxes, including government participation, where fixed nominal amounts are transferred to "manage" the economy. This model is unrealistic because transfers represents a zero-sum game in what is a very dynamic reality where the probability of zero-sum outcomes is improbable (See Production, innovation and national accounts ).

In historic terms, any country that increased exogenous money either by just printing, minting or lending out more money ended up debasing the currency4. The fall in purchasing power always led to depression for the majority of constituents. The social agitation resulting from this policy imposed instability led to revolutions and wars where foreign interests were blamed for national policy-induced chaos. One can see the same irrational logic being applied today in international relations for the same reasons. The justification, for those who understood that if productivity rose at the same rate as money supply, debasement would be less, never introduced productivity enhancing policies like RIO-Real Incomes Objective policies. They simply stated the economy would "grow out of debt". George Osborne stated this sort of thing. However, this has never happened in recent years except, going back a bit, in phases of the UK industrial revolution as well as, more recently, between 1945 and 1965 when Keynesian policies were not in fact applied. The growth in this times was a result of private sector initiatives in investing and securing rising productivity and paying people relatively decent wages.

The main reason monetarism cannot simulate adequate productivity, and of the type that supports sustainability, is the combination of the national accounting approach and the centralized one size fits all impositions of interest rates, money volumes and taxation. This leads to the creation of winners, losers and some who remain in a neutral policy-impact state. This is caused by the inability to respond to the particular needs of each economic unit as a result of monetarism, in general, having no microeconomic foundations. As a result everything is zero-sum as a gain for a minority and loss the for majority. Monetarism, in it current form cannot secure positive systemic consistency i.e. all gaining as a result of policy.

The simplist and most transparent data of the impact of monetarism has been the steadily increasing share of GDP taken up by profits during the last 35 years and the steadily decreasing share being taken up by wages in the same period. This evidence is indisputable.

One major perennial and misleading claim of monetary policy is that money volumes are varied, along with interest rates, to control inflation. Most interpret this to refer to the prices of goods and services. In reality, monetary policy has always been directed an generating inflation in asset markets (originally land and real estate) to increase the "value of holdings". On the other hand the rises of land and real estate asset prices plead to inflationary leakage in the form of rises in prices and rents for land, houses, office and industrial real estate in the goods and service production sectors. This inflation reduces disposable incomes of wage earners and small businesses as a result of these price rises. These policies combined a specific monetary policy inflation rate target of 2% per annum in the goods and services markets have resulted in the £ purchasing power being less than 1% of its value in 1945. On the other hand the exchangeable value of assets, over the same period, have been stable or have risen in real terms.

It is instructive to note the failure of economists, governments, central banks and the UK media to explain this stark reality of the differential outcome of monetary policies on the income and wealth of asset market participants and wage earners the consumers in the goods and services markets.

As companies have changed their decision making priorities from productivity and market performance, measured in term of price-earning ratios, to "shareholder value", company shares have become an important additional "asset" in asset holder portfolios. As asset price rises are the main result of the normal leakage of exogenous money into asset inflation, then monetarism has extended the asset market with a major new growth asset class, in the form of corporate share prices. Monetary policies expanding the supply of low interest money has been used by companies to purchase their own shares to bolster prices as a result of speculation and create a stock market "boom". The pre-1929 New York Stock Exchange Crash involved a similar speculative build up. In the meantime investment in goods and service production stalls, productivity declines and real incomes of non-asset holders, the majority of the population, decline.

Although monetarists and central bank managers are stating that monetary policy does not cause income disparity, the track record evidence does not support their statements.

For a long time the logic behind monetary policy has been the Quantity Theory of Money (QTM) which relates inflation to money volume. The QTM equation applied for many years as the justification for monetary policy decisions, did not included assets in the form of endogenous money savings or assets holdings which are non-circulating money. If allowance is made for this, the impact of money volumes is reduced. This is why QE did not work out as expected and inflation did not rise in the goods and service consumption markets. However, QE caused a significant increase in the value of asset markets resulting in a measurable transfer of income to asset holders. This flaw or gap in the QTM was corrected by our own research to substitute the QTM by the Real Money Theory (RMT) (See: A Real Money Theory and The real incomes component of the Real Money Theory - a note ). This adds savings and assets and the impact of QE on asset market inflation and share prices can be traced directly as can the reduction in real incomes. Under QE, interest rates are so low that savings are naturally are close to zero and with a high asset growth converting circulating money into non-circulating money, money velocity is virtually zero.

Legal frameworks that prejudice constituents

Mention has been made of the fact that the high degree of dependency of the majority of constituents on selling their efforts to employers or clients in exchange for services provided, places asset holders in a strong bargaining position. This "position" is further weakened by the corporate taxation regulations that apply accountancy norms that classify labour as a cost. This makes labour, as a "production factor" antagonistic to asset holder profit. Like monetary policy through the centuries, taxation started out and has had a similar role of raising funds from the population and those involved in production to pay for wars and other activities deemed essential and therefore imposed by royalty or governments.

Today the Treasury works closely with the Bank of England.

MMT in practice

Because of Covid-19, MMT has been suggested as ways to get out of the current depression, tackle the issue of income disparity and getting back to full employment.

One suggestion is by creating money to lend out at negative or zero interest rates to businesses in exchange for a guarantee that they achieve a specific range of return on investment can help accumulate income and assets over time. This can be achieved, as it was in the past, by deploying existing endogenous money to enhanced productivity activities. However, the current thinking appears to parallel Keynes' concerning savings, as demonstrated by QE. Endogenous supply side sources for growth in the form of savings that compete with exogenous funds should be got rid of. QE's zero interest rates effectively achieved this montarist's dream. The mechanism of linking loans to a guaranteed return is a fantasy as anyone working in investment projects knows. Projects almost never turn out as originally planned even with the best of intentions, and in any case creative accounting or off account "deals" can ensure the zero rated interest funds transition into asset markets to bolster the wealth of asset holders.

The large asset holders see expansion in asset holdings by "others" as an invasion of their command over this aspect of economic life and their power over the decisions made by political parties and government. Some politicians actively think in terms of promoting an asset-holding electorate in order to gain ground amongst voters e.g. Margaret Thatcher. There is a logic to this, but the experience with right to buy with respect to council houses in the UK undermines this assumption. Besides these practical realities, a more brutal reality is that "new" asset holders would have a stronger bargaining position with respect to need for additional income and become less totally dependent upon the wage market. This is regarded by large asset owners as a threat to the convenience of keeping wages paid at "tolerable" levels.

Lastly, another favourite MMT proposal, bolstered somewhat by Rishi Sunak's recent money in your pocket and restaurant discounts "it's on the government" meals, is to send all families a fixed sum of money each month to bolster "demand" and therefore growth in the economy and a movement to full employment.

Why most of this will not work

The overriding naivety of MMT is that three factors represent major operational gaps:
  • Who decides?
  • Labour status
  • Who does?
Who decides?

Without an effective participatory democracy operating on a constitutional economic basis of genuine public choice, we will continue to see monetary policies being decided by those who wish to use exogenous money to promote asset values and avoid excessive rises in wages. There is no sign that MMT has any proposals as to how to move policy decision making into a more democratic arena. Until this particular detail is resolved, this aspect of MMT remains a practical impossibility.

Labour status

Governments are unlikely to change accountancy regulations because the larger corporations will resist this because it is a convenient way to restrict wages within the terms of "economic and financial logic" and by "operating within the legal requirements". The fact that creative accounting provides an additional flexibility for larger corporations and supports a massive accountancy and audit service activity, appears to be overlooked. Without this being changed, which is highly unlikely, MMT providing a means to increase wages, even at full employment is unlikely.

Who does?

It is reasonable to imagine that some dedicated individuals and mutual groups might use interest free money to dedicate themselves to developing investments that realize some benchmark rate of return. However, in general, there are no incentives for those taking up zero interest loans to sustain efforts in this direction when the incentives to transfer the money into assets are greater, leading to loss in policy traction. This occured under supply side economics in the 1980s as well as under monetary policy pre-2008 and under QE post 2008. This has always been the case in all exogenous money-based policies.

The main practical gap in all monetary policies including Keynesianism, supply side economics, and it would seem on current evidence, MMT, is the inability and interest in handling the issue of productivity linked to planetary and human survival. As with the other exogenous money policies like Keynesianism, it is simply a repackaging of an archaic policy model that is not attuned to the current circumstances of a modern democratic country where citizens should have a voice and influence over the decisions that affect them.

The political economy of monetarism

The lame excuse is that "well this is a political problem, nothing to do with economics". It is however, quite the reverse. It has been the continued manipulations of those who have command over monetary policy who have caused our so-called democracy to be prevented from being able to satisfy the need for delivery of sound factual information to a well population supported by a good educational system, to bring about the possibility of creating a rational participatory policy decision making arrangement to deliver the full potential of universal suffrage.

The main proxies in this manipulation have been our political parties who are unable to act independently of the pressures placed upon them as a direct result of their more-than-evident lack of independence.


MMT remains unconvincing as an "alternative". It is in the same Aggregate Demand Model (ADM) camp as Monetarism, Keynesianism and supply side economics, so-called. All of these policies have operated in such a way as to prejudice the majority through policy-imposed instability. So far I have not seen anything that changes this conclusion. I am open to receiving any explanations or corrections to what has been set out above from anyone who might wish to comment.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

2 Supply side economics appeared more obviously in the late 1970s. However, this name is a misnomer because it does not address factors which can be considered to be supply side; it is a marginal taxation scheme.

3 It is almost certain that Gordon Brown made the Bank of England "independent" so as to distance government from any blame related to prejudice resulting from monetary policies such as Thatcher's interest rates resulting in the repossession of many thousands of homes affecting almost a million people and essentially putting paid to Conservative party election prospects at that time. This was the very first act by the new Labour government but for reasons other than those stated.

4 For a detailed historic review, up to the present day, Saifedean Ammous' book, "The Bitcoin Standard - The decentralized alternative to central banking", 286pp, Wiley, provides an excellent analysis in the first 100 pages of this book which provides many examples of the inevitable instability and disasters resulting from growth in "exogenous money".

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