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Understanding what the T in MMT involves

I’ve been meaning to write about this topic for some time, but a Tweet the other day reminded me that there was still major misunderstandings of what Modern Monetary Theory (MMT) represents and that it was time to clarify some of those errors in comprehension. Specifically, there is a current out there that considers MMT to be incorrectly labelled because according to the argument there is no theory involved. It’s hard to imagine why anyone would think that but the fact that they do tells me that I should write this blog post. As I noted yesterday, our Macroeconomics textbook to be published by Macmillan Palgrave in February 2019 is full of theory. It has a lot of description, taxonomy, accounting, history, and philosophy, but also a lot of theory that ties some of those other components together in a meaningful way. The T in MMT is not a misnomer. The Tweet I saw the other day also said there was nothing new in MMT so what’s with the modern bit! I have already dealt with that issue in the past.

On the question of the ‘modern’ bit, the following blog posts are relevant among others:

1. Modern Monetary Theory – what is new about it? (August 22, 2016).

2. Modern Monetary Theory – what is new about it? – Part 2 (long) (August 23, 2016).

3. Modern Monetary Theory – what is new about it? – Part 3 (long) (August 25, 2016).

When I don’t know the meaning of something I initially look up the dictionary, which in part, also helps me understand the etymology involved.

The Oxford Dictionary entry for Theory is:


1 A supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.

1.1 A set of principles on which the practice of an activity is based.

1.2 An idea used to account for a situation or justify a course of action.

1.3 Mathematics A collection of propositions to illustrate the principles of a subject

It comes from the late C16th “denoting a mental scheme of something to be done) – “contemplation, speculation”.

The Oxford Thesaurus notes:


hypothesis, thesis, conjecture, supposition, speculation, postulation, postulate, proposition, premise, surmise, assumption, presumption, presupposition, notion, guess, hunch, feeling, suspicion.

This list isn’t very helpful because it conflates many different conceptual structures with the work theory.

For example, a theory begins, in my view with a hypothesis or conjecture which is different to a postulate or assumption. A theory is more than a conjecture though.

The Wikipedia entry for – Theory says:

A theory is a contemplative and rational type of abstract or generalizing thinking, or the results of such thinking … Depending on the context, the results might, for example, include generalized explanations of how nature works …

In modern science, the term “theory” refers to scientific theories, a well-confirmed type of explanation of nature, made in a way consistent with scientific method, and fulfilling the criteria required by modern science. Such theories are described in such a way that scientific tests should be able to provide empirical support for, or empirically contradict (“falsify”) it. Scientific theories are the most reliable, rigorous, and comprehensive form of scientific knowledge … Scientific theories are distinguished from hypotheses, which are individual empirically testable conjectures, and from scientific laws, which are descriptive accounts of how nature behaves under certain conditions.

So we get an idea that theory is about abstraction intending to explain characteristics of reality.

However, while a conjecture is a proposition we consider, in advance, will help us understand and explain reality, they transcend to theoretical status when they are confronted with that reality using data and empirical techniques.

We start with a conjecture or hypothesis and then interrogate that supposition with the data.

I don’t want to get into the eternal debates in the philosophy of science about falsification and the like. Suffice to say, I am not a Popperian (falsification) and lean more to the ideas of Imre Lakatos (but not his anti-Marxism British phase!) and even Paul Feyerabend.

A body of thought often doesn’t subject itself to empirical scrutiny because it is inherently untestable – it represents a sort of core faith – the ‘hard core’ of the research program in the Lakatosian sense.

Surrounding that ‘hard core’ is a ‘protective belt of auxilliary hypotheses’, which taken together constitute a falsifiable theory.

But the practice of refutation (empirical scrutiny) might conclude that the theory (the ‘hard core’ and the ‘auxilliary hypothesis’ together) produce false empirical predictions (see below) but then we have a dilemma.

Does the empirical prediction failure lead to a rejection of the ‘theory’ or just an alteration of the ‘auxilliary hypotheses’?

Scientific communities are very reluctant to jettison their ‘hard core’ when they can simply alter the ‘protective belt’.

But, ultimately, too many empirical failures, spawns counter paradigms, which eventually supplant the dominant program.

And so it goes.

But all those rabbit holes aside, what is obvious is that even though research and theorising in the social sciences must involve empirical confrontation, it is quite different to the natural or physical sciences because we study humans in uncontrollable situations.

That means the way we proceed and the types of conclusions we draw are quite different. There are no ‘laws’ in economics as there are in physics, for example.

This has been a debate within economics for decades.

The mainstream like to think they are doing ‘science’ akin to the way a physicist does science. This gives them a sense of authority, which they use to parade over the masses, and tell them that certain propositions are non-contestable.

They even call some of their conjectures – ‘Laws’ – for example, the so-called Law of Diminishing Returns, which is a pillar in the propositions that mass unemployment is the result of excessive real wages and, hence, cuts are required to cure it.

To hide the ideology, they invented a ‘Law’.

While gravity is a law founded on measurable physical relationships, this mainstream economics ‘Law’ is just an assertion, which, because of its conceptualisation and abstraction (marginal analysis), bears little relationship to real world practices and is inherently ‘untestable’ as a conjecture.

The real world doesn’t look as though the ‘Law’ could be applicable in most situations (certainly outside of agricultural applications).

So we understand that economics is a social science and is contestable as a result.

A theory is thus a logical ordering of linked conjectures about the real world.

A theory will typically have several components.

1. Definitions and concepts – which describe or delineate key components that make up the theory – so concepts such as national income, unemployment, trade etc

These concepts will be defined in particular ways and often, in economics, related to in an accounting manner.

So total output (GDP) is equal to the sum of the expenditure flow on final goods and services in some particular period.

There are a number of definitions and concepts required to make that statement operational.

2. Functional or behavioural relations – which take the important variables (concepts) and write out how they interact.

What drives what? And to what effect?

This stage of the theory requires us to make assumptions as a way of adding some control to the analysis and to develop conjectures (hypotheses).

3. Predictions and shocks – we then ‘shock’ the behavioral relationships that make up our ‘theory’ by changing values of variables or the parameters linking them in the behavioural specification and make predictions as to what happens to some or all of the variables (the ‘system’).

That is what I think of as a process of theorising.

A theory transcends a conjecture when it has empirical congruency.

So if we say that if national income rises by a dollar, household consumption will rise but not by a dollar – that is a conjecture.

If it turns out that the conjecture is what happens in the real world, then we have a theory that is congruent.

Predictive accuracy – congruency

When we undertake empirical research in economics using the techniques derived from mathematical statistics and econometrics we are not searching for truth but congruency with the data.

Congruency means that an explanation is currently the tentatively most adequate in terms of helping us understand the dynamics of the data of the real world.

There is a lot of misconception about that.

A congruent body of ideas should also have some predictive confidence, although cannot withstand sudden regime shifts the push the data in unpredictable ways.

I wrote about those themes some years ago and this 2007 Working Paper (a revised version of a paper I wrote in May 1995) – Econometrics, Realism and Policy in Post Keynesian Economics – covers some of the discussion. This paper was subsequently published in a modified form but this version is free to all.

The point of the paper was to oppose the view by so-called Post Keynesian realists who eschewed any serious empirical work in economics on the grounds of fundamental uncertainty.

I argued that econometric research and practice is a necessary part of a paradigm which ultimately emphasises policy intervention.

I argued that, without negating the existence of fundamental uncertainty, the demands of policy can be accommodated and the utility of econometrics justified within a satisficing environment where rules of thumb and habits create a stable context for decision making.

If you take the fundamental uncertainty line to its logical conclusion you end up with a a nihilism, which would appear to be at odds with an interventionist policy emphasis.

Following the great George Schackle, it is true that “we simply do not know” about the future but we make guesses about it and try to calibrate those guesses based upon what we do know – humans behave habitually, hunt in packs, etc.

Fundamental uncertainty only prevents us from ever discovering, knowingly, the truth and therefore the best solution.

As a result, people and institutions thus search for adequate solutions to their problems. In the institutionalist literature this has been called satisficing. When we discuss satisficing the role of rules of thumb and habits emerges.

It is not the existence of uncertainty which is important, but rather the ways in which people in the economy deal with its existence.

So when I talk about predictive accuracy, I’m not talking about knowing the future or establishing truth. Rather, I’m talking about congruency.

And I think it is without doubt that economists who see the world through an MMT lens have been much more successful in making statements about future events, particularly following major policy interventions, than our mainstream colleagues.

The latter have what can be called an appalling record of congruency.

There was a great article in The Week last month (August 14, 2018) by Ryan Cooper – The biggest policy mistake of the last decade – which took his readers through a sequence of forecasting blunders by significant mainstream economists after the GFC.

He notes the predictions of Alberto Alesina and Silvia Ardagna, Carmen Reinhart and Kenneth Rogoff, apart from having “major conceptual problems”, “got everything wrong” about the real world.

He also cites “a bunch of conservative financial and economics luminaries, including Michael Boskin, John Cogan, Niall Ferguson, Kevin Hassett, Douglas Holtz-Eakin, Bill Kristol, and John Taylor” who were also raising alarm bells about inflation following the fiscal stimulus in the US:

Yet it’s been six to eight years since their arguments and there’s hardly been a glimmer of the kind of inflation they warned about.

In fact, not only has there been no hyperinflation, inflation has consistently come in under the Fed’s supposed target value of 2 percent.

He lists other major blunders by the mainstream doomsayers.

I discussed some of these issues in this blog post – MMT predicts well – Groupthink in action (February 6, 2017).


Abstraction is an important part of theorising. We cannot simply have a theory of everything (easily!). So we simplify.

In itself simplification is not a reason to criticise a theoretical structure. So attacking neoclassical ‘theory’ because involves highly abstracted assumptions to be tractable is not the reason we reject it.

We reject it, for example, because the predictions it makes about human behaviour, which are based on their highly simplistic set of axioms about human behaviour, simply do not explain reality.

Psychologists just laugh at the promotion of Homo Economicus (the basis of neoclassical theory about the individual) by mainstream economists.

We should also understand that in macroeconomics there are many abstract concepts.

If you think about it (and understand it), the entire body of macroeconomics is an abstraction.

There is no such thing as a “price level” in the aggregate, or a household. The aggregates are the sum of the parts.

So that sort of abstraction is not the reason to criticise a body of work.

However, if those abstractions, taken together, lead to predictions that are just ridiculous, then one can reject the ‘theory’.

For example, New Keynesian macroeconomics did not even have the banking sector included before the GFC. It could never explain the reality that unfolded as a consequence.

Now why is there a T in MMT?

At the outset, we have to be careful not to conflate theory with new. A body of work can be considered to be a theory even if in putting together that body of work there was no new theorising involved.

In the case of MMT there is a substantial body of ‘theory’ that we inherited from past schools of thought and integrated into a MMT framework.

The standing on the shoulders of giants syndrome!

Now, lets start thinking about theory in the MMT context.

Here is a simple example.

An oft-stated claim is that MMT is about accounting relationships. Well in part it certainly is. It is part of the stock-flow tradition in heterodox economics that ensures consistency between flows of things and the stocks they flow into, period to period.

I wrote about that in this blog post – Stock-flow consistent macro models (September 8, 2009).

Those who make that spurious claim about MMT often use the sectoral balances framework to make their point.

They note that the basic sectoral balances relationship, which is a core part of the way an MMT economist analyses the world, is, at heart an accounting truism that has to be true because it is derived from a larger accounting framework – the nation’s National Accounts.

That is true so far.

While I know there is a debate in accounting about the theory of accounting, we will accept, here, that an accounting truism is one that has to be true (add up in this case) by the way we define it. It is not opinion or conjecture – it just has to be.

So the statement: the Government deficit (surplus) equals the Non-government surplus (deficit) dollar-for-dollar is such a truism.

It must be true.

By introducing this truism into the economic debate, MMT proponents have been able to alter the way people think about government deficits and surpluses and that sparks interesting new insights and options.

So when a mainstream economist or a politician that is mouthing that same economist rails against deficits and says surpluses represent national saving and putting money into the piggy bank for the future, anyone who understands MMT knows automatically that surpluses destroy non-government financial wealth (through the fiscal squeeze).

They further know that a currency-issuing government doesn’t ‘save’ in the sense that a household saves by postponing consumption to generate higher consumption possibilities in the future.

A financially-constrained household has to save to achieve that goal.

A currency-issuing government can spend whenever it wants as long as there are things for sale in its own currency, irrespective of what it did last period.

A fiscal surplus provides such a government with no extra capacity to spend in the future.

So a simple truism has a powerful effect if understood correctly.

But we can go much further than that.

When we write out the sectoral balances equation as:

[(S – I) – CAD] = (G – T)

We know the term on the left-hand side [(S – I) – CAD] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

So if (G – T) > 0 (a fiscal deficit) then it has to be true that [(S – I) – CAD] > 0 (a non-government surplus).

Further, if (G – T) increases (that is, a larger fiscal deficit), then the non-government surplus has to increase.

These propositions are true by definition.

Further, if there is a current account deficit (CAD < 0), and the private domestic sector start to save overall (S – I > 0) then the government deficit has to become larger and if the government tries to resist that fall in non-government spending, then national income will fall and the fiscal deficit will become even larger still.

This statement goes beyond the inherent sectoral balances accounting.

Focus on the part of that statement – “national income will fall”.

The interesting question is what drives the movements in the components of the sectoral balances such that they always obey the accounting truism?

That is where we need theory!

Remember that the derivation of the sectoral balances comes out of the basic income-expenditure framework that is a core part of MMT (inherited from earlier Keynesian theory).

We know that expenditure drives income through output creation.

In the national accounts, the sources of expenditure are:

1. Household consumption expenditure (C)

2. Investment expenditure (I)

3. Government expenditure (G)

4. Exports (X) less Imports (M) – or Net Exports (X – M)

We can clearly write out accounting relationships (and identities) about these variables such as

(1) GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.

But that begs the question, what determines (explains) these components (C, I, G, X, M)?

To answer that question, we need theories about the behaviour which determines how much and when a household or business firm will spend.

We need theories of government spending.

We need theories about the way trade operates to determine exports and imports.

We also know that when the government taxes total income, households are left with disposable income. That is just an accounting statement.

Then households make choices on how to use that disposable income – to consume and by construction (as a residual) to save. For the individual household total saving becomes a behavioural choice. We need a theory to explain that.

In the most simple MMT expenditure model (which we inherited) we say that

1. C is a function of disposable income. That seems like a very simple statement. But it is a conjecture that can become theory if it stacks up against the data.

More advanced studies try to work out the nature of the relationship between C and (Y – T) and a number of competing theories are out there (Permanent Income Hypothesis, Relative Income Hypothesis, Life Cycle Hypothesis and more).

We might try to work out how wealth (a stock) impacts on consumption expenditure (a flow).

2. I is a function of the cost of funds (interest rate), expected revenue (proxied by some function of income) and other non-linear type of impacts (irreversibility etc).

And so it goes. I won’t rehearse all the theories for G, X and M (only M is considered in the simple model to be a function of income and real exchange rates).

So while the sectoral balances equation as an accounting identity provides some interesting insights in its own right, the really interesting times begin when we place the equation in a dynamic setting to analysis what happens if.

The ‘if’ being a change in the one or more component and the way those changes evolve over time by reverberating through the theoretical linkages between the components.

And by theorising we understand how national income changes bring the economy into a state that we account for.

Thus, if private domestic sector households decide to cut consumption expenditure, what happens next?

We need our theory to trace the consequences through!

Firms notice inventory build up. They don’t produce to store goods and servies. They produce to sell.

So they start to cut production – first by cutting working hours (shifts, intensity etc) then, if the expenditure decline cements itself, they start laying of labour.

Incomes fall and this reverberates into further reductions in expenditure.

Soon enough the firms form a view that expected future revenue from sales is lower than previously expected and so they cut investment plans.

And this creates further expenditure shocks and so on.

Our theory tells us that the national income changes that follow these expenditure adjustments impact on:

1. C – it falls.

2. S (household saving) – it falls because it is linked to income.

3. I – it falls.

4. T (taxes) – they fall because they are linked to economic activity (income generation).

5. M (imports) – they fall because they are linked to economic activity (income generation).

6. G – it is likely to rise because welfare payments through income support systems rise.

And so you can see that the national income changes drive shifts in the financial balances for each sector.

At all times in this adjustment path, the accounting relationship we call the sectoral balances equation is satisfied.

Eventually, when the economy reaches a new equilibrium (an abstraction), which just means the national income changes from the expenditure shock finally become zero, we reach a new set of sectoral balances.

But we needed theory to explain how we got from one steady state to the next one following a shock.

Of course, in the real world, there are shocks occuring continuously, and it is hard to isolate them.

But that doesn’t alter the point.

I could talk about other examples of how ‘theory’ is a core part of what we call MMT.

I discussed the ridiculous proposition that MMT has no inflation theory in this blog post – I wonder what the hell I have been writing all these years (February 12, 2013).

The same character who made the original assertions that MMT had ignored inflation is still making the claims – he is just a serial nuisance.

But as I indicated yesterday, MMT has an elaborate theory of inflation embedded within it.

Part D of our textbook, the front page of that part shown here, contains 3 chapters which develop that theory in contradistinction to the mainstream theory.

We inherited some of the ‘inflation’ theory that is now part of the core MMT body of work. But some of it is new.

I can claim some credit there personally as key propositions from my PhD (buffer stocks etc) are now part of that inflation approach and represent a ‘new’ way of thinking about the relationship between unemployment and inflation.

MMT replaces the mainstream Phillips curve with an employment buffer stock.

See the linked blog posts I provided at the top of this blog post for more discussion about that.


There are many other examples of how MMT combines accounting, description and theory.

But I think I have given you the idea.

MMT is much more than a descriptive lens.

It is a coherent body of propositions that allow us to understand how the monetary system works. Understanding comes with explanation.

Explanation requires, in part, theory.

MMT is appropriately named. There is no misnomer.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

This Post Has 26 Comments

  1. Y is introduced without explanation or context. I know it has been utilized previously, but that might not help.

    Lakatos got his notion of auxiliary hypotheses from Pierre Duhem though he placed them in a context other than the sort Duhem considered. Duhem’s thesis can be viewed as a way of modifying Popper’s falsification scheme without the added baggage of the core hypotheses. Duhem did not consider any proposition beyond revision, though he revised his position over the years.

    Basically the situation is this. You have a central scientific hypothesis you wish to test. But this hypothesis can not be tested in isolation. Accompanying it are a number of auxiliary hypotheses, such as the theory of the experiment, the theory of the questionnaire, the theory of the data obtained, and, sometimes, the theory of the experimenter, etc. It is this group of hypotheses that is tested. Hence, if the prediction, that is, the central hypothesis in which the investigator is really interested, is not observed, the central hypothesis “can be saved” and one or more of the auxiliary hypotheses can be chosen for rejection instead.

    In its simplest terms, this is Duhem’s thesis. One does not always have an option of selecting an auxiliary hypothesis for the chop; any decision about what is rejected must be made on a case by case basis.

    (On the Duhem thesis, there is Roger Ariew, “The Duhem Thesis”, British J for Philosophy of Science, Dec. 1984; then there is Patrick Suppes, “Models of Data”. In E. Nagel, P. Suppes, & A. Tarski (Eds.), Logic, Methodology, and Philosophy of Science. 1962 — but it is online.)

    Lakatos makes great weather of his stipulation that a scientist’s personality has no bearing on his work, a position a logical positivist would certainly have taken, a tradition in which Lakatos worked for much of this life, though it was dying during the years that Lakatos did his later work (given its death knell in 1974). A consideration of Lakatos’s own biography tests his personality-work thesis to a significant extent. He went from being a Stalinist revolutionary in his youth, where he did some awful things and suffered a great deal as well, to being a bit of a reactionary. While none of us wants to be judged by what we did in our youth, one has to decide for oneself how much of Lakatos’s own history can be found influencing his later work. I say this as a fan of his work. i met him and found him to be fun and quite personable.

  2. Since economists use the term “model” when they should use the term “theory”. It might be apropos to distinguish them briefly. A theory is a set of proposition, or sentences, that have a truth-value. A theory is a conceptual, or linguistic, structure. If a theory does not have a truth-value, then it is nonsensical. A model, on the other hand, is a non-conceptual, or non-linguistic, structure in which a theory is true. A true theory can have more than one model, while a false theory has none. In economics, the most relevant model for an economic theory is an aspect of the real world. No theory talks about the real world in its entirety. And, in the context of economics generally, the real world is not a conceptual or linguistic entity.

    Since this distinction is so simple, it is puzzling why they seem never to be able to get it right.

  3. Feyerabend not Feyerband (and cf Feierabend [Zeit nach der Arbeit]: beer o’clock [Aus.] [coll.])

  4. It’s partly to do with the order in which we structure adjectives in English. I bet it would be different in Italian (Thomas?). So for some time I have thought of MMT as being a Modern Theory about Money, not a theory about Modern Money. But I still think it’s a bit more than a theory rather than, as Bill quite rightly says, a Law. The trouble is there isn’t a word for what it is so Theory will have to do.

  5. Nigel, MMT could be considered to be a progressive research program, as opposed to a degenerate research program, which is how I would characterize the mainstream economic research program. This would fit with Lakatos’s perspective, I think.

    I would think Theory of Modern Money would be right, rather than Modern Theory.

  6. As for the Italian, Modern Money Theory might translate as Teoria Moderna dei Soldi. On the other hand, if Bill’s terminology is used, Modern Monetary Theory becomes, in Italian, Teoria Monetaria Moderna. So, directly from the Italian, we have Modern Theory of Money vs. Modern Monetary Theory.

    The term “law”, in the sense of natural scientific law, doesn’t really work here. Sometimes, the term “regularity” is substituted for “natural law”, as it is thought this better reflects how such statements work.

  7. I don’t think you can do any controlled experiment with the atmosphere, but climate scientists study climate. They make predictions of stronger and more frequent tropical storms and we have been getting them. Stronger West Coast fires were predicted and we are burning up here. Temperatures have been getting warmer. Ice sheets are melting.

    MMT offers facts on how sovereign government modern monetary systems work. As we have seen countless times when congress raise military budget time and time again, or during WWII when US ran deficit of 25 percent, or when they bail out the banks. Anyway, may be there is something in MMT that doesn’t reflect the real world but I haven’t spotted anything yet.

    Congruence is the first step to any meaningful knowledge about the real world.

    In his book, M. Hudson quoted William Vickrey spiel about economics just has to be internally consistent and how real world doesn’t invalidate economic theory.

    Its true what he said. It is also true that economics is science fiction because it satisfy exactly the criteria for science fiction. =)

    Today I learned of a new species called Homo Economicus.

  8. Hello Bill,

    According to your book will be available in paperback on 4th October 2018 (£52.99).



  9. Dear Chris (at 2018/09/21 at 9:!2 am)

    The Amazon launch date is incorrect. It will be published in February 2019. We are working to that schedule and it would be impossible for it to be available next month.

    best wishes

  10. Thanks for the link goven above to your 1995/2007 paper “Econometrics, Realism and Policy in Post Keynesian Economics”.
    This is a very valuable anti-dote to the anti-econometrics of the “realism” of Lawson, Syll etc.

  11. “So if (G – T) 0 (a non-government surplus).”

    If G-T was less than 0 wouldn’t that mean a fiscal surplus? Taxing more than you spend??

    eg. 100-110 = -10???

  12. Something went wrong in my comment above – maybe the symbols aren’t liked by the online form??
    I’ll try one more time.
    Bill writes
    “So if (G – T) IS LESS THAN 0 (a fiscal deficit) then it has to be true that (S – I) – CAD IS GREATER THAN 0 (a non-government surplus).”
    If G-T was less than 0 wouldn’t that mean a fiscal surplus? Taxing more than you spend??

    eg. 100-110 = -10???
    Typo maybe? Am I a pedant? Probably. Or maybe wrong….also very likely. If so apologies. If not, a sign facing the wrong way can confuse you quite a bit with sectoral balances.

  13. Thank you, Bill! This post helps me to appreciate the theoretical rigour of MMT.

    MMT provides a framework for analysing, explaining, and predicting real world phenomena, including complex cause-effect relationships. This is what makes it a coherent theory. It does a lot more than describe.

  14. Bill you miss something interesting, IMV, when you say

    “The interesting question is what drives the movements in the components of the sectoral balances such that they always obey the accounting truism?

    That is where we need theory!”

    Within an SFC model one can test differing behavioural hypotheses, for example how does Household Consumption equal Business Output – floating price, fixed volume market clearing supply demand equilibration (the mainstream hypothesis); supply demand mismatch with inventory compensation (supply > demand, inventory depletion, supply >demand, inventory accumulation); or administrated prices or price markup with floating volume, fixed price equilibration?

    MMT produces more realistic outcomes than mainstream macro partly because it uses this more neutral framework – SFC – that can test not just competing hypotheses but, a la lakatos, also the differing core theories that select the relevant (competing) auxiliary hypotheses.

    Mainstream macro is less of a theory and just a model in this sense, since its preferred modelling tool(S) CGE/DGSE assume what it is trying to prove, for example how does one see if market clearing equilibration is the correct empirical behavioral relationship when it is assumed a priori in the model?

    In this sense it is better have a theory which can test and select better (tentative and provisionally best) models which is the outcome of MMT, whereas neo-classical macro is just a model and *not even a theory*. I am sure there is some framing of this that can help highlight such an, IMV, important difference.

  15. Martin, the neoclassical macroeconomic framework is a theory that, in point of fact, has no model in the real world because it is, fundamentally, empirically false (though many neoclassical economists don’t care about this). A theory has a truth-value, while a model does not. In order for a theory to have a truth-value, it must be internally consistent. In order for a theory to have a model in the real world and be scientifically relevant, it must be descriptively accurate and, in addition, correctly characterize the causal relations it finds.

    For me, Bill is not asking enough of his theory. Internal consistency and being congruent to the data are necessary conditions for an empirically relevant theory, but this is not sufficient for me. It must also have a truth-value, and it must satisfy the best theory of truth. The one I recommend is the Gupta-Belnap Revision Theory of Truth, not the standard, logical positivist theory of truth. (For further information, the Stanford Encyclopedia of Philosophy could be consulted, searching for The Revision Theory of Truth by Phil Kremer. It is a technical discussion for the most part, I should warn.)

    Moreover, a theory that does not provide a TRUE causal explanation is inadequate. MMT satisfies this requirement. Congruency with data is fine as far as it goes, but this seems to me to not go much beyond an instrumental attitude to theory construction, which does not focus sufficiently on the truth, or not, of the theory’s substantive propositions. To be truthful is what it means for a proposition to fit its data. It fits its data because it says something truthful about them.

    It is important, as well, to distinguish between the theory’s substantive propositions, which have a truth-value, and the theory’s definitions, which do not (according to a particular theory of definition). These considerations show to me that theory construction and testing are quite complicated affairs, and Bill’s discussion does indicate this.

  16. Larry

    You want clearer definitions and that is fine. I said neoclassical macro is “less of a theory” not that it was not a theory.

    What I do reject is that neoclassical macroceconomics has a *framework* in the sense that market clearing/floating prices and general full employment equilibrium are shown as the tentatively best outcome of a framework, whereupon they can be used to model actual economies.

    A framework can be used to compare and contrast different auxiliary hypotheses (primary or secondary etc.) coming from different core theories, in this case neoclassical versus MMT. The SFC model is such a framework, CGE etc is not since the key primary auxiliary hypotheses coming out of the core cannot be evaluated – market clearing and general equilibrium, they are assumed and not hypotheses at all.

    There are two senses of model here – one used to construct and evaluate the theory – the framework sense and one used to apply it to actual economies – the applied sense. SFC can be used as a framework, CGE cannot. Both can be used in the applied sense and, barring the challenge of variable explosion, specification and measurement as a model becomes more detailed, only SFC derived (for the purposes of argument here) MMT applies to the real world whereas CGE/DSGE fails.

    Going into theories of truth whether Gupta-Belnap Revision Theory of Truth, or better know ones such as correspondence, coherence, disquotation etc. is beyond the scope and needs of this discussion. We need only a more instrumentalist, pragmatic or Bayesian view in terms of empirical adequacy, with tentative yet provisionally best models which CGE/DSGE failed from the outset.

  17. I love the work you do an how long this blog has lasted. How do we shift the burden of taxation? From earned income an wages back on to unearned income and rentseeking. In the same breath we are saying Taxes don’t fund spending and the amount of money in the system does not cause inflation. States like mine Ma the profits are the rent seeking if you can make them from plain old production or a service you are in the minority. All the players do it speculate on housing prices,fines,fee’s I think they use them to try to lower the price they would to have had to charge in the first place. Even the state contractors have fines fee’s rent wrote into the contract. The amount of parking lots is nausating. They are marketizings needs in place of reform an deficit spending. It’s kind of like a instant pyramid if your the first one to do it an you don’t get arrested or sued. Good example is Air at gas stations used to be free I have no lie seen it jump from 50cents to up to 3$ in my life time. If scarcity controls inflation an price we got a horrible picture. Is there any way to go deeper than the bare bones macro fed level? Is there an optimal level for say state currency user taxation? I don’t think we are going to move fast enough an in the U.S.A it would not be an exaggeration to say that in some states people are so bought or brainwashed. They would attempt to secede rather then openly having the majority of their funding coming directly from the Fed they would see as a threat to sovereignty. I. I’m gonna assume threw military contracrs an the war machine in some ways it already does.
    Second thing I was Wondering about is the Fed’s balance sheet could we just flip the assets an liabilities that will put a huge dent in F.I.R.E sector Kst wallst an oligarchy. They think preto distributions an Scurves are divine proof of natural law an use them to defend inequality instead of Amongi reseting the ledger. Would it be possible with full employment to have the public sector competing against the private sector? I assumed they would it’s a weight against oligarchy. If we use it right. This is out there but it’s an example of risk the private sector would never reasonably attempt space travel in the moder day pyramid an aquaduct building in the past. Just switching pipes,welding bridges,mass distributing decentralized solar power many More basic infrastructure I left out, is probably a hundred years of work. Digging ditches an filling them in or mass rationing the critism against full employment an Ww2 welfare capatalism is hardly fair. Employers of last resort isn’t exactly what I had in mind the way warren an wray present it. Even tho picking up syringes an plastic would not be a negative. Since now we do it with nonviolent so called criminals on Probation an out an out slaves with pre-release prisoners. One thing I never heard mentioned what about loss of Labor with say someone like Peter shiff? Or brain drain like canda an Europe talking our scientists an giving them a full ride bc Merica doesn’t wana fund it. I’m sorry I jumped all over the place just trying to narrow down arguments I get into a people. Sorry one last thing is it correct to say wages should be defined within the borders of individual countries? Pretty much that the currencies compete that labor does not compete globally. If it is a simple as that that should clear up all that import-export arguments we argument to take care of your citizens so they’re more productive in the first place.

  18. Larry

    Apologies, I re-read my original comment which you addressed and, you are correct when I said “*not even a theory*”. However, that was more of a rhetorical statement grounded in an argument, that you might dispute, rather than meant to be an explicit factual statement, as I hope my follow up comment makes clear.

  19. Martin, Your follow-up comment does clarify this, but I am still not in complete agreement. I agree with you that models can be used in both the senses you mention but I would not describe the uses the way you do. Let me take an abstract example, Peano arithmetic. The theory has a model in the integers and one in the rational numbers. But the real line is not a model for Peano arithmetic. This is because Peano arithmetic has a next number and, in the theory of the real numbers, there is no next number or, rather, there is an infinite number.

    Which one of these models approximates the real world? Thinking of physical theories, it depends on whether you are considering quantum theory or relativity. In relativity, there is continuity and, hence, the notion of a real line could be said to be applicable. In quantum theory, however, its universe is discrete, not continuous, so no real line model applies. This is a quite simple example, but it helps show, I think, that a model of a theory is not necessarily straightforward, and that a given theory usually has more than one model, only some of which will represent aspects of the real world.

  20. Tom, while it may not be possible to have experiments with the requisite controls in the macroeconomic realm in the strict sense you may have in mind, it is possible to have what are known as “natural experiments” with the proviso that not all the desirable controls will be operative though some will. Osborne engaged in such natural experiments, a number of them, with the result that certain economic consequences can be drawn from his animadversions, even though the strict controls that might be ideally desirable were absent. Even so, the fact that a number these consequences were antithetical with respect to his stated objectives show that things can be learned even under less strictly controlled circumstances, perhaps leading to a rejection of some of the assumptions underlying the “natural experiment”, possibly leading further to a questioning of the justification(s) associated with the experiment in the first place.

  21. Hi Bill.
    I’m one who has challenged the T in MMT. It seems to me that your lens is Truth.
    My concern is the widely held interpretation that a Theory ‘is just a theory.’ The word is used to express doubt!
    That doesn’t seem a good place to start when we are trying to convince the world that MMT should be our guide.
    I suspect that, for the most part, politicians know. They lie, to maintain the debt illusion.
    I listened to your interview with Alan Kohler. It occurred to me that you might have pointed out that maintaining the borrowings lie is entirely to the benefit of the rich and powerful who control society, whereas letting people know the truth would benefit them.
    This is why there is such resistance to MMT. It challenges the right’s narrative that small government is needed to reduce tax, that is, the root cause of most that is nasty about right-wing government. This is why MMT is commonly regarded as left-wing.
    Thanks for your great work.
    Roy Hives.
    BA(social science) Not an academic Retired secondary Maths/Science teacher.

  22. Roy Hives- I think that people use the word “theory” to disparage MMT, confusing a theory with a hypothesis. A Theory is of course a hypothesis which is supported by the evidence, e.g. the Theory of Gravity.
    Interesting comment, that you suspect that “for the most part, politicians know”. I’m absolutely sure that the ones with real power do, and also senior Treasury officials, but as you say they routinely lie to defend their policy options. I suspect that many backbench and Cabinet MPs are as ignorant as the general public, though. Would be fascinating to know for sure.

  23. Talking to a few colleagues last night in the mainland (with red flag), I said to them it seems that your leader seems to understand MMT very well, as I can see how the monetary system is being used to better the people well-being all over. But why not in my country, I wonder why, or any other countries for that matter, I asked.

    They said that yes, that might be the case for their homeland, understanding and using MMT to the maximum benefit.

    As these groups of colleagues have been doing business in my country as we as other countries, they have observed that it is not the understanding of MMT, but it is about the decision making process and the political system that make things difficult.

    My colleagues said that, for example in your (my) country, or any other countries being aware of the MMT, there are also fairly large inequality gaps, so who do you think will be at the decision making table?

    Coupled with the democratic and multiple parties running the country, it will get even harder to move anything forward, good and bad.

    In their minds, it is the political representation, not the understanding of MMT nor the resources ones have, that matters.

    These observations strike me like a light bulb got switched on in my head.

    I come to understand now why money for research, for development, for healthcare, for soft and hard infrastructures, for education, for culture, for welfare, and so on, are difficult to come by as opposed to say the military budget, or thing that will benefit big corporations like interest rate adjustment.

    It is mainly because who sits at the decision making table.

    Whereas in a single party system, it can be very fast and furious However, as we have seen, not many choose this path either for various reasons (e.g., self serving dictatorial regime),and there a price to pay (I am sure you know a few).

    Last night conversation informs me a lot of things about making change for the better.

    It tells me that it is almost certain that MMT it is never going to be practiced in most places. This is reality. But I will keep hoping and trying in any case.

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