MMT and the MMT Project – Part 1

One of my presentations are the January Sustainability Conference in Adelaide focused on the basics of Modern Monetary Theory (MMT). I was asked by the organisers to provide some clarity on the basics of MMT and to demarcate where MMT starts and finishes. I started the first of two talks I gave at that conference by stating that MMT was macroeconomics. It is within that discipline. It is not within the discipline of law, sociology, psychology, cultural and media studies etc. Macro is macro. I subsequently received a lot of correspondence about this and have had subsequent follow-up conversations with some MMT activists about the meaning of the ‘categories’ I introduced. I thought it would be useful to write an extended account of what I was thinking when I said those things. It will help clarify what I see as the difference between MMT and the MMT Project. You can see exactly what I said if you want to watch the video of the presentation. But, of course, that doesn’t necessarily mean you will ‘know’ what I meant. So this blog post seeks to clarify some of those comments so that everyone explicitly understands what I was talking about. This is Part 1 of a two-part series (split because of length). In Part 1, I discuss the idea that MMT is macro. In Part 2, I discuss what I call the MMT Project and other issues that seem to cause confusion and/or concern.

Unfortunately, the film seems to have missed the start of the presentation where I made some of the comments that I am addressing in this two-part series.

MMT is macroeconomics

At the Conference, I said that Modern Monetary Theory (MMT) is macroeconomics. Macro is macro.

When we started out, our aim was to present a comprehensive challenge to the existing, dominant New Keynesian macroeconomic framework.

It was designed to dismantle the mainstream consensus in the macroeconomics discipline.

Which invokes the question: What is an academic discipline?

An – academic discipline – is “field of study … a branch of knowledge, taught and researched as part of higher education”.

Further:

A scholar’s discipline is commonly defined by the university faculties and learned societies to which they belong and the academic journals in which they publish research.

You can see from the taxonomy presented on the Wiki page I linked to above that Macroeconomics is a stand-alone discipline within the broader Economics discipline.

The historical development of macroeconomics is well-defined and supported by a corresponding literature, conference structures and academic posts within the overall academic hierarchy.

It subject matter is very well defined.

Macroeconomics is not law, nor sociology, nor psychology, nor political science, nor economic history, nor cultural and media studies, nor history, nor geography, and so on.

While these other disciplines (or areas of study) provide institutional context, historical background, insights into human behaviour and the like to help understand the place of macroeconomics in the broad world of knowledge, they are distinct areas of study.

There is no hierarchy operating here. One discipline is not superior to the other.

When I was young and starting thinking about what the ‘academy’ might be I became absorbed with the notion of being ‘well read’, which should be the ambition for all of us as a path to intellectual enlightenment – which translates to ‘knowing a lot of stuff’

So I thought that meant I had to know the classical literature in philosophy, politics, history, mathematics as well as the great writers in fiction (Tolstoy, Camus, Dostoyevsky, Joyce, Hemingway, Dickens, Hardy, Melville, Kafka, Sartre, Brontë, Hesse, to name my favourites among many).

And I have tried to honour that ambition.

But as I was also pursuing an academic career after a time, I knew that one had to specialise in a discipline.

I was helped by the fact that I studied mathematics at University and so I found the mainstream economics to be easy, which gave me plenty of time to indulge in the broader literature (Marx, Kalecki, etc).

But I also accepted that I would work within a discipline structure and the thing that interested me the most was macroeconomics because it dealt with the big influences on poverty reduction and the attainment of full employment.

These social issues guided my interest. I had no interest in microeconomics – it was dull.

But macroeconomics was full of possibilities and was where the main game or contest against the mainstream had to be fought.

This article – The History of the Academy and the the Disciplines – is interesting.

All disciplines have their own language and way of thinking. I don’t apologise for that.

And there are various ways of talking depending on who the audience might be.

For example, the way in which I will discuss macroeconomics with another macroeconomist, irrespective of their particular view on the discipline, will vary quite dramatically from the way I write my blog posts about macroeconomics.

And I will discuss macroeconomics quite differently to someone who is discussing macroeconomic concepts from the perspective of another discipline.

They can cross fertilise each other but there is a distinct field of knowledge that each operates within.

So at the Conference I said very explicitly that MMT is macroeconomics. It is not law, cultural studies, humanities etc.

But then I said, that I didn’t want anyone in the room concluding from that that I thought the excellent work being done in these other fields was unimportant.

I noted that it was excellent that related disciplines in the social sciences and humanities could find the core MMT work to be useful in furthering knowledge in their areas.

I told the audience that I found that exciting and inspiring. But that doesn’t accept a blurring of the boundaries between all these disciplines.

It is possible that you might retort that I am ‘institutionalised’ in a sclerotic academic structure (discipline demarcations) and cannot see other possibilities.

But that doesn’t get us very far.

If by that you mean we all should aim for a theory of everything and if we don’t do that we are nasty isolationists who don’t want to cooperate or respect other disciplines and cannot see the empowering nature of cross-discipline fertilisation then you have got me wrong.

Being ‘well read’ and understanding where all the disciplines fit in the scheme of overall knowledge is a good goal to have. But that doesn’t say we should blur the meaning of each discipline by saying everything is everything.

MMT is macro. That is it!

By saying that I give the area of knowledge we work within meaning and context.

And I definitely don’t demean other disciplines that give further meaning to our work or gain extra meaning and leverage from our work for their academic endeavour.

What is macroeconomics?

When we were discussing with the publisher (Macmillan) what the title of our textbook should be, I was somewhat insistent that it be simply called Macroeconomics.

This was in accord with our view that the subject matter, reflecting an MMT understanding of the monetary system, belonged in that discipline and would impart meaning within the academy on that basis.

But, if you read Chapter 1 of our textbook, you will see we were very careful to note that “This textbook will instead take a broader perspective of the discipline of economics, by including it within the social sciences.”

We also wrote:

While we may think it is useful to separate ‘the economy’ from the rest of social life, and to apply ‘economics’ to the study of that area of life, we recognise that the division is necessarily arbitrary. In truth, there is no completely separate sphere of ‘economic life’, meaning that economics is linked to, and incorporates findings from, the other social science disciplines.

So we were clearly recognising that economics is part of the social sciences and draws on the other disciplines.

Later in that chapter we argued that “there is no such thing as ‘natural’ human behaviour; rather, it is shaped and changed by institutions, culture and society”, which brings in disciplines such as sociology, law, politics, psychology, anthropology, cultural studies and the like.

And you will note that I regularly write blog posts that draw on some of those disciplines as a way of understanding why economic trajectories take a certain form that is contrary to the way the mainstream conject.

There is a section in Chapter 1 “What is Macroeconomics?” where we state that macroeconomics is about the study of the aggregate outcomes of economic behaviour.

So:

Macroeconomics focuses on a few outcomes at the aggregate level and is considered to be the study of employment, output and inflation in an international context. A coherent macroeconomic theory will provide consistent insights into how each of these aggregates is determined and why it changes.

We study the “factors that determine the flow of total output produced”.

We explore what determines total employment and unemployment.

We consider the determinants of inflation and the way in which a national economy interacts with the rest of the world.

Implicit in that study are institutional factors (such as the law of contracts, global accords, psychological motivations, etc).

But in macroeconomics we don’t study those factors. Otherwise, we would be seeking to know everything about everything and that wouldn’t get us far.

In that vein, we create an organising framework that represents a simplification of the system that is being investigated.

We also have a section in Chapter 1 sub-titled “The MMT approach to macroeconomics”, which notes that “Modern Monetary Theory (MMT) is distinguished from other approaches to macroeconomics because it places the monetary arrangements at the centre of the analysis”.

These arrangements are not about the culture of money, or the law of money, but the technical logic that flows from noting that the legal framework specifies the monopoly status of the currency-issuer.

Another important aspect of MMT as a new way of thinking about macroeconomics is to understand why macro started out in the first place.

Up until the 1930s, there was no separate discipline within economics. The mainstream neoclassical school thought that macro aggregates were just the result of adding up individual relationships.

The problem encountered, though, known as the ‘aggregation problem’ is that there was no clear way of adding all the heterogenous individual functions together.

To avoid that the economists of the day invented ‘representative agents’ (a single aggregate household or firm that behaved like the utility- or profit maximising entities that they theorised about in microeconomics), which really meant there was no macro theorising at all.

And, in doing so, the analysis fell into error by dint of the so-called fallacy of composition.

I wrote about this fallacy and why it matters in this blog post (among others) – Fiscal austerity – the newest fallacy of composition (July 6, 2010).

The fallacy of composition refers to situations where individually logical actions are collectively irrational. These fallacies are rife in the way mainstream macroeconomists reason and serve to undermine their policy responses.

So some proposition, which make sense at an intuitive, personal level, fails to hold an aggregate level.

A classic example is the so-called ‘paradox of thrift’ – where individual virtue can be public vice.

So if an individual tried to increase his/her individual saving (and saving ratio) they would probably succeed if they were disciplined enough.

But if all individuals tried to do this en masse, and nothing else replaces the spending loss, then everyone suffers because national income falls (as production levels react to the lower spending) and unemployment rises.

The impact of lost consumption on aggregate demand (spending) would be such that the economy would plunge into a recession.

As a result, incomes would fall and individuals would be thwarted in their attempts to increase their savings in total (because saving was a function of income). So what works for one will not work for all. This was overlooked by the mainstream.

The causality reflects the basic understanding that output and income are functions of aggregate spending (demand) and adjustments in the latter will drive changes in the former. It is even possible that total savings will decline in absolute terms when individuals all try to save more because the income adjustments are so harsh.

But these sorts of insights established macroeconomics as a distinct field of academic endeavour – there was a reason to treat the aggregate or the collective with care and the body of work referred to as microeconomics was unable to provide the same insights no matter how the aggregation problem was solved.

MMT adds more insights to these basic awareness that the collective is a special place to study.

The distinction between the non-government as a currency user and the government sector as the currency issuer is crucial to understanding the dynamics of the economic system.

We engage in that reasoning assuming all the other determinants, such as legal system, are unchanged.

Why was the macroeconomics terrain largely abandoned by progressive academics in the 1970s.

In – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we argued that for various reasons, the heterodox economists did not develop a coherent alternative to the mainstream New Keynesian consensus.

While there was some macroeconomic research published (for example, early 1970s on the profit squeeze as a distributional issue), the progressive narrative became increasing hampered by the acceptance of mainstream views on government financial constraints.

In this blog post, for example – The origins of the ‘leftist’ failure to oppose austerity (July 22, 2015) – I discussed the 1973 book by US sociologist James O’Connor, which became a sort of bible among the Left as part of their attempt to understand why Keynesian policy era had failed.

This book and the derivative literature that followed it was extremely influential among ‘left’ scholars and effectively negated their capacity to challenge, what by the mid-1970s, was becoming the Monetarist resurgence.

He was trying to address the growing claims that the capitalist system was in crisis because the full employment era had created a squeeze on profits (through rising wage demands ahead of productivity), which led to a slowdown in capital accumulation.

The state was in a contradictory location because, on the one hand, it had to set out conditions to appease capital and encourage their investment, but, on the other hand, it had to provide a Welfare State to “maintain social harmony”.

O’Connor felt the two aims were incommensurate and forced the state to seek to expand its expenditure share but such an aim was difficult because it meant increased taxes were required.

So the fiscal bias was for increasing deficits which would eventually lead to insolvency.

This became a major influence on Left thinking and eventually the dominant progressive narrative in macroeconomics, which persists today.

We see all sorts of progressive politicians talking about the need for surpluses, bigger surpluses, Fiscal Credibility Rules and all the rest of the mainstream garbage.

In effect, as the post modern movement started to infiltrate academic disciplines, the progressive academics found new things to study as they conceded the macroeconomic terrain and the contest to the mainstream.

I wrote about those issues in this blog post (among others) – Moving on from the post-modernist derailment of the Left (December 27, 2016).

They effectively abandoned Marxian class analysis to understand location and, instead, the ‘post structuralists’ became increasingly popular and argued that we are incapable of understanding the entirety of human society and we must thus concentrate on pieces of this puzzle by seeking information about it rather than drawing generalisations based on the mode of production.

What we ended up with was the notion that took us away from Marxian class categories and focused, instead, on studying elements of political power, the use of language and narratives as the way of gleaning meaning.

This is also defines new arenas of political struggle that are diametric to those defined by the class struggle of Marx.

Here I am referring to the rise of feminism, movements against homophobia, multiculturalism and the other disaggregated (from class) movements that occupy the so-called ‘progressive’ Left these days.

Marginality is no longer described in class terms but rather in terms of cohort identity and fragmentation of consciousness has resulted.

Marxian exploitation is replaced by individual cohort oppression as the fundamental expression of struggle. There is nothing general.

The hegemony of the capitalist gives way to the power struggles between husband and oppressed wife, or gay and homophobic, between racist and object of racism, and all the rest of the individual power struggles that define the cultural struggles.

So class struggle is not the path to liberation but, rather, laws designed to overturn ‘glass ceilings’ (for example) become the desired end.

The class struggle was about solidarity of a collective. But this new post-modernist idea of struggle has no collective (society) only unities that span Marxian class boundaries.

We encounter the strange bedfellow case where feminists (who might be capitalists or workers) are now fighting for the same end!

Moreover, the institutions that might have evolved (or evolve) to promote the class struggle for workers – such as trade unions or political parties – become subjugated to these non-class struggle foci.

So we see political parties that were originated to defend the workers as a class against the vicissitudes of capitalist power becoming vehicles that reject the class struggle as the overarching form of the political activity and, instead, become obsessed with issues relating to issues like womens’ rights to be on corporate boards etc as an expression of what they believe to be the progressive voice.

The focus against ‘capitalism’ is replaced by a focus against racism (for example) and the roots of the racism and the way the capitalists might use the sentiments to divide and conquer the workers is lost.

By deconstructing and decentering meaning – anything goes, but the development of a working class consciousness that is capable of pushing capitalism towards a more liberated socialist epoch is lost.

This doesn’t mean these terrains are unimportant or that in criticising the Left obsession with them that a person is racist, sexist or homophobic/transphobic.

They are all part of the progressive struggle to eliminate tyranny of any form.

But from my perspective, by diverting the focus away from the macroeconomic contest, the mainstream was left to do what it wanted and we have seen where that has taken us.

That is why MMT was important.

We were aiming to renew a contest against the mainstream on the terrain that mattered the most to them – the big picture and the big policy levers, which went right to the heart of the capacity of the currency-issuer and the production of income.

Conclusion

I hope that this post clarifies my thoughts on these issues so far.

In Part 2, I will move onto to discuss what I mean by the term MMT Project.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.