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MMT and Power – Part 2

This is Part 2 of a series that is developing here on the topic of Modern Monetary Theory (MMT) and power. I often read that Modern Monetary Theory (MMT) is defective because it has no theory of power relations. Some critics link this in their narrative to their claim that MMT also has no theory of inflation. They then proceed to attack concepts such as employment buffers, on the grounds, that MMT cannot propose a solution to inflation if it has no understanding of how power relations cause inflation. These criticisms don’t come from the conservative side of the policy debate but rather from the so-called Left, although I wonder just how ‘left’ some of the commentators who cast these aspersions actually are. The problem with these criticisms is that they have clearly adopted a partial approach to their understanding of what MMT is, presumably through not reading the literature widely enough, but also because of the way, some MMT proponents choose to represent our work. In Part 1, I examined how the economics discipline evolved from political economy to a narrow focus on the ‘economy’ as if it existed in a void of power. I also disabused readers of the notion that MMT ignores the link between money and the real econoy, which is a regular claim offered by critics from the Left. I also questioned critics who seem to want MMT to be a theory of everything. As I regularly point out MMT cannot predict who wins the football this week, but that isn’t a criticism. In Part 2, I am going to complicate things a little by expanding on the MMT is the MMT is a lens narrative as if we can neatly separate values from facts. I will also explain how power enters into the dominant theory of inflation in MMT.

Description and Theory

Many MMT proponents (and critics) have somehow landed on the notion that MMT is just a description of reality.

It is a very limited depiction of our work.

If all we had done was to provide a better description of the reality of the monetary system then we wouldn’t have advanced knowledge much at all.

It is one thing to observe something and be able to relay the observation more or less accurately.

Another example of the ‘description’ story is that MMT is just about accounting relationships – for example, deriving sectoral balances from the National Accounting framework and then concluding that a government deficit (surplus) must equal the non-government surplus (deficit).

In part, MMT certainly exploits accounting consistency to assemble an analytical framework This 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.

If the stocks and flows, for example, don’t correspond, which is a problem of mainstream macroeconomics, then spurious inference will follow.

So the statement: the Government deficit (surplus) equals the Non-government surplus (deficit) dollar-for-dollar is a truism and must be true.

At this level, it helps us refute any notion that fiscal surpluses represent national saving and allows the government to accumulate spending capacity in some piggy bank for the future.

Even at the accounting level, we know that fiscal surpluses destroy non-government financial wealth.

We also know from the ‘description’ of government capacities 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 the descriptive accuracy provides powerful insights.

But economics is a political discipline because it informs policy and policy requires an understanding of causal relationships that go beyond description.

So at the descriptive level if the government was to increase the fiscal deficit, we know from the consistent accounting that the non-government surplus will increase.

But the question that we need further capacity to answer is what behavioural patterns generate these accounting relations. Accounting is just a measurement of things that happen.

What we want to understand is what is happening and why.

A policy maker that wants to increase employment needs to know how to do that and what investments are requirement to make it happen.

So going back to the sectoral balances, 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!

I dealt with this in more detail in my blog post – Understanding what the T in MMT involves (September 20, 2018).

So once we venture into the theoretical space we go well beyond description and this also has implications for how we take into account power relations in the society.

The lens narrative

I was the person who introduced the characterisation of MMT as a lens to better understand the functions of the fiat monetary system and the capacities of the currency-issuing government within that system and the consequences of using that capacity in one way or another.

Other MMT proponents took up this framing and it is now commonplace.

It is not the same thing as saying that MMT is purely descriptive, which is a version of the story I sometimes read and hear.

When I introduced the notion of MMT being a superior lens to allow people to achieve a better understanding of the way the monetary system work, the operative word is ‘understanding’.

That goes beyond description. Understanding requires an appreciation of causal processes, which, in turn, requires theorising.

So when I start talking about MMT to a new audience I think it is important to note that MMT should not been seen as a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.

I say it is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.

The lens helps us better understand the choices available to a currency-issuing government and the consequences of surrendering that currency-issuing capacity (as in the Eurozone).

And the lens lifts the veil imposed by neoliberal ideology and forces the real questions and political choices out in the open.

An MMT understanding means that statements such as the ‘government cannot provide better services because it will run out of money’ are immediately known to be false.

Such an understanding will change the questions we ask of our politicians and the range of acceptable answers that they will be able to give. In this sense, an MMT understanding enhances the quality of our democracies.

But of course I knew full well that this was to some extent a fudge.

At the time I introduced that framing I made it clear that it was a heuristic device, designed to discourage destructive, circular and ultimately useless arguments about whether MMT was Left, Right or something else.

I made it clear that, of course, there is no such thing as a value free statement.

The lens I might see out of is coloured in every way by my socio-economic background, my gender, my education level, the colour of my skin, how tall I am, and all the rest of the conditioning factors that shape and influence our perspectives.

I recall the early days at university studying philosophy and having interminable debates about whether one could separate ‘objectivity’ from ‘subjectivity’. The obvious conclusion is that values permeate everything.

And recognising that doesn’t require us to declare that there are no absolutes because everything is relative, which was a corollary to those debates.

We don’t have to go down that post-modernist sink hole where everything becomes void of meaning.

But by simplifying the presentation to focus on the ontological characteristics of the monetary system doesn’t mean that a deeper level of enquiry is embedded in the body of knowledge we now call MMT.

In social sciences, we have to isolate things to focus on one thing.

So when I introduced the ‘lens’ analogy, I was clear that I was abstracting from many significant issues.

The first MOOC I designed and ran recently was an introductory course covering a multitude of topics – the breadth of the MMT ambit.

But it glossed over many things, which will be taken up in greater and more meaningful detail in the followup course that we are building at present.

It should have been obvious to everything that there was no clean line between lens and value.

MMT and power

Take the MMT account of the inflationary process.

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 it is clear that 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.

So MMTs inflation narrative is much more than a lens.

But we can go deeper than that.

My contribution to that part of the MMT body of knowledge goes back to my undergraduate days in the 1970s and by then I had consumed almost all the written works of Marx and other allied writers.

Deeper because there is a theory of economic class and power built into the way we construct the inflation causality.

While we clearly incorporate the notion of demand-pull into our inflation narrative, the analysis goes a lot further than that.

In my UK Guardian article (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – that I mentioned yesterday – I wrote:

All spending – public or non-government – carries inflation risk if nominal spending growth outstrips productive capacity. As full employment is reached, governments have to constrain spending growth and may have to increase taxes to curtail private purchasing power. But we are a long way from that point with elevated levels of unemployment and largely flat wages growth.

This is the demand-pull argument.

Spending can become excessive relative to productive capacity.

But I also wrote this later in the article:

Fear mongers point to the OPEC hikes in October 1973, when global oil prices rose from an average 2.48 US dollars per barrel in 1972 to $11.58 in 1974. However, there is little prospect of a 1970s-style inflation emerging. Then, strong unions and firms with price setting power engaged in a donnybrook aimed at shifting the real income losses from the rising oil prices onto each other. But the strength of the relationship between oil prices and inflation has waned since the 1990s. The ability of workers to engage in this sort of distributional struggle has been constrained by the rise of precarious work, persistent elevated levels of unemployment and underemployment and pernicious legislation that has reduced union capacity to pursue wage demands.

This is the economic class and power aspect of our inflation theory.

The so-called ‘battle of the mark-ups’, where the powerful economic classes – capital and labour – use whatever tactic they can to defend and advance their real income grab given available produced income.

And if that power struggle is unchecked and then accommodated by expansionary fiscal and monetary policy (to offset negative employment effects) then an inflationary spiral can eventuate.

And using that framework also allows us to understand a lot of the developments in the capitalist monetary economy over the last several decades including the rise of the gig economy, the substitution of independent contractors for employees, the industrial relations legislative attacks on trade unions and more.

So it is clear that any accusation that MMT as a body of work does not incorporate power struggles and institutional realities is false.

The position individual MMTers might take on how to address that power struggle if ever is another matter altogether and will reflect, the specific values the person might carry with them.

There were 12 blog post written outlining the MMT approach to Unemployment and Inflation – go to this – Page – and follow the trail.

They were followed by this 5-part set of posts:

1. Buffer stocks and price stability – Part 1 (April 26, 2013).

2. Buffer stocks and price stability – Part 2 (May 10, 2013).

3. Buffer stocks and price stability – Part 3 (May 17, 2013).

4. Buffer stocks and price stability – Part 4 (May 24, 2013).

5. Buffer stocks and price stability – Part 5 (May 31, 2013).

The problem of fiscal dominance

MMT advocates a return to fiscal dominance because the dominance of monetary policy over the last three decades or so has been revealed to be an ineffective counter stabilisation policy tool and has been pushed to such limits that a range of unintended consequences have arisen – including the undermining of pension fund returns.

While many would see the return to fiscal dominance as a way to improve the negative outcomes of the neoliberal era – the impact of austerity biases on public infrastructure development, the degradation of public services, etc – there are real dangers that existing biases in procurement policies and the way in which governments are captured by elite vested interest groups, will allow income and wealth inequality to worsen and the real socio-economic problems to persist.

Fiscal policy is only a tool after all. A chain saw can save backbreaking work for forest rangers and does not have to kill a rainforest. But in the wrong hands it becomes destructive. The problem is that fiscal dominance is only a necessary condition for advancing progressive policies.

I have seen many social media attacks on our work that claims that we are just part of the establishment and want to shore up profits.

They are way off the mark.

But it is true that the existing power balances in society will influence the way in which fiscal policy manifests and it is no certainty that the era of fiscal dominance will increase generalised well-being.

I will write more later on that but it is an aspect of this ‘power’ discussion.


It is simply untrue to claim that MMT ignores institutional power.

In a separate post I will expand on my concerns about fiscal dominance.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 20 Comments

  1. Thank you for returning to MMT and power. But I am somewhat lost here. What is the definition of ‘power’ you are using? I’ve always assumed power is the ability to get people to do what you want them to do- whether through moral suasion, intellectual argument, violence and/or the ability to withhold from them things they need, or maybe even personal charm or attractiveness. I’m sure there are other aspects of ‘power’. What do you mean by ‘power’ in this series?

  2. Thanks for this, Bill. I’m learning all the time. I have been using the term ‘description of how monetary system works in reality” and will now add ‘understanding’. However, sometimes it’s the only way to respond to people who just don’t ‘get it’ (despite having purchased a copy of ‘The Deficit Myth’ – presumably not consumed).
    But I’m puzzled by your apparent concern to maintain the predatory pensions industry: “the undermining of pension fund returns”.

  3. @Carol
    I think you are reading too much into what Bill has written regarding pensions. The dominance of monetary policy and subsequent very low interest rates have undoubtedly had the unintended consequence of undermining the returns of investment for private pensions.
    Capitalist investors prefer private pensions because they can make profits from them. But if returns are insufficient to provide a halfway decent pension, then what? Only public pensions can fill the gap. So the failure of private pensions can lead to the expansion of public pensions, reducing profit opportunities for private investors. That is an unintended negative for private capital.
    We went through this in Canada after the GFC. Public pensions were increased by about one third due to the failure of many private pension schemes. The banks, the single most powerful business segment in Canada, were opposed. Eventually they came around once the federal government, the provinces, and the labour movement agreed to increase the Canada Pension Plan by a lesser amount than originally called for (one third rather than doubling).

  4. “It should have been obvious to everything (everyone?) that there was no clean line between lens and value.” Perhaps the first value to be considered in this regard is that of WANTING to gain clarity of vision, the internal incentive or impetus to look through a magnifying lens in the first place, unafraid of what one might see. Part of the problem in getting people, especially neoliberal people, to accept MMT–a bigger part IMHO than we often realize–lies right here at this initial value stage: the willingness or desire to see something at the risk of upsetting one’s intellectual applecart, akin to what Galileo faced in trying to get clerics to look through his telescope.

  5. @ Jerry Brown Your power definition seems reasonable to me. The typical (horror) story of 1970s inflation (I’m thinking of the UK) is either very simply, the government ‘printing’ too much money or the government giving in to demanding unions of unproductive workers, with the oil price rise maybe getting a mention. There is no mention of the culpability of the other side, the capitalists, or of a distributional struggle, which Bill says ‘is the economic and power aspect of our inflation theory’. I’m sure I remember Bill referencing Michal Kalecki (as well as Marx) as an influence. Wiki has a Kalecki quote (1943) ‘Their class (business leaders) instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the normal capitalist system.’ The capitalist dream is to have a line of workers begging for work each day or as now, sitting at home on call with a zero hours contract. If a job requires training, then the government or some other company (preferably abroad) will pay for it. I seem to recall also Kalecki predicting as Bill says: ‘if that power struggle is unchecked and then accommodated by expansionary fiscal and monetary policy (to offset negative employment effects) then an inflationary spiral can eventuate.’ (in the absence of a Job Guarantee scheme). Seems to me also that, as Keith says, the financial sector uses its power over government to ensure inadequate public pension provision so that we have no choice but to fall back on the failing (for workers/pensioners) private pensions ‘industry’.

  6. About the The Guardian Op Ed and the comments it entailed, I must say that you are facing a sort of what the Brasilians call bolso-minions.
    In this case, we could call them the mainstream-minions.
    This minion trope came from the movie “Despicable Me”, and takes the form of small yellow criatures that live to serve the biggest villan they can find.
    One fellow with access to many different profiles (real and fake ones) can make dozens of comments to a single post/article, making readers believe that they are dealing with many people.
    Going back to Brasil, the quantity of minions waned, once the goal was attained.
    That means that someone is paying for their time.
    That also means that there is some kind of organization behind this system.
    An organization that collects money from wealthy donors, which allways brings about corruption, in the ways that payback happens.
    And we all heard about some names behind this system.
    We keep hearing about Koch, Bannon and the like.
    And some of them are globetrotters, spreading their dirty money all over the world, even financing coups, as the putsch that happened in Bolívia, debunked as having been financed by some mediatic bilionaire.
    We have to consider that the truth will float in a sea of lies. It allways does.

  7. Other Paulo,

    the english term is astroturfing, which has a bit of a longer history. I’m pretty sure Bill is aware of it, although I’m not sure it apples; there are no lack of useful idiots parroting neoliberalism without knowing, even on the left.

  8. Patrick B- thanks. I am at this point mystified by the ‘MMT and Power’ series because it has not addressed what I see as clear differences that become apparent when looking from an MMT perspective compared to standard econ.

    One basic difference MMT shows is that we as human beings in a society have constructed what we call an ‘economy’. And that this construct should be serving the interests of people as opposed to all people having to adapt to that construction when it becomes obvious that it is not working for many. One of the things about power is realizing you might actually have the ability to exert some level of power in the first place. If you think you have no power over something- then you don’t really have any power over that thing. Realizing that you, or we, might have an ability to not blindly follow the dictates of ‘the market’ is a type of power in itself.

    Well, that is just one opinion and maybe Bill wouldn’t agree with it. I have more though 🙂

  9. Yes, Jerry. What struck me immediately when I was exposed to MMT was the extraordinary AGENCY it revealed we have in the economic arena. That insight still escapes large segments of the left, who seem determined to wage and win a distributive battle in a zero sum game. Thus many radical leftists, like their neoliberal enemies, have no desire (lack the values of curiosity and openness) to look through the MMT lens.

  10. My question is how will the job guarantee effect the battle of the mark ups.
    Will the JG give more power for all workers wage claims.
    I hope so .How do I reconcile a power based inflation theory with JG being an inflation buffer?

  11. Is it a pre-requisite to understand MMT that you are Left? I use MMT purely to speculate in the stock markets, just like Mike Norman

  12. Of course not, Dean. Anyone of any political inclination can look through the lens and profit from the clear view. This is why Bill separates values from knowledge. MMT can aid people like Warren Mosler to make money, or people like Bill to shape and advance a leftist agenda. It’s this neutrality of the knowledge brought by MMT that rankles much of the radical left willing to look into it. Because they live and breathe their Marxist ideology, they ignore or criticize everything beyond its bounds…even when, in this case, it would be of use to them.

  13. Newton, in defense of the left, it is also true that in many places at many times, the wealthy take and use up a large share of the real resources that are available for their personal use. MMT shows that the government doesn’t necessarily need their ‘money’ in order to spend- but it can still be the case that the imbalances in consumption need to be addressed. At any point in time there are just so many resources available, and if one group is using those for themselves and leaving much less for most others, well- you know.

  14. Jerry, I agree with you strongly that those things need to be addressed.

    But in defense of Newton, I think he merely suggests that understanding of the MMT will help the left advances their agenda better while retaining their beliefs.

    The imbalances of consumption, the mismanagement of fiscal allocation, the environmental negligence and etc. are the consequences (as well as the success and failure of the deployment) of ideology, not the lens.

    When one looks at many social and/or communist societies (or even democratic ones) across the globe, one will see many examples where highly desirable ideology exists but fails to deliver because of the misunderstanding of the monetary system.

  15. I agree vorapot. But Newton doesn’t need a defense because I was not attacking him, rather, I was trying to point out that it can still be the case that a segment of society controls, or uses, altogether too many of the real resources that are available at any one time. And that can still be a problem whether or not you understand MMT. A lot of what ‘old school’ lefties say is still applicable even if you are an MMTer like me. They are just wrong to think that the government needs a billion dollars from Bill Gates in order to spend a billion on say vaccines though.

  16. @Keith Newman

    I recall an article in ‘the economist’ some years back that pensions are at risk because pension funds haven’t earned enough to meet defined benefits. A looming crisis, he sincerely believed.
    I responded in the comments section that it’s a funding prob and if we are short of the goods and services we need to support the aged, that is the real problem.
    He just didn’t get it.
    Went into a rant saying he will send his senior citizens to my country to be looked after!

  17. Bill sez: “So when I start talking about MMT to a new audience I think it is important to note that MMT should not [be] seen as a regime that you ‘apply’ or ‘switch to’ or ‘introduce’. I say it is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.”
    This is still problematic. The notion of MMT as a lens is good. But we need to note too that legislators, central bankers, economic advisors, et al. are already using some kind of lens (or none at all). The point is that they should instead “switch to” (or “introduce”) the MMT lens — to see things more clearly.
    Is Friedmanesque monetarism also a lens? Is supply-side economics a lens? Did Keynes give us a lens? All of these distort things whereas MMT does not?

  18. Dear Bill,

    Many thanks for setting the record straight. Speaking of power dynamics: could you one day propose an MMT analysis of the petrodollar?


  19. Replying to: Thomas Burke @Monday, June 14, 2021 at 3:08

    I agree with you. But your concern is covered by the qualifier “superior lens” is it not? Who would not want to switch out their lens for a superior one? Only a credentialed lamestreamer whose salary depends upon using the cloudy lens.

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