In defense of Modern Money Theory

A dissenter let me know that one of the founders of Modern Money Theory (MMT), Warren Mosler, has no PhD in economics! And...MMT is a cult! Eeek!

Don't get me wrong: economics is rife with cultic activity. Take a look at the religious devotion to the gold standard of previous generations. Or look again at an article describing "How Economics Became a Religion." But given orthodox economics' lack of success predicting economic events like the Great Recession, current economic orthodoxy, including what's coming from credentialed economists, looks more like theology than science. But don't take my word for it! Who predicted the Great Recession? The orthodox guys, or the heterodox ones?

Mosler's own account of his 'discovery' of MMT goes like this:

The origin of MMT is ‘Soft Currency Economics‘ [1993] at www.moslereconomics.com which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago, who sent me to Art Laffer, who assigned Mark McNary to work with me to write it. The story is in ‘The 7 Deadly Innocent Frauds of Economic Policy’ [pg 98].

I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.

The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it. (from his website...comments there are worth a look, too.)

...So, it sounds as though Mosler lacked some knowledge of economics...by his own admission! What follows are some of the economic pronouncements that anticipated MMT--statements that Mosler himself says he didn't know--and some indication MMT isn't quite as monolithic as your run-of-the-mill cults, and while Mosler has certainly contributed, he is not alone in 'creating' that "new perspective." Those blessed with sanctified economics degrees said MMT-like things too.

Incidentally, throughout human history, something been "in the air" and discovered by more than one person (e.g. Leibnitz and Newton discover calculus in the 17th century)  MMT as formulated by Mosler followed the discovery of Chartalism, a word coined in 1905. MMT has been called "neo-chartalism."

If you're curious about what MMT says about corporate taxation (it's in the news) here's a recent paper. The authors say "In our view, corporate income taxes do not merely fail to deliver the purported benefits; they also have strong perverse impacts on corporate behavior."...although they stop short of recommending elimination of such taxes. Meanwhile, I'm not so sure there aren't "perverse impacts" from personal taxation, either, so maybe I'm a heretic.

That same paper discusses another precedent for MMT "[In] 1946...former President of the New York Federal Reserve, Beardsley Ruml, [observed] that, in the context of a sovereign government with a non-convertible currency with a floating exchange-rate, no foreign debt and its own central bank, 'taxes for revenue are obsolete...'" That's straight MMT, but coming from a source that predates Mosler's birth.

One common MMT policy recommendation is a job guarantee (preferred over the basic income guarantee--something even super-conservative economist Milton Friedman advocated). Hyman Minsky (1919-1996) predates Mosler in advocating that, too.

Minsky also said "Anyone can create money [as IOUs]...but the problem lies in getting it accepted." Minsky was a professor to Randall Wray. Wray wrote Modern Money Theory. One of Wray's shorter articles is recommend more than the MMT book. See here for more about Wray on Minsky, and for Minsky's departures from Keynes.

MMT's job guarantee--the possibility of full employment--predates Minsky and MMT itself, too. Polish economist Michal Kalecki (1899-1970) wrote about "The Political Aspects of Full Employment" in 1943. Kalecki essentially says that sovereign, fiat currency creators like those Beardsly Ruml cites could employ everyone without raising taxes, but if jobs were plentiful and labor scarce, it would empower labor. Business would prefer plentiful labor and scarce jobs to enforce "labor discipline." That's what we have now.

Kalecki's writing anticipates even Keynes' "demand-side" economics, but unfortunately Kalecki wrote that bit in Polish, so the world acknowledges Keynes, not Kalecki, for that discovery. From Wikipedia: 'Kalecki has been called 'one of the most distinguished economists of the 20th century" and 'likely the most original one.'"

As for dissents from MMT's cultic discipline, Steve Keen has some criticism of MMT in this 30-minute interview. For example, he says Mosler's description of imports as a net positive is very U.S.-centric, and doesn't really apply to nations who don't have the world's reserve currency. If nothing else, Keen demonstrates MMT isn't monolithic.

If credentials matter to you: Keen has a PhD. in economics and won the Revere Prize for predicting the Great Recession. He assembled the mathematics for an economic simulator that uses calculus rather than linear equations to make economic predictions. The program's name: Minsky. You can download it from the link and try it yourselves, if you're that ambitious.

Other credentialed MMT economists include Minsky, Wray and CSUS graduate Stephanie Kelton (Bernie Sanders economic advisor for the minority on the Senate budget committee). Notice that Mosler mentions Don Rumsfeld, and was advised by Art Laffer (both Republicans) while Kelton advises Sanders Democrats. MMT doesn't necessarily pick sides in the fight between team blue and team red.

So, it's true that Warren Mosler, does not have the academic credentials. On the other hand several others who agree with him are credentialed.  But...Mosler managed bank operations and hedge funds, is wealthy....and now has a cult following!

Incidentally, Mosler and his brother were mechanically inclined as youngsters. When he got the resources to do so, Mosler founded Mosler Motors to make race cars. The Moslers won often enough that the racing authority changed their rules to ban the cars. You may remember racing genius Jim Hall's Chaparral cars faced a similar fate.

I had thought Einstein was an example of un-credentialed genius--not precisely true--but one might also mention Ben Franklin, Thomas Edison ("Edison only attended school for a few months and was instead taught by his mother"- Wikipedia) or Henry Ford (educated as an "apprentice machinist"- Wikipedia).

Says Wikipedia: "In 1900, Einstein was awarded the Zürich Polytechnic teaching diploma." Wikipedia says "After graduating in 1900, Einstein spent almost two frustrating years searching for a teaching post. ... With the help of Marcel Grossmann's father, he secured a job in Bern at the Federal Office for Intellectual Property, the patent office,^[47][48] as an assistant examiner – level III.^[49][50]" So Einstein couldn't get a job in academia, but wrote his seminal papers while working for the Swiss patent office.

On the other hand, Mosler corresponds with me by email...so his judgment may be questionable.

(For those interested in related comedy: Nichols & May explore name dropping here.)