The State Of MMT Theory Is Good

I have returned from the first Modern Monetary Theory Conference, and I am feeling complacent about the state of theory within Modern Monetary Theory (MMT). I am looking at this from a particular perspective, which I will explain in this article. Other aspects of Modern Monetary Theory are obviously a work in progress, which I hope to discuss in a later article.

Background: Theory For Outsiders

My perspective is straightforward, although it may appear novel to some academic economists. I am interested in getting a handle on economic theory, taking into account that I am numerate and have a background in some other areas of study. In other words, I am not looking for a primer on "What is money?" in comic book form; feel free to throw whatever equations you want at me, so long as they are written in standard mathematical notation.

I can give an analogy from the area of academics that I worked in: robust control theory. A great many engineers from different fields (mechanical, chemical, aerospace) discover the hard way that it is difficult to get the systems they have built to behave, and they are forced into learning about robust control theory. I would send such a person to a textbook in the area, unless they were interested in a very specific topic that had not yet made it into a textbook. (In which case, they would need to consult a textbook and some journal articles, ideally a literature survey.)

Although it may be surprising to outsiders, even control systems engineering has different schools of thought (although they are not politically based like economics, so they are less persistent). Optimal control theory was popular in the 1960s, but I would only teach it to graduate students as an exercise in mathematics for the sake of mathematics (and history of thought), but absolutely not as a way to design actual engineering systems. Even within robust control, there were some debates that could only be described as philosophical, but you could probably cover the competing sides within the same coherent textbook. (Of course, there will be disputes over who gets cited for what, but these are only interesting to connoisseurs of academic politics.)

Economics is somewhat different. If you assemble twelve economists in a room, you are going to end up with twelve (or more!) coherent theories of economics that differ on some key points somewhere. It is a major effort to end up with a single textbook that covers the major views of a number of economists. For a purist, you could argue that the best way to deal with this is to dive into the academic literature, and tease out strands of logic. However, that strategy is not an option for someone with time constraints, and who has to pay various pirates $20 (or more) per eight-page PDF file. Academic textbooks are not cheap, but they are supposed to be self-contained, and you can get quite a few of them for under $1000 (which is what you might have to pay just to chase down the citations of one journal article).

Circling back to MMT, the macroeconomics textbook by William Mitchell, Martin Watts, and Randall Wray is projected to be published in April 2018. Based solely on the table of contents and the quality of the authors' other work, I expect that this textbook will be the best starting point for learning macroeconomic theory for someone who wishes to learn from a textbook. (There is a preliminary version already available; I was given the suggestion to wait for the final version.) Obviously, I reserve the right to change my mind, once I read and review the book...

I am going to put aside whether the contents of the textbook are "the truth"; I leave the question of determining the Final Truth to a Higher Authority. Will I agree with everything in the text? That would probably be a surprising outcome. That said, we need to start somewhere.

But! But! But!

Many of my readers are post-Keynesians, and they may (legitimately) be unhappy with what I just wrote. For example, one could look at Post Keynesian Economics: New Foundations by Marc Lavoie, a textbook which I am impressed with. The problem with discussing "post-Keynesian economics" is the fragmentation of schools of thought. One could glance at Table 1.2 of the text, in which he lists twenty heterodox schools of thought (albeit including some like Neo-Austrians, that probably do not qualify as "post-Keynesian" under almost any definition of "post-Keynesian.")

Modern Monetary Theory can be viewed as an attempt to hack out a coherent single narrative out of the post-Keynesian jungle. It may be that there is a better way to do so; I am not the person to attempt such a task. In any event, it seems obvious to an outsider that post-Keynesians who object to MMT need to think carefully how to better package their views so that they are relevant to those outside academic economics.

Other readers may see a more obvious objection: what about mainstream macro? The mainstream has a lot of best-selling economics textbooks. I do not see mainstream dynamic stochastic general equilibrium (DSGE) macro as a serious competitor. The only adherents of DSGE macro that I am aware of are people whose credentials and/or job are based on DSGE macro modelling. Conversely, finance is filled with highly numerate analysts with a vested interest in getting macro calls correct, and I never met a single one who had anything positive to say about DSGE. This is not one would expect to see from a vibrant intellectual movement.

Of course, there are a lot of believers in mainstream "non-DSGE" macro. For example, most financial market economic macro analysis could be characterised as such. Additionally, central banks produce a slew of research that goes in any number of directions. However, this analysis seem to rely on randomly selected sections of pre-1990s textbooks, and no longer represents a coherent school of thought. (That is, although individuals may have a coherent world view, each one will differ in important respects from others.) One might be able to construct a coherent school of thought out of these analyses, but I do not see anyone trying to do so.

Finally, there are other bodies of thought (Marxism, Austrian economics) that are coherent, but largely tied to one's political views.

A Permanently High Plateau of Theory

Assuming that the textbook meets my expectations, it will provide an introduction to MMT that is accessible and not reliant upon what is available on the internet. I was involved in a discussion on Twitter on that topic yesterday, and I am not greatly enthusiastic about going back there.

The problem with the internet version of MMT is that for some people, it is defined by comments made by non-specialists on various websites. (I am not trained as an economist, but I have fifteen years experience analysing the effects of interest rates, so I can take care of myself in debates.) Obviously, some of those comments can be incorrect, and not reflective of the academic MMT view. Many other economic schools of thought do not face this problem, largely because they have few non-academic followers. (Austrian economics would be the notable exception; there's almost no academic representation any more, but a large internet following.) Why should we be surprised when someone with a doctorate in economics has better formed economic views than someone with no economics training? In any event, this textbook may help bury that issue.

With the textbook in place, MMT should be able to expand to fill its "market," and one can argue that the job of marketing MMT will have apparently succeeded. Unfortunately, that does not mean that everyone will be MMTers, and we should have no expectation that will ever be the case.

The first problem is that there is a reason why religious metaphors always pop up in the discussion of economics (for example, orthodox versus heterodox). (One other conference participant without training in economics noted the religious parallels when speaking to me.) It seems fairly clear that it would be difficult to get many economists to toe any theoretical line, particularly in the naturally contrarian heterodox community. Although it seems like the most prudent political strategy for most post-Keynesians, there is little sign that they will rally any further around the MMT flag.

Another problem is that political economy is not going to go away. The free market political movement is not going to evaporate any time soon. On paper, MMT is politically neutral; but it seems clear that it is rarely framed in a way that a devotee of Ayn Rand is going to be comfortable with. Very simply, a person who is convinced that only gold is money -- and anything else is fraudulent -- is unlikely to be a fan of Chartalism. That said, one could imagine that country club Republicans (do any still exist?) could come to terms with MMT.

Finally, it seems very unlikely that the mainstream community will commit professional suicide and embrace MMT. It is possible that inroads will be made into institutions, but that is likely to be the result of shifting political winds. 

One can see from these comments that even though MMT may have succeeded in developing theoretically, its position may look similar to what it is today.

Concluding Remarks

Under the assumption that the MMT textbook meets expectations, the raw theoretical tools are in place. This is extremely useful for people who are interested in understanding how the economy will act, such as financial market participants. However, for most people, the more important question is whether this theoretical improvement will lead to an improvement in policy outcomes?

That more important question is more complicated, and I hope to discuss it in a later article. I am much more cautious in that area, so I wanted to break out my triumphalism regarding theory into this stand alone article. 

(c) Brian Romanchuk 2017