Modern Monetary Theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory concerning the role of fiscal and monetary policy in sovereign governments that borrow and issue government debt in their own currency. MMT departs from the mainstream economic consensus by rejecting the conventional model of central bank independence. MMT argues that responsibility for achieving full employment while maintaining price stability should rest with the elected government, with the central bank limited to accommodating the government's fiscal needs. In MMT, public expenditure is financed through money creation, with no intention of later refinancing it through taxes. MMT proponents acknowledge that money-financed spending is sustainable only while the economy has spare capacity, such as unemployed workers and underused production facilities. Once full capacity is reached, further money creation will generate inflation, which the government should counter by raising taxes to reduce private consumption and investment. In addition to its macroeconomic policy proposals, MMT includes a theory of money often associated with neo-chartalism, principles based on national income accounting, and labour market proposals such as a job guarantee. MMT synthesizes ideas from the state theory of money of Georg Friedrich Knapp (also known as chartalism) and the credit theory of money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky's views on the banking system and Wynne Godley's sectoral balances approach. MMT is opposed to the mainstream neoclassical macroeconomic frameworks and has been criticized by many mainstream economists. In a 2019 survey of top U.S. economists not a single respondent agreed with the basic aspects of MMT. MMT has also been rejected by many economists from otherwise divergent schools of thought, including Keynesian and Austrian economists.

Tenets

MMT's main tenets are that a government that issues its own fiat money:

Creates money with any and all government spending Effectively destroys money via taxation Cannot be forced to default on debt denominated in its own currency Is limited politically in its money creation only by demand-pull inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilised at full employment Should strengthen automatic stabilisers to control demand-pull inflation, rather than relying upon discretionary tax changes Has the option to issue bonds as a monetary policy device or savings device for the private sector. Bonds cannot act as a means of funding public spending. The government can set whatever price for bonds it decides. Uses taxation to provide the fiscal space to spend without causing inflation and also to drive demand for the currency. MMT frames government spending and taxation differently to most orthodox frameworks. MMT states that the government is the monopoly issuer of its currency and therefore must spend currency into existence before any tax revenue can be collected. The government spends currency into existence and taxpayers use that currency to pay their obligations to the state. MMT argues that the primary risk once the economy reaches full employment is demand-pull inflation, which acts as the only constraint on spending. MMT also argues that inflation pressures can be mitigated by increasing taxes on everyone, to reduce the spending capacity of the private sector, releasing real resources such that the state can employ them at current prices in a non-inflationary way.:150 The primary demand and inflation management approach advocated by most MMT economists is the job guarantee employer of last resort (ELR) programme. This provides a spend-side automatic fiscal stabilisation mechanism and establishes a nominal price anchor, utilising a buffer stock of employed labour. This is in contrast to the orthodox monetary dominance approach to demand management which involves adjusting interest rates and utilising a pool of unemployed labour as a buffer against inflationary pressures following a belief in a Phillip's curve trade off between the two.

Comparison with mainstream economics Françoise Drumetz and Christian Pfister (Bank of France) summarise the main differences between MMT and mainstream macroeconomics in the table below.

History MMT synthesizes ideas from the state theory of money of Georg Friedrich Knapp (also known as chartalism) and the credit theory of money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky's views on the banking system and Wynne Godley's sectoral balances approach. Knapp wrote in 1905 that "money is a creature of law", rather than a commodity. Knapp contrasted his state theory of money with the Gold Standard view of "metallism", where the value of a unit of currency depends on the quantity of precious metal it contains or for which it may be exchanged. He said that the state can create pure paper money and make it exchangeable by recognizing it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices". The prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value, but proponents of MMT such as Randall Wray and Mathew Forstater said that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists, including Adam Smith, Jean-Baptiste Say, J. S. Mill, Karl Marx, and William Stanley Jevons. Alfred Mitchell-Innes wrote in 1914 that money exists not as a medium of exchange but as a standard of deferred payment, with government money being debt the government may reclaim through taxation. Innes said:

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