What is MMT, the heterodox economic theory that has captivated Alexandria Ocasio-Cortez, made its way into the Green New Deal discussion, and inspired dozens of thinkpieces and critiques? What does it say? How can we tell if it's a good theory or a bad one? These are incredibly important questions. Thanks to Ocasio-Cortez and the Green New Deal, MMT has very quickly gone from an obscure heterodox idea to one of the most potentially influential and important theories in all of economics. Formal Models vs. Guru-Based TheoriesThese days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don't have to go ask Mike Woodford what New Keynesian theory says. You don't have to go
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Formal Models vs. Guru-Based Theories
These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don't have to go ask Mike Woodford what New Keynesian theory says. You don't have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own.
MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT's policy recommendations. But that's different than having a formal model of the economy. In a criticism of MMT, Thomas Palley writes:
The critical economic policy question is what does the power to money finance deficit spending mean for government’s ability to promote full employment with price stability? This question can only be answered by placing that power within a theoretical model and exploring its implications...Proponents of MMT have a professional obligation to provide [a simple mathematical] model to help understand and assess the logic and originality of their claims. Yet, [MMT proponents Eric Tymoigne and L. Randall Wray] again fail to produce a model...If MMT-ers did produce a model, I am convinced the issues would become transparent, but readers would also see there is “no there there”.Now, a lot of people like to criticize mathematical models in economics. And they do have their drawbacks. Economists can sometimes become so entranced by the precision of math that they ignore the need to connect that math with the real world. And the difficulty of hacking through math can lead economists to make the models too simple.
Furthermore, Palley is being a bit too strict in demanding math; formal models can be stated in English or in graphs, rather than in equations.
But formal models have important advantages. For one thing, a good formal model can be compared with quantitative data, to see whether it works or whether it fails. Formal models can make testable predictions.
A second advantage of formal models is that you can figure them out for yourself, without having to ask any gurus. If you have to run to the gurus to ask them what the theory says any time you think you've found a flaw, it becomes almost impossible to skeptics or outsiders to evaluate the theory objectively.
This latter issue comes up a lot when dealing with MMT. In a recent post, Brad DeLong expresses his frustration with the theory's apparent slipperiness:
"Functional finance" is a doctrine originated and set out by Abba Lerner...When I said that "functional finance" is at the core of MMT, I got immediately smacked down by one of the gurus...Perhaps the key to the eagerness of [L. Randall] Wray to dismiss me (and James Montier) for saying that MMT is Lerner+ is sociological. Perhaps MMT is not model-based ("IS-LM with a near-vertical IS curve") and not idea-based ("Functional Finance") so that it can be guru-based. (emphasis mine)It wasn't just DeLong and Montier who conflated MMT with Functional Finance. Aryun Jayadev and J.W. Mason did something similar in their attempted write-up of MMT, leading Josh Barro to do the same thing in his own criticism of MMT. Mason, Jayadev, and Barro criticized MMT on the grounds that raising taxes to control inflation - something you have to do in Functional Finance, and which some MMT advocates agree is necessary - is politically very difficult.
But in response to these critiques, Mason, Jayadev, Barro, Montier, and DeLong were told: No, MMT is not just Functional Finance. It is very very different. On Twitter, MMT insider Rohan Grey declared that MMT has other tools besides fiscal policy for fighting inflation. On his blog, MMT insider L. Randall Wray said that MMT's main tool for maintaining price stability is the federal Job Guarantee:
Yes, MMT does have another tool to maintain price stability. It is the JG approach to full employment. It has always been a core element of MMT. We have never relied the simplistic version of Functional Finance that was presented by Mason. It would take about five minutes of actual research to demonstrate this.Now that's a perfectly fine rebuttal. People get theories wrong all the time. It's perfectly possible that Mason, Jayadev, Barro, Montier, and DeLong were all very wrong to equate MMT with Functional Finance, and that five minutes of actual research would have demonstrated this.
But which five minutes? If you want to know how MMT differs from Functional Finance, where do you look? Do you trust Wray's blog? Or Grey's tweets? Or an online explainer? Or a video explainer? Or in one of the many papers written by MMT proponents? Which one?
Because MMT doesn't often include formal models, the question of how MMT thinks inflation works is very difficult to answer for yourself. The same is true of a number of other questions, such as how MMT's Job Guarantee would create full employment with price stability. You have to go ask the MMT People themselves.
But "few formal models" doesn't mean "no formal models". Occasionally, MMT people do write down a formal description of how they think the economy works (or might work). One example is "Monopoly Money: The State as a Price Setter", by Pavlina R. Tcherneva.
Examining an MMT Model (or, "Pavlina Tcherneva and the EMPL of Doom")
"Monopoly Money: The State as a Price Setter" explains the idea of how a Job Guarantee would work. The formal model begins on p.130 (page 7 of the PDF).
Here is the model's "conceptual framework":
Now let's look at exactly how people work for the government and pay their taxes: