Modern Monetary Theory
현대화폐이론
The macroeconomic theory holding that a government issuing its own currency cannot run out of it, so that it does not have to gather money through taxes or bonds before it can spend: it creates money by spending and withdraws it through taxes. It argues that the constraint on government spending is not the deficit as such but only the inflation that follows once labour and capacity are fully used, and puts forward a job guarantee as the means to full employment. It combines Knapp's state theory of money (chartalism), Lerner's functional finance and the ideas of Minsky and Godley. Most mainstream and Keynesian economists have rejected it, and on the Marxist side Michael Roberts criticised it for treating money as a creature of the state without a theory of value.
In depth
What does it claim?
A nation's finances are often understood like a household's: collect taxes and spend them, borrow when short, and when debt grows too large tighten the belt to pay it back. Modern Monetary Theory (MMT) says this analogy does not fit a government that issues its own currency. A government that borrows in its own currency, such as the US dollar, the Japanese yen or the British pound, is the monopoly issuer of that currency, so it must spend the currency into existence before taxpayers can use it to pay their taxes. The order is not "tax and spend" but "spend and tax".
MMT's main tenets are these. A government that issues its own fiat money creates money with all its spending and effectively destroys money through taxation. It cannot be forced to default on debt denominated in its own currency. Its money creation is limited only by demand-pull inflation, which accelerates once the economy's real resources (labour, capital and natural resources) are used at full employment. Bonds are not a means of funding public spending but a monetary policy device or a savings device for the private sector. Taxation provides the fiscal space to spend without causing inflation and drives demand for the currency.
Take some numbers as an illustrative assumption. If in a year the government spends 100 and collects 90 in taxes, it runs a deficit of 10. In the sectoral balances accounting MMT relies on, that 10 equals the increase in net financial assets of the non-government sectors (households, firms and the rest of the world): the government's deficit is the private sector's surplus. So as long as there are unemployed workers and idle capacity, deficit spending to raise demand is fine, and once full employment is reached and prices begin to rise, taxes can be raised on everyone to reduce private spending power and free real resources.
For managing demand and inflation most MMT economists advocate a job guarantee, an "employer of last resort" programme. If the government offers anyone who wants to work a job at a set wage, employment rises automatically in bad times and falls in good times, giving a stabiliser, and that wage serves as a nominal price anchor. This is the reverse of mainstream monetary policy, which moves interest rates and uses the unemployed as a buffer against inflation. MMT also rejects the convention of central bank independence, holding that responsibility for full employment with price stability should rest with the elected government and the central bank should confine itself to accommodating the government's fiscal needs.
Where does it come from?
MMT combines several lines of theory. The German economist Georg Friedrich Knapp wrote in his State Theory of Money (1905) that "money is a creature of law". Against "metallism", in which money's value comes from its metal content, the state theory of money holds that a state's money is whatever is accepted at its public pay offices. The name, chartalism, comes from the Latin charta, a token or ticket. Keynes referred to Knapp in the opening pages of his Treatise on Money (1930). Alfred Mitchell-Innes held in 1914 that government money is debt the government reclaims through taxation, and Abba Lerner argued in "Money as a Creature of the State" (1947) that responsibility for avoiding inflation and depressions lay with the state because it can create money or tax it away. Lerner's "functional finance" judges fiscal policy by its effects on the economy rather than by whether the budget balances. To these were added Hyman Minsky's views on banking, Basil Moore's endogenous money and Wynne Godley's sectoral balances.
The former hedge-fund manager Warren Mosler, L. Randall Wray, Stephanie Kelton, Bill Mitchell and Pavlina Tcherneva revived chartalism as an explanation of money creation, and Wray called the revived formulation neo-chartalism. Mitchell coined the name "modern monetary theory" and used it in Full Employment Abandoned (2008), written with Joan Muysken. It became a political issue in January 2019 when US Representative Alexandria Ocasio-Cortez said the theory should be a larger part of the conversation, and in February of that year Mitchell, Wray and Watts's Macroeconomics appeared as the first textbook based on it. Kelton, a former economic adviser to Bernie Sanders, saw her book The Deficit Myth become a New York Times bestseller in June 2020.
Why do mainstream and Keynesian economists object?
In a 2019 survey of leading economists by the University of Chicago Booth School, not one agreed that countries borrowing in their own currency need not worry about deficits because they can always create money to finance their debt, or that such countries can finance as much real government spending as they want by creating money. The economist Mark Skousen remarked that MMT is unusual in drawing criticism from a broad ideological range, from Keynesians to Austrians.
The New Keynesian Paul Krugman argued that MMT ignores the inflationary implications of maintaining deficits while the economy is growing, and likened its devotees to players of "calvinball", the game in Calvin and Hobbes whose rules change at whim. Gregory Mankiw said MMT contains "some kernels of truth" but its most novel prescriptions do not follow cogently from its premises. The post-Keynesian Thomas Palley held that MMT is largely a restatement of elementary Keynesian economics that "assumes away the problem of fiscal–monetary conflict", the possibility that the legislature setting the budget and the central bank controlling the money supply may not cooperate. Marc Lavoie said the neo-chartalist argument is "essentially correct" but that many of its counter-intuitive claims depend on a "fictitious" consolidation of government and central bank operations. The Austrian Robert P. Murphy called MMT "dead wrong".
The low real interest rates and inflation of the mid-1990s to the late 2010s, and the spread of quantitative easing, are cited as the background to MMT's prominence: these conditions gave governments room for larger deficits and created the superficial impression that money creation could finance spending without inflation or reactions in the debt markets.
What is the Marxist critique?
The Marxist economist Michael Roberts criticised MMT in "The Modern Monetary Trick" (Salvage no. 10, 2021). He began with why MMT had gained traction on the left: as austerity slashed welfare and public services, a theory saying the state cannot run out of money and so can reach full employment without fearing deficits and public debt is attractive to the labour movement. Roberts divided his critique into three parts: whether MMT's account of how money is created and circulates is correct, whether governments can create as much money as they like without consequences, and what problem MMT sets out to solve.
First, theory. For Marx money is not a convention set by the state but arises from the exchange of commodities. Marx wrote in the Grundrisse that "money does not arise by convention, any more than the state does. It arises out of exchange and arises naturally out of exchange." On Roberts's account today's fiat money does not change this: its value is still tied to value measured in the labour time created in capital accumulation, and the mint can print any number on its notes but cannot decide what that number refers to. Borrowing from Schumpeter, Roberts sums up chartalism as "either obvious and right; or interesting and wrong". MMT's circuit starts with the state, passes through the private sector and returns to the state as taxes, but for Marx money M becomes more money M′ only when value is increased in capitalist production through the exploitation of labour. Since taxes are levied on income already produced, the claim that taxes "destroy" money also gets the order backwards. Above all, Roberts argues, MMT has no theory of value, so it detaches money from value and makes it the primary force for change. He likens this to Proudhon in the 1840s, who located what was wrong with capitalism in the monetary system rather than in exploitation, and cites Marx's critique of "tricks of circulation" that seek to change relations of production by changing the instrument of circulation.
Second, practice. Kelton herself grants that the only economic constraints currency-issuing states face are inflation and the availability of labour and other material resources in the real economy. Roberts sees these as big constraints: the state may control the currency, but the capitalist sector controls technology, labour conditions, skills and intensity of work, that is, the productivity of labour. When the state's creditworthiness is questioned the currency can collapse, as he notes in Venezuela, Zimbabwe and Argentina. Third, aims. Roberts argues that MMT boils down to a theory justifying unrestricted government spending for full employment and says nothing about why capitalist accumulation breaks down at regular intervals. In the light of Marxist work showing that the fault lines in the profitability of capital are the most compelling explanation of recurring crises, his conclusion is that the answer to unemployment and crises lies not in issuing money but in replacing the profit-making monetary economy itself.