7 Reasons for Adopting the MMT Approach & 1 Good Reason for Dumping Neoliberal Economics
MMT Economics: Why Economists Should Aim to Be More Like Mechanics and Less Like Priests – and Why Mainstream Economics Can Learn from Modern Monetary Theory (MMT)
MMT Economics: What You Will Learn
Why there are at least eight good reasons for adopting the Modern Monetary Theory (MMT) approach; why MMT can help governments make better policy decisions; why neoliberal economics has failed even by its own standards; why economists should be more like mechanics, not priests; and how MMT can fill the knowledge gap by studying the real-world economy instead of starting with abstract models.
Technical Terms/Jargon Used in This Article
You will find definitions of all of the technical terms/jargon used in this article in my series of MMT Economic Jargon Buster articles. Paid subscribers can also download my MMT Dictionary.
A guide to moving beyond neoliberal economics and towards policies that work
“…unfortunately, our Federal government thinks it’s ‘run out of money’ and ‘dependent on foreign borrowing that our children will have to pay back.’ Complete nonsense, but they believe it, as does the mainstream media and academic community.”
— Warren Mosler – Mosler Economics
The aim of this post is simple – to answer the question: what is MMT good for? Does it offer a way to make citizens’ lives better? Can it help smooth out the ups and downs of the business cycle? Can it help mitigate the effects of climate change and can it help with the many other problems we face right now? And – on a more fundamental level – can it help to change the very approach that mainstream economists take to understanding the economy?
Or should we be reporting MMT to the advertising standards authority for making false promises?
There are, of course. many good reasons for adopting an MMT approach; but the main one, as I argue here, is that MMT can point politicians and economists towards a different way of studying the economy – one that actually arms them with the knowledge and tools to make better decisions.
Right now, both politicians and mainstream economists are making an absolute botch of it. And they’ve been doing so for decades – certainly since the rise of neoliberalism in the late 1970s and early 1980s. They are making a botch of it because their core approach to understanding the economy is not designed to do the job it is meant to do. That is, if we assume their job is to understand how the economy works, and to help governments use that knowledge to make people’s lives better.
However, before I get into that argument, ‘right out of the bat’, here are eight good reasons for adopting the MMT framework (in case you are not buying into my main hypothesis and need me to live up to the title of my post). Seven of these bullet points are drawn from Stephanie Kelton’s book, The Deficit Myth, plus the one that I have added myself – which is the main focus of this post.
If you have any questions or if you disagree with anything I write in this article, I want to hear from you. Please add your comments in the discussion area. Contrary views are welcome.
MMT can help governments to make better policy decisions. If politicians and their economic advisors don’t understand how government spending works and/or how the major macroeconomic levers they control work, how can they make informed decisions? MMT helps to reduce what I will call the knowledge deficit that politicians and economists operate under.
MMT can help bridge the gap between the number of jobs available and the number of people who want to work. MMT recommends job guarantee programs. A job guarantee program is designed not only to ensure all those who want a job can have one but it is also designed to stabilise prices and act as a stabiliser of the economy. In times of recession the government employs more people (and spends more money) and in times of economic strength it employs fewer people. MMT helps to reduce the jobs deficit (and spends less money).
MMT demonstrates that for currency-issuing governments affordability is not a barrier – they can afford to fund universal healthcare if the real resources (staff, equipment) are available. MMT helps to reduce the healthcare deficit.
Similarly, MMT reveals that investment in education is constrained by real capacity, not by a lack of money. You can increase capacity by spending on support for schools, teachers, and students. MMT helps to reduce the education deficit.
MMT helps governments understand that they have the wherewithal to mobilise resources in order to repair and modernise the country’s infrastructure. MMT helps to reduce the infrastructure deficit.
By exposing the false “taxpayer money” narrative (i.e. understanding that tax revenues do not pay for government services: spending comes first, taxing comes later), MMT empowers citizens to demand policies that reflect public purpose rather than artificial budget limits. MMT helps to reduce the democratic deficit.
MMT can fund climate change mitigation projects. Government can pay to develop the resources and manpower needed. Right now both governments and the private sector are staring at their feet – full of excuses about why they can’t take action. Climate change is an existential threat to us: there are no excuses for not taking action. MMT helps to reduce the climate funding deficit.
MMT demonstrates that a guaranteed retirement income can always be afforded. As Kelton points out, many households currently lack enough income or assets to build security, withstand shocks, or plan for retirement. MMT demonstrates that it is possible to reduce the domestic savings deficit.
Each of these items is a problem that can be fixed – but they are problems that are not being fixed by current politicians and economists. Why is that? Because the mainstream approach to understanding the economy acts as a blindfold: economists can’t see past (or over) the ‘mountain of misunderstanding’ that neoliberal economics has built. They simply can’t see solutions within their models, because their models don’t reflect reality. Instead their models - at heart - reflect an ideological viewpoint (I will explain why shortly).
Mainstream economics is more akin to a religious sect than an academic discipline. In a true academic discipline, models and ideas change when presented with new information and the failure of past hypotheses. This does not happen in mainstream/neoliberal economics. Mainstream economists therefore, are marketeers, selling an idea built on faith, not science.
That’s why they are lost when it comes to trying to make people’s lives better. Their beliefs – act as a blindfold. They are suffering from a knowledge deficit.
Note, that paid subscribers resources are now on this page. Downloadable factsheets, a downloadable dictionary of economic jargon, my book/journal recommendations and much more.
MMT can help governments to make better policy decisions By Solving The Knowledge Deficit:
Since the late 1970s early 1980s inequality has continued to widen, jobs have continued to be lost, poverty has continued to increase and public infrastructure has continued to deteriorate. All the while, our planet continues to become less and less habitable for us – and for the rest of the earth’s beasts.
As economist Steve Keen has pointed out, the data shows that the neoliberal economic approach has failed, even by its own standards. The free market has not delivered the promised prosperity for all.
“…the shift from so-called "Keynesian" to "Neoclassical/Neoliberal" economic policies that began in the mid-1970s, which was supposed to unleash the private sector from the shackles of the State, has failed on its own terms. The rate of economic growth under Neoliberalism—which I date from the beginning of 1975, when a surge in inflation empowered the political and academic rise of Milton Friedman's ‘Monetarism'—has been lower for every country in this database.” Steve Keen – The Failure of Neoliberalism
As the following statistics demonstrate, the neoliberal approach has seen inequality worsen, poverty increase, jobs disappear and infrastructure deteriorate.
Inequality Has Worsened
In the U.S., the top 1% share of pre-tax income has doubled since 1980. The top 1% hold nearly 35% of total wealth. Financial Times: Letter: Politics explains why US wealth gap keeps growing
Globally, since 1980, income inequality has surged: in Europe, the richest 10% went from 27% to 36% of income; in the U.S., from 35% to 47%. Wikipedia
In OECD countries, the gap between the richest and poorest 10% widened from 7:1 in the 1980s to around 9.5:1 today. OECD
OECD data also show that the top 10% of households own over 50% of all household wealth. In the U.S. this climbs to a staggering 79%, underscoring extreme wealth concentration. OECD
Poverty Has Grown, Especially in the UK
A 2024 Joseph Rowntree Foundation report found that it’s now much harder for Britons to escape poverty. [In the U.K.] 22% of the population (14.4 million people) live in poverty, including 4.2 million children and 2.1 million pensioners. Poverty has deepened over two decades with growing gaps between income and the poverty line. The Guardian
Since 2010, under austerity, child poverty in the UK has reached its highest level since before World War II, and 1 in 3 children (around 4.3 million) now live in relative poverty. TIME, The Guardian
A think-tank report found average households are £10,200 worse off compared to the trend pre-2010, showing a "level-down" across the country where relative poverty has increased everywhere. The Times
Jobs, Wages, Infrastructure Are All Under Strain
In the UK, wage growth has stagnated. After inflation, real wages are back to 2005 levels by 2023, and productivity remains largely flat. Wikipedia
In relation to job quality and security, neoliberal policies, like union-busting and labor deregulation, have helped depress wages and increase precarity in the U.S., while real wages grew by just 0.3% per year since 1979, even as top incomes doubled. Development Education Review
In relation to housing and services: In the U.S. homelessness nearly doubled in the 1980s, driven by social service cuts and neoliberal policy shifts.Wikipedia
Mainstream/neoliberal economics - is it the solution to these problems?
Have the policies of mainstream economists addressed any of these issues? No, the statistics say that they have made them worse. In the UK alone, over the last 15 years, there have been 300,000 deaths due to austerity. That’s 300,000 lives lost due to a faulty approach to understanding and managing the economy (The Guardian).
Neoliberal economists are more like priests promoting a particular brand of religion (or if you prefer, magical thinkers, fortune tellers, or soothsayers from the ‘olden days’) than mechanics. The product they sell are their beautifully constructed, self-adjusting, abstract models. The problem is, that these beautiful models don’t help them to solve the problems we are having right now. I’m sure they would like to understand the real economy, but they neither have the tools nor the time to do that: their minds are fully occupied elsewhere.
“The bad is that the neoclassical dominance is so complete. In fact, the uselessness of economics is a major defence in its favour, because you don’t use economics to build a bridge.… In economics, they can get away with saying, ‘Oh, the global financial crisis wasn’t our problem’ … then they continue teaching the students the same crap, unchallenged thus far in the real world.”— Steve Keen, Can Heterodox Economics Make a Difference? Conversations With Key Thinkers (2020)
Economists Should Be More Like Mechanics
If car mechanics got the same type of training that economists get — the theoretical underpinnings of how one type of energy (fuel) gets transformed into another type of energy, i.e. forward motion — they would struggle to fix your car. Sure, they need a bit of theory, but more importantly, they need a detailed description of all the bits and pieces that make up a vehicle, how each part works and how they fit together as a whole to turn a set of wheels. For good measure, it would also be handy if they have some recipes for diagnosing and fixing common problems to speed up their daily work.
Theory just isn’t enough: a simplified, abstract model of how cars work isn’t enough. They need whatever the modern equivalent is of the old Hayes Manual: a detailed description of the vehicle they are trying to fix. Economists need something similar: a detailed description of the ‘mechanics of the economy’.
But, of course, the economy is a complex piece of ‘machinery’ with many moving parts. And the response to this complexity (for mainstream economists) has been to build simplified, theoretical models — using simple assumptions (because you need to keep some variables static) — aiming at reflecting how the real economy works. That’s not a criticism, it’s an appropriate approach.
However, unlike a mechanic’s education, economics as a discipline seems to have an aversion to supplementing the approach by studying aspects of the real economy, even those parts that are — relatively speaking — easy to understand. For example, they don’t get taught about things that are central to how the economy works, like the mechanics of government spending. Like the material difference between governments that issue their own currency and those that use the currency of another country.
You Need Assumptions to Build Useful Models – But Those Assumptions Should Not Influence the Results
And, as I hinted earlier, mainstream economists’ models are based on assumptions that are unrealistic. Those assumptions are primarily based on a view of human nature that reflects a particular ideological viewpoint. That is the self-interested, rational, all-knowing individual, making choices to maximise their personal satisfaction.
At the heart of mainstream economics is the individual who stands alone. Thatcher’s individual. Reagan’s individual.
“There is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first.” Margaret Thatcher Woman’s Own magazine in 1987
However, all individuals are part of a family, a community, a school, a workplace, a town, a country. And all individuals are influenced by marketeers, propagandists and, of course, their education, environment, and class background. So, sure, simplified theories are essential but when you have an ideological viewpoint at the root of your theory and you are selling that theory with religious zeal, are you part of an academic discipline or a high priest, teaching the gospel of neoliberalism?
To get back to my argument: this is no way to study how the economy works; this is no way to diagnose economic problems; and this is no way to develop useful economic policies.
Can MMT help turn neoliberal high-priests into humble mechanics?
It is clear that the mainstream/neoliberal economics approach isn’t designed to fix the problems that need to be fixed: the ‘results are in the data’. They may well have done a great job for a particular section of society but they self-evidently have failed the rest of us. Economists need to go back to school and the curriculum needs an update. Economists need a broader curriculum, one that includes Modern Monetary Theory and other economic schools of thought including: behavioural economics, institutionalism, ecological economics and the rest.
In the short term, MMT can’t shift the mountain of existing beliefs, myths or change the underlying ideological assumptions. But what it can provide is that part of an economist’s education that is missing: the ‘Hayes manual’ part. That is, MMT can fill the knowledge gap: what is happening in the aspects of the real economy that can be studied without the need to start with a simplified model based on self-serving assumptions.
Economists need to study the real world, not just the abstract world. It’s time to take off the blindfold. In the longer term the neoliberal approach to studying the economy must be done away with all together: it is not fit for purpose. Indeed, to hark back to a question I mentioned at the start of this post, it is the neoliberal economics that needs to be reported to the advertising standards authority - for making false promises.
“If you look at mainstream economics there are three things you will not find in a mainstream economic model” - Banks, Debt, and Money.” Economists Steve Keen
If the topics that MMT becomes part of mainstream economic education that will eventually change the landscape entirely. There’s a reason that MMT economists are so good at predicting financial meltdowns, understanding the true nature of government ‘debt’, understanding why pushing up interest rates is a blunt tool for controlling inflation, understanding why quantitative easing (QE) primarily just increases inequality, and understanding what makes a job guarantee good as a stabiliser of the economy. That reason is that MMT is primarily about observing and describing the real economy: via the institutions, the balances sheets and flows of money between different sectors. MMT does have a theoretical aspect, but that comes later: after aspects of the economy (primarily the monetary system) have been studied to find out how they work in practice.
In short, if you start with an understanding of the history and mechanics of the monetary system you can end up with governments making policy decisions based on real needs and opportunities, rather than being constrained by myths, artificial rules and a particular ideological viewpoint.
“I am often asked what I would keep of Neoclassical economics in a new paradigm. My answer is that I would keep as much of Neoclassical economics as modern astronomy kept of Ptolemaic astronomy – which is to say, nothing at all.” – Steve Keen, The New Economics: A Manifesto
That’s all for now. Don’t forget to subscriber for more MMT economics related content from MMT101.
Resources
The Deficit Myth - Stephanie Kelton
The failure of neoliberalism - Steve Keen
Political Attacks On The Poor Have Produced Penury - The Guardian
Average households are £10,200 worse off compared to the trend pre-2010 - The Times
UK, wage growth has stagnated - Wikipedia
US real wages grew by just 0.3% per year since 1979 - Development Education Review
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MMT Factsheet 3: If Taxes Are Not For Spending What Are They For?
From cultural anthropology comes the definition of an egalitarian society. It is one where (decision-making) power flows upwards. This system is a moral system and it exists in the human species as *the* means of the rank-and-file to jealously defend their own liberty. The function of morality is to keep a lid on dominance, although we all well now that morality can and has been hijacked to serve dominance. The solution is not mechanical, it is moral.
Money is not a veil on barter. Money is a veil on economic tyranny. It’s the wealth distribution stupid.
Heterodox models are just as blind as orthodox models. They deliberately ignore wealth distribution even though direct observation says it is the most important factor driving economic dynamics.
MMT is a descriptive theory. *deficit spending has always been used by economic power structure* The wealthy and corporations fully understand deficit spending. They have the economic and political decision-making power, and they use both public and privately created money credit to butter their own toast while they use austerity (inflation + usury) to create a permanent under class.
In other words, you all in the MMT community fail to argue effectively. You are begging for recognition from the authorities that already use deficit spending to their advantage.
In order to win what most MMT proponents say they want to win you need to work from an understanding of what drives public affairs: confrontation of moral sentiments. The confrontation: the desire, intrinsic to the human species, for freedom from subjugation.
You need to point to the fact that deficit spending is natural as a matter of course, and focus on the real topic at hand: where that money where that created money just like commercially created bank money is invested in and to what end and to whom it benefits and serves
People at the top of a hierarchy enjoy their position because they are free from subjugation and are free instead to inflict it upon everyone else. They have embraced humanity’s psychopathic tendency to seek mastery in a world of slaves. They will never surrender their position and re-enter the mutual obligation that an egalitarian society will demand of them. Until you leverage public sentiment to see and reclaim their economic and political decision-making power you will remain on the periphery constantly trying to curry the ear and favor of today’s aristocracy.
Economics should indeed be a discipline more like engineering. If a civil engineer were to design a bridge, using the mathematical theories and models he learnt in college, and the bridge collapsed, what would he do? He would analyse the wreckage to find out the cause of failure, then revisit and revise the models to more accurately reflect reality so the same thing didn't happen again. It seems that an economist in the same situation would blame the bridge, or complain that he couldn't have been expected to account for the unexpected stresses of a cyclist riding over it.