Since the 1990s, MMT has been developed by economists and financial market practitioners in the USA such as Randall Wray, Warren Mosler, Stephanie Kelton, Pavlina Tcherneva as well as William Mitchell in Australia. The most important German representative is Dirk Ehnts, whose book “Geld als Kredit” (“Modern Monetary Theory and European Macroeconomics”) was instrumental for this article and is also the source of the T-account presentation.
MMT-economists refer to the following historical predecessors and their ideas: Abba Lerner (inflation and unemployment are crucial, not the national debt), Georg Friedrich Knapp (money derives its value from state taxation), Alfred Mitchell Innes (credit money forms with equal debt), John Maynard Keynes (the expenses of one, always constitute the revenues of another), Wynne Godley (revenues equal expenses also on a sectoral level), and Hyman Minsky (credit money leads to crisis susceptibility of the financial system).
MMT is to a large extent purely descriptive and analyses the current state of our monetary system. The methodology consists of empirically tracking practices in the financial system and ministries of finance, as well as accounting transactions between all private and state participants. It applies an additional analysis of the balances of different sectors (private, government, foreign), which corresponds to accounting at macro level. According to this methodology, MMT results are also falsifiable, which is unique in monetary theory. As far as this descriptive part is concerned, no scientific objections exist. It is exactly this descriptive part of MMT that this article tries to summarise.
Aside from that, there is also a normative part, in which MMT economists draw conclusions from their analysis. They present different ideas for the sensible management of monetary and fiscal policy that could initiate far-reaching changes. Understandably, this part of the theory often leads to opposition and polemics, for the profound political implications. However, the objections are usually generalised, and compensate for the lack of valid arguments against the descriptive part. For the sake of achieving a complete picture, what follows is an overview of the normative element of the MMT. MMT economists agree that the amount of public debt is in itself insignificant and does not deserve further attention. They advise to consider the figures of unemployment and inflation instead, because these are the two real phenomena that should actually be controlled. The focus on government debt is thereby pointless, as there is no empirical evidence of causality between government debt and inflation.
MMT economists thus come to the provocative conclusion: as long as there is no significant inflation, the state can exercise its monopoly on money creation and spend money on its democratically decided policies. Preferably, it should do this through the creation of work. MMT-economists sometimes put it bluntly by saying that if unemployment is too high, then the national debt is too low. With regards to monetary policy, MMT-economists recommend coping with inflation by adjusting taxes rather than the key interest, since a high key interest rate often slows down the real economy to an extent that triggers the rise of unemployment. The key interest rate as an instrument would thus turn dispensable and the payment of interest would become a political matter.
Besides, MMT-economists have come up with a very concrete and socially far-reaching proposal, which can only be touched on here. The so-called MMT job guarantee would work to solve the two most important problems of monetary and fiscal policy at the same time: unemployment and monetary stability. The job guarantee advocates the right to a state-assured job for everyone who is able to work, wants to work and can’t find a job. This program would act as a strong automatic stabiliser for the economy.
In recessions, many people would transfer from the private to the public sector of the job guarantee – demand would therefore decrease slower than in other cases, and deflation would be avoided. The necessary deficit spending would not lead to inflation, since on the one hand the additional work would create extra services and on the other hand, employees in the public sector would be remunerated at a state-approved pay rate, which anchors the price of labour to counteract inflation. Once an economic recovery occurs, more people would return to the private sector. Private employers could draw from a pool of educated workers from the public sector, so that even in boom periods, the rise in wages and prices would be delayed. Nevertheless, should inflation occur, the state could increase taxation to remove demand from the system.
Regardless of one’s opinion on the job guarantee, MMT extends the democratic scope in general. The state possesses money because it can create money. Government debt is not a problem in and of itself but is instead the flip side of money creation. By adopting this mindset, we could focus on which political projects to finance instead of discussing how to finance political projects. This theory is encouraging, especially regarding upcoming transformational processes in the context of climate change and future crises. It demonstrates that we have the means to shape our future.
