Tuesday, January 3, 2012

The History of Modern Monetary Theory

My last post got a bit hijacked by my attempt to write a digression on the origin of Modern Monetary Theory (MMT), which has also been called Chartalism, neo-Chartalism, the Kansas City approach, and soft currency economics. It strikes me that the subject deserves a post in its own right, so I will attempt one here (bear in mind there is some repetition).

Chartalism in the historical sense should be distinguished from Modern Monetary Theory. Chartalism was a theory of money developed by Georg Friedrich Knapp (1905; English translation 1924), which he called the “state theory of money.” This was taken up by Keynes in his Treatise on Money (1930). It appears to me that economists in the late 20th century associated with Post Keynesianism revived Chartalism as a theory, with the work of Alfred Mitchell-Innes (1913 and 1914) on credit money, including Charles A. E. Goodhart (although, strictly speaking, Goodhart does not regard himself as a Post Keynesian; see Goodhart 2005: 817).

Chartalism has been one source of MMT, and an early proponent L. Randall Wray appears to have used the term to describe the macrotheory he was developing. Randall Wray states:
“... somehow [sc. Chartalism] ... got the name Modern Money Theory. We think the first time those exact words were used might have been in a comment to Bill’s blog in 2007; if anyone can find that comment or a previous use, please send it along. It also looks like Bill used the term “modern monetary theory” in an academic paper in 2008.”
L. Randall Wray, “MMP Blog #30: What is Modern Money Theory?,” January 1, 2012.
The broader sources of Modern Monetary Theory are as follows:
(1) G. Frederick Knapp’s work (1905; 1973 [1924]);
(2) Mitchell Innes’s work (1913; 1914).
(3) Keynes;
(4) Abba Lerner’s functional finance model (1943; see also Lerner 1944; 1947; 1951);
(5) Post Keynesianism (with influence from both Keynes and MichaƂ Kalecki), and
(6) Hyman Minsky’s work (e.g., the employer of last resort idea and the financial instability hypothesis).
Economists who stand out as inventors of Modern Monetary Theory include L. Randall Wray (1998), William F. “Bill” Mitchell, and Warren Mosler.

L. Randall Wray explains the origin of MMT:
“[sc. the origin of MMT] ... goes back to PKT (Post Keynesian Thought) in the early 1990s—the first internet discussion group I ever heard of. It started off with all the stars of heterodox economics—Paul Davidson, Herb Gintis, Michael Perelman, Ed Nell; even Hyman Minsky contributed a post or two. And then there was ... Bill Mitchell ... He had little tolerance for Keynes but otherwise I found myself agreeing with him more often than with anyone else. On Kalecki, on Marx, on fiscal policy, and especially against the Austrians that were slowly but surely killing PKT.

And one other guy stood out—a hedge fund manager named Warren Mosler who was continually pushing two things. First there was something he called soft currency economics. It sounded to me like good old Keynesian economics from the Treatise on Money, which followed Knapp’s state theory of money. ....

What Warren also added was a much deeper understanding of bank reserves and treasury bonds. I came at this from the PK endogenous money, horizontal reserves view of Basil Moore. There’s nothing seriously wrong with that, but it never understood why a sovereign government would sell bonds. Warren explained bond sales as a reserve drain, and lightbulbs went off. Exactly right: government sells bonds to hit the overnight interest rate target. I think it was Mat Forstater who brought the final piece of the puzzle: Lerner’s functional finance approach.”

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.
By 1995, Warren Mosler called his theory “soft currency economics.” I quote Warren Mosler:
“The origin of MMT is ‘Soft Currency Economics’ .... I had never read or even heard of Lerner, Knapp, [Innes], Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations ... .”
http://mmtwiki.org/wiki/History_of_MMT
Mosler, as I understand it, has a connection with Paul Davidson (see also this interview for Mosler’s passing remarks about Charles Goodhart and the LSE). One of Mosler’s early publications was published in the Journal of Post Keynesian Economics (Mosler 1997-1998: 167-182).

Chartalism clearly was an important influence on other Modern Monetary Theory economists, but MMT, as it now exists, goes well beyond the original theories of Knapp or Mitchell-Innes.

The leading proponents of MMT hold that it is now an independent macroeconomic theory (by contrast, the Cambridge Post Keynesian Mark Hayes regards MMT as a sub-branch of Post Keynesianism). At the very least, Post Keynesianism can be regarded as the important macro-theory that stands behind MMT as one of its intellectual fathers, so to speak.

Perhaps it is even possible to think of MMT economists as a new generation of Post Keynesians—that is, as a younger generation that has developed Post Keynesian theory in new ways.

Appendix
I will end this post with a list of advocates and supporters of MMT (mainly academics):

Warren Mosler
Randall Wray
Bill Mitchell
Pavlina Tcherneva
Stephanie A. Kelton (formerly Stephanie Bell)
Mat Forstater
Ed Nell
Scott Fullwiler
Mike Norman

BIBLIOGRAPHY

Bell, S. 2000. “Do Taxes and Bonds Finance Government Spending?,” Journal of Economic Issues 34.3: 603-620.

Goodhart, C. A. E. 2005. “What is the Essence of Money?” (Reviewing: Geoffrey Ingham, The Nature of Money, Polity, Cambridge, 2004), Cambridge Journal of Economics 29: 817–825.

Keynes, J. M. 1930. A Treatise on Money, Macmillan, London.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1918. Staatliche Theorie des Geldes (2nd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1921. Staatliche Theorie des Geldes (3rd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1944. The Economics of Control, New York, Macmillan.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Lerner, A. P. 1951. The Economics of Employment, New York, McGraw Hill.

Mitchell, Bill, 2011. “MMT is Biased Towards Anti-Crony,” December 28.
http://bilbo.economicoutlook.net/blog/?p=17528#more-17528

Mitchell, W. and J. Muysken. 2008. Full Employment Abandoned: Shifting Sands and Policy Failures, Edward Elgar, Cheltenham.

Mitchell-Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell-Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Mosler, W. 1995. “Soft Currency Economics,”
http://www.mosler.org/docs/docs/soft0004.htm

Mosler, W. 1997-1998. “Full Employment and Price Stability,” Journal of Post Keynesian Economics 20.2: 167-182.

Mosler, W. 2010. The Seven Deadly Innocent Frauds of Economic Policy, Valance Co., St Croix, U.S.V.I.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.
http://neweconomicperspectives.blogspot.com/2011/12/mmt-doubly-retrospective-analysis.html

12 comments:

  1. The Austrians already had the fundamental mechanics of the MMT framework set out long before Mosler had his "independent" thoughts on the matter.

    http://www.economicpolicyjournal.com/2011/12/john-carney-sips-bit-of-mmt-kool-aid.html?m=1

    http://www.cnbc.com/id/45795986

    Having said that, MMTers and Austrians differ radically on how the accounting tautologies and the mechanics of the theory are to be interpreted and utilized.

    ReplyDelete
  2. Even Warren Mosler himself is aware of the many affinities the mechanics of MMT has with the Austrian school:

    http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-780128

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  3. "Even Warren Mosler himself is aware of the many affinities the mechanics of MMT has with the Austrian school:"

    That comment by Warren Mosler is obviously a quick attempt to appeal to Austrians by being generous and receptive to their ideas.

    When he says "And Austrians also agree that there are some governmental functions that serve public purpose and require provisioning," he is obviously thinking of Austrian Classical liberals who support a limited state, not anarcho-capitalists.

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  4. "The Austrians already had the fundamental mechanics of the MMT framework set out long before Mosler had his "independent" thoughts on the matter."

    Garbage.
    Most Austrians would adhere to the view that taxes and bonds "finance" modern government spending - a myth that is nothing but an echo of the gold standard days, days that Austrians worship with quasi-religous superstition.

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  5. "That comment by Warren Mosler is obviously a quick attempt to appeal to Austrians by being generous and receptive to their ideas."

    It is more than that. It is Mosler reaching out and trying to convince Austrians that they should agree with the theory of MMT, and not be so antagonistic towards him. Well sure, in theory there are a lot of similarities between MMT and Austrianism, after all, Rothbard for example already had the mechanics of MMT worked out long before Mosler thought about it.

    "When he says "And Austrians also agree that there are some governmental functions that serve public purpose and require provisioning," he is obviously thinking of Austrian Classical liberals who support a limited state, not anarcho-capitalists."

    Sure, but at the Mises Institute, where he posted that comment, there's probably 1% of scholars at the Mises Institute who are classical liberals. The rest are anarchists. I can only think of George Reisman as a classical liberal in the Misesean tradition, but that's only because Reisman was brainwashed by Rand's minarchist claims.

    ""The Austrians already had the fundamental mechanics of the MMT framework set out long before Mosler had his "independent" thoughts on the matter."

    "Most Austrians would adhere to the view that taxes and bonds "finance" modern government spending - a myth that is nothing but an echo of the gold standard days, days that Austrians worship with quasi-religous superstition."

    But taxes and bonds do finance modern government spending. The realization that most of what circulates as dollars in the economy were created by government, does not refute the fact that government spends money it collects through taxes, and spends money it collects through borrowing. Yes, the money it taxes and spends was almost all created by government originally, and if you ask any Austrian, they will of course understand this.

    Every Austrian knows that governments that can print money are not revenue constrained.

    Every Austrian knows that governments that can print money are not obligated to tax or borrow if they want to spend money.

    Every Austrian knows that governments that can print money are effectively only "limited" by inflation getting out of control.

    Like Mosler said, MMTers and Austrians agree almost entirely on the theory behind MMT, and it's true, we do. As a matter of theory, we are in almost complete agreement. Where we differ is what we ought to do with it, and the implications of using it one way over another.

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  6. "But taxes and bonds do finance modern government spending."

    No, they don't - and, by asserting that, you've demonstrated clearly that you are far from MMT.

    Bell, S. 2000. "Do Taxes and Bonds Finance Government Spending?," Journal of Economic Issues 34.3: 603-620.

    ReplyDelete
    Replies
    1. Actually they do.
      The nuances of reserve accounting are transitional and irrelevant to answering this question.
      The bigger question I have is why it is necessary to make any determination of such import in order for MMT to stand.
      The accountant's agreement of what is a plus in one column and a minus in another is incapable of determining whether we need to support the expenses of the government through taxation or otherwise.
      The law says we must.
      MMters keep saying they simply describe what is.
      Which trumps - the Treasury statute or the accountant's criteria?

      Delete
  7. I would include Scott Fullwiler in that core group of MMTers. He is the one who really nailed down the detailed mechanics and accounting of fiscal and monetary operations.

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  8. To the list of intellectual forefathers, you would probably need to add Wynne Godley for introducing the sector balances?

    ReplyDelete