How does Modern Monetary Theory differ from the ‘orthodox’ theory of money?

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I just watched the documentary ‘Finding the Money’ and found it interesting. However I don’t understand economics enough to fully grasphow MMT is a revolutionary way to look at money compared to the traditional theory of money.

In: Economics

3 Answers

Anonymous 0 Comments

It’s less a revolutionary way to look at money, and more a revolutionary way to look at the government’s role in relation to money.

“Classical” theories like Keynesianism and Monetarism (those are still “modern” in the sense that they were created in the 1930 and 1970s, respectively) assume that money is external to the government: it is created and destroyed by the banking sector and the central bank, and the government handles it like any private business does: balancing income (from taxes) and expenditures (government wages, welfare, subsidies), taking out and repaying loans where they don’t balance. Basically the government is just a large non-profit organization subject to the same economic laws as everyone.

MMT argues that money is fundamentally a creation of governments (in fact, historically, heavily monetized economies usually exist within states with at least some amount of administrative apparatus that can collect taxes/tribute and pay government employees and soldiers). Therefore, governments should embrace that role and just create money out of the blue to pay for whatever needs to be done. Conversely, taxes aren’t used to cover expenditures, but instead to remove money from the economy (the government just destroys the money it collects as taxes) in order to control inflation.

While this is for sure an interesting way to look at it, fundamentally it doesn’t change the fact that in the long run (and assuming economic growth remains within some boundaries) government expenditures and taxes can’t just wildly diverge forever without creating inflation. The policy implications stay the same. MMT gained popularity in the wake of the 2008 banking crisis and following economic crisis because it allowed people to propose what Keynes would have called “deficit spending”, but without saying the name Keynes, hiding the fact that those proposals are based on a 70 years old theory that has been implemented with varying success, and analyzed (and challenged) in academic circles ever since.

Basically, the exactly same policy would be described by Keynes as “the government goes into debt in order to stimulate the economy during a crisis and later repays that debt by taxing the economy once the crisis is over” while MMT would describe it as “the government creates money to stimulate the economy during a crisis and later taxes the economy to reduce inflation once the crisis is over”.

Anonymous 0 Comments

The difference is fiat currency versus commodity currency.

Fiat is what we use now. It has no intrinsic value and only has the value that society gives it, and so is highly dependent on the economic activity of the money’s issuing country.

Commodity currency was what we used to use. It was money that represented as legal tender a certain amount of a commodity—gold. So $1 used to be like a voucher for a certain amount of gold, and this was more dependent on the value of gold within the global economy.

Beyond this, someone else will have to explain, but the gist I understand is that MMT = magic money, value is socially determined; commodity money = money represents an actual physical commodity with its own value.

Anonymous 0 Comments

My take: MMT is when someone finds a cool rock, thinks it’s a genie in a bottle, then closes their eyes and makes a big wish.

(I.e., it’s bullshit.)

/u/vanZuider has it right. It’s basically looking at how the creation of money is handled in an economy. It doesn’t really work in theory and definitely doesn’t work in practice (one presumes, I guess) but the shadow of an idea is there.

It is not taken particularly seriously by most academic economists. There’s a few outliers, but I suspect the only thing we’ll even glean from this is maybe a few productive studies about the impact of money supply on the economic cycle, mostly disproving MMT but giving us some extra insight.